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Greetings. Welcome to Decisionpoint Systems, Inc. First Quarter 2023 Earnings Call and Webcast. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to Brian Siegel with Hayden IR. Thank you. You may begin.
Hello, and welcome to the Decisionpoint Systems Earnings Call. Joining me today are Steve Smith, Chief Executive Officer; and Melinda Wohl, Vice President of Finance. For those of you that have not seen today's release, it is available in the Investors section of our website at www.decisionpt.com. Before beginning, I would like to remind everyone that except for historical information, the matters discussed in this presentation are forward-looking statements that involve several risks and uncertainties. Words like believe, expect and anticipate mean that these are our best estimates as of this writing but that there can be no assurances that expected or anticipated results or events will actually take place. So our actual future results could differ significantly from those statements. Also during this call, we will discuss non-GAAP measures, including non-GAAP net income, non-GAAP EPS and adjusted EBITDA. These non-GAAP financial measures adjust our GAAP net income and EPS for stock-based compensation, any gains on extinguishment of debt, M&A and other financial transaction costs and other nonrecurring, nonoperating income and expense items. Further information on the company's risk factors is contained in the company's quarterly and annual reports filed with the SEC. With that, I'll now turn it over to Steve. Take it away, Steve.
Thank you, Brian. Good morning, everyone, and thank you for joining us today. I'm excited to say our business remains strong as we reported first quarter revenues today. Before I discuss these results, I'm going to start the call by discussing who is Decisionpoint Systems, our market opportunity and our growth strategy to capture and expand this opportunity. I'll then briefly review our first quarter and then turn it over to Melinda to discuss our financial results. Decisionpoint is a mobility-first enterprise services and solutions company. So what does that mean? It means that we aim to be at the center of several emerging secular trends, including enterprise mobility, which encompasses work from home and field mobility, cloud and managed services, SaaS, 5G and IoT. Now these markets represent hundreds of billions of TAM. So we've identified a subset of industries within these markets where we either already have, can acquire or develop expertise and therefore the ability to become significant players. Currently, these industries are retail, logistics, hospitality and health care, where we have established customers, industry-specific solutions, the right technology partners and several under or underpenetrated (sic) [ unpenetrated ] segments for us to go after. Our value proposition to customers is clear. Simply, we enable our customers to be their best at moments that matter. We do this by enabling frontline employees, those task workers who work at the edge of the network to make better, faster, more accurate business decisions inside and outside the 4 walls and create operational efficiency, effectiveness to drive better customer experiences and business outcomes at their moments that matter, or we like to say, the decision points. The business has historically grown at a run rate in the mid-single digits, with M&A and project orders being incremental to those numbers, the latter of which can also introduce some lumpiness at times. We also have an excellent annuity-type business, replenishing consumables for these devices. So think of the razor and the razor blade model here. That said, over the past 3 to 5 years, we've transformed the company to both organically and inorganically increase these growth rates and margins significantly by aggressively moving upmarket to increase various high-margin services, especially ones that generate reoccurring revenue. For example, we offer professional services, including consulting, staging, deployment, installation, repair and customer-specified software customization and hardware and software maintenance support. The gross margins for these services tend to be significantly higher than when we resell technology hardware. And part of our strategy is to increase the services mix within our portfolio to drive higher gross margin and more reoccurring revenue.
We also offer managed services where companies outsource certain IT functions and are opportunistically building our high-margin reoccurring revenue SaaS solutions portfolio, which today includes both packaged and custom-developed software solutions such as MobileConductor and route manager for the direct store delivery or the DSD industry and ViziTrace, which helps manage an RFID implementation. As we mentioned in the press release, we've made some investments in developing products in these areas and adding sales and biz dev head counts to go after these higher-margin opportunities and drive growth over the mid- to long term. We said last quarter that we expected this to add about $1 million in incremental operating expense in 2023 versus 2022. Looking at managed services. We offer a comprehensive product portfolio designed to simplify the complexity of designing, deploying and managing a mobile solution. These managed services include provisioning, monitoring and help desk to improve on the visibility and status of our customers' device landscape. Our company has spent this past year developing our new portal for managed services. Vision. The comprehensive landscape of our services is broad and diverse, depending on the customer and industry needs of each client. Vision offers our customers a customizable solution for monitoring actions on everything in their IT infrastructure. Decisionpoint can now manage the entire life cycle of mobility and IT infrastructure, all in one view. Vision provides real-time visibility to manage the health, location and status of your mission-critical IT assets no matter where they are located in the enterprise. Vision also enables customers to monitor the progress of rollouts. This enables our customers to minimize downtime and simplify the management of a large distributed enterprise. Moving to our 4 pillars of growth strategy. The first pillar is to increase share in our current verticals, specifically grocery, hospitality and specialty retail, supply chain, health care, warehousing, distribution and transportation. The second pillar is to leverage our experience in these verticals into adjacencies. Examples would include in retail, grocery, quick-serve restaurants and convenience stores, along with big-box retail, hospitality and supply chain logistics. The third pillar is to drive growth and margin expansion by increasing service and software attach rates. These include professional services, managed services, ISV and SaaS services, software from partners and repair and maintenance services. The fourth pillar is geographic expansion, where we can pick up new customers, expand field sales and increase our coverage. Our M&A strategy supports these 4 pillars and complements our organic growth. Note we aren't going to just make acquisitions to achieve more scale. We have specific requirements of the companies we target. These include a track record of positive revenue growth and EBITDA, integration-ready solutions and operations and cultural compatibility. By focusing on these areas, we have developed a successful integration strategy that allows us to move quickly to reduce SG&A costs, streamline operations and drive revenue synergies by expanding their offerings nationwide throughout our system. We will generally look to add 1 or 2 acquisitions per year at $2 million plus in EBITDA.
If you look at our 4 pillars growth strategy, plus M&A, you will see that our acquisition of Macro Integration Services, or MIS, at the beginning of Q2 hits every one of these on the head. MIS has a service mix of about 70%, therefore, significantly higher gross margin than Decisionpoint. They will strengthen our presence in the broader retail vertical while expanding our capabilities in grocery, food service and hospitality parts of retail. They also brought us a presence in the Southeast and the Mid-Atlantic area with a 100,000 square foot warehouse, staging and integration center, a complete go-to-market team, including sales, technical and project management personnel as well as adding additional solutions and capabilities and access to new customers. We expect that in Q2 through Q4 of this year, they will add at least $12 million in revenue and at least $1.2 million in incremental EBITDA. Moving to our results. Our first quarter continued the streak of record quarters with revenue growth 37% to $27 million. The strength was broad based across run rate, follow-on orders and services, the latter of which grew by 18%. A large retail customer equipment order skewed gross margin, while the 18% growth in services validates our strategy of growing our software and services revenue over time to generate higher gross and operating margins. Adjusted EBITDA increased 98% to $2.2 million in the quarter.
We left 2022 with a strong backlog of over $30 million, which, as I mentioned on prior calls, is due to customers placing orders with longer lead times to ensure access to supply. We have a strong relationship with our vendors. And as such, we tend to not only have taken on some inventory to ensure delivery, but we are well positioned with them should we get additional orders beyond those in our backlog and run rate business. For the second quarter, including MIS, we are expecting to report revenues in the range of $29 million to $31 million, with adjusted EBITDA between $1.5 million and $1.8 million. In closing, we delivered a great quarter with strong revenue and adjusted EBITDA growth. And I want to thank every dedicated employee within this company for their continued hard work, enabling us to deliver on these results. I look forward to speaking with you again on our second quarter call in August.
Now I will turn it over to Melinda to review our financials.
Thank you, Steve. Details of our first quarter operating performance compared to 2022's first quarter were as follows. We saw continued strong demand in Q1 with total revenue up 38% to $27 million. During the quarter, we worked through a portion of our $30 million backlog from last quarter and rebuilt it to $26 million, which is still about 4x our historical norms. Backlog remains higher than normal due to the global supply chain issues that are impacting many companies. As a result, our clients are putting orders with longer lead times. And as Steve has mentioned, we have fortunately been able to leverage our strong partnerships with OEMs such as Zebra and our distributors to gain access to products to ship and build up inventory. Moving to gross profit. We saw a 29.4% increase from the prior year, which was a result of higher sales volume. Gross margin was impacted by a higher mix of equipment sales due to the ongoing fulfillment of a retail customer order.
GAAP operating expenses were 18% of revenue versus 22.5% last year. The absolute increase was a result of additions to sales and biz dev personnel, acquisition costs and also a full quarter of depreciation and amortization. We expect to continue to realize the benefit of cost synergies and improve our operating leverage over time as we see sales return on these investments. GAAP net income and diluted EPS were approximately $0.9 million and $0.11. Weighted average shares outstanding increased by 125,000 from last year. Our non-GAAP net income and diluted EPS were $1.3 million and $0.16, up about 1% each compared to last year. The non-GAAP net income and EPS numbers excluded the following: stock-based compensation of $196,000 this year versus $225,000 last year; M&A-related expenses of $221,000 versus $177,000 last year. Adjusted EBITDA was $2.2 million, up 90% compared to $1.1 million last year. Turning to our balance sheet. We ended the quarter with cash and cash equivalents totaling $18 million versus $7.6 million at December 31, 2022. Deferred revenue increased by 62% to $16.7 million, of which approximately $12.2 million is expected to be recognized over the next 12 months.
Total debt at the end of the quarter was about $12.1 million. The higher cash and debt was to fund the MIS acquisition on the last day of the quarter. As Steve mentioned, the deal closed on the first day of Q2. Our plans are to pay this debt down as swiftly as possible. Net cash used in operating activities was $1.5 million versus cash provided by operating activities of $11.7 million. The swing was a result of a decrease in deferred revenue collections and an increase in accounts receivable. And with that, operator, we can move to questions.
[Operator Instructions] Our first question is from Howard Halpern with Taglich Brothers.
Congratulations on the quarter, guys. In terms of the MIS acquisition, what type of activity are you seeing in the first month and change of that acquisition in terms of cross-selling or new customers? If you could just give a little insight into that.
Well, the first thing we're seeing, Howard, is them living up to the due diligence that we did on them. We knew this would be a perfectly standard on-target hit to our acquisition strategy. They play in retail. They play in food and retail. And they play in grocery, convenience store and quick-serve restaurants to be specific. And those are new verticals for us. And in the retail vertical, they all represent food, and that is the place you want to be in addition to where we already are. So first thing that we saw was living up to the acquisition as our due diligence proved out, and we really like what we see thus far. I visited with about half a dozen, maybe 10 customers in all. We're aligned very closely with senior management there. And we like everything we're seeing and hearing with the acquisition and very comfortable with what they'll do for us as an overall entity going forward. And as you know, they're heavy into services. We referenced 70% services in -- historically. They have lived up to that and notched above it in Q1.
Okay. And in terms of the services overall, is that going to help drive your service gross margin toward -- to maintain that upper 30% area and closing it on 40% over time?
That's the goal and that's the target. And with every acquisition and with every organic investment we make, we're driving to those results. And so we're going to continue to remain that be at the center of our focus. We believe future state, this company can be a 30% to 40% services company and maybe more. And we also think that it will increase our gross profit and our gross margin over time. That's the strategy and we're executing on the strategy.
Okay. And in terms of the warehouse that you mentioned, are there any incremental investments that you're going to make within that warehouse? And then overall, how is that warehouse going to help you leverage operations going forward?
Yes. I'm happy you centered on that, Howard, because we're really excited about this presence that we've added. Recall the facility we had in Laguna Hills, California is 20,000 square feet with an option to go to 30,000 square. Here, we take a major step forward, a giant step forward, with regard to our facility by centering ourselves in the Southeast here in Greensboro, North Carolina. It's 100,000 square. And it's not just warehouse. It's warehouse, staging and an integration center. And the staging and integration center are very key adjectives here in that we could bring in point-of-sale equipment from all the point-of-sale providers, HP being the primary. We could also integrate our customer solutions on-premise in Greensboro before we even deliver it to the grocery store, the convenience store or the quick-serve restaurants. So it's -- the warehouse space, yes, but the real thing that has -- as excited on top of that is the integration and staging capabilities. And I don't need to tell you that real estate in North Carolina is a little less expensive than that in California.
Yes. Okay. In terms of also the verticals that you're in and the new vertical overall in food, any kind of hesitation on customers' parts with, I guess, economic uncertainty? Or are you in verticals that are sort of need what you offer and therefore not as hesitant as maybe some other types of industries?
I love this industry. I have been part of this for 28 years, Howard, as you know. And the thing I always loved about it is it thrived in the bad times and it thrived in the good times. Why? Because we're selling tools. We're selling solutions to the task worker that enable them to be their best at moments that matter. And what customer that we serve doesn't want to be their best at moments that matter? So whether you're delivering a package, delivering food to a restaurant, serving customers in a retail establishment, returning cars at Avis or administering medications to patients and hospitals, those moments that matter will always matter, even in the bad times. And as such, we're delivering tools that enable our customers to be their best at moments that matter. That's what I mean behind it. And this industry has thrived in the good and the bad times. Now having said that, I'm not an economist. I can't tell you what macro trends are going to do in this world, and we certainly face them here today. And -- but if you look at historical track record here at Decisionpoint, we've delivered 23% CAGR growth over the last 6 years. We have been able to outmaneuver and outpace the macro trends, and we like our chances going forward.
Okay. And one last one. Most of your larger customers now, have they migrated to your Vision Portal? And how happy are they with it?
They love it, and the existing customers have. So we have approximately 30 customers in a production way on the portal. So we've moved everybody over. As of the end of April, that effort was complete after developing the portal, as you know, in '22 and '23. We're still going to continue to invest in the portal. We think there's incremental functionality that we can add. And we also think there's incremental functionality that our customers will want and pay for.
So that represents -- it's an anchor tenant. It's kind of like we just broke from the starting gear and there's lots of upside going forward, and a portal and giving visibility to assets and activities is table stakes if you're in the services business.
Okay. And you have now the opportunity to migrate MIS customers over to that portal as time goes on?
Of course. Yes. Thanks for filling in those blanks. We'll take that asset to our newly acquired company, and we'll start to sell the customers on the benefits of it, and we'll migrate them as appropriate.
Our next question is from Michael Taglich, member of Decisionpoint Systems Board of Directors.
Steve, great quarter again, and it's unusual for me to ask a question on a conference call. But regarding the guidance we gave in Q2 -- for Q2, is there a reason expected margins are going to be materially different or expenses are going to be materially different from Q1?
Melinda, any comment on the expense side of it?
The expenses we're going to incorporate with our new sales and biz dev-related people, that should still keep the margins within play with our new guidance of the $29 million to $31 million, Mike.
Okay. So our gross margin should feel similar roughly, as the quarter is not over yet, in Q2 versus Q1. And we're going to have some additional SG&A. The -- what order of magnitude do you expect from an SG&A standpoint in Q2 versus Q1? How much do you think we'll spend, Melinda?
It's going to be higher than Q1 just because we're incorporating the new acquisition, and we need to kind of figure that out a little bit more as we go over the quarter.
Okay. Correct me if I'm wrong. The guidance you gave is exclusive of macros economics?
That's correct.
Okay. So macro, which we've told the Street is going to be accretive, right, is -- the additional expenses would be a macro as well as the additional cash flow on top of it?
Yes.
Correct?
Yes.
Okay.
And Mike, I'll just add to that with a comment because I think I know where you're going here. So we've guided slightly down on the EBITDA line. Is that where this question -- stream of questions are going?
At the end of the day, yes.
Okay. All right. So let me just -- as you know, as a Board member, we've acquired 5 companies already. And you always end up spending a bit more money on the integration of these companies. You hire some consultants to bring over data and databases. There's always a little expense that are sort of unaccounted for and around the corner and surprises. And so we have accounted for all of that with the guidance that we provided both on EBITDA and revenue.
Good. Okay. That's a great answer. So it's a plug number, is the difference in EBITDA based on your experience in integrating companies that you would expense and then capitalize. Onetime in nature?
Yes. And you've said it in our Board meetings -- yes. So that's the plan -- and yes. Okay.
That's the plan. No guarantees. These are guesses about the future? Okay.
Yes.
Okay. I'm very proud of the job you've done. You should be, too. Great teamwork for the whole company.
There are no more questions at this time. This will conclude today's conference. You may disconnect your lines at this time, and thank you again for your participation.