Cemtrex, Inc. (NASDAQ:CETX) Q4 2022 Earnings Call Transcript

Cemtrex, Inc. (NASDAQ:CETX) Q4 2022 Earnings Call Transcript January 5, 2023

Operator: Greetings and welcome to the Cemtrex Fourth Quarter and Full Fiscal Year 2022 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. Before we begin the formal presentation, I would like to remind everyone that statements made on the call and webcast may include predictions, estimates or other information that might be considered forward-looking. While these forward-looking statements represent our current judgment on what the future holds, they are subject to risks and uncertainties that could cause actual results to differ materially. You are cautioned not to place undue reliance on the forward-looking statements, which reflect our opinions only as of the date of this presentation.

Please keep in mind that we are not obligating ourselves to revise or publicly released results of any revision to these forward-looking statements in light of new information or future events. Throughout today’s discussion, we will attempt to present some important factors relating to our business that may affect our predictions. You should also review our most recent Form 10-K and Form 10-Q for a more complete discussion on these factors and other risks, particularly under the heading Risk Factors. A press release detailing these results was issued on December 28, and is available in the investor relations section of our company’s website centrex.com. Your host today, Saagar Govil, Chief Executive Officer, and Paul Wyckoff, Chief Financial Officer will present results of operations for the fourth quarter and full fiscal year ended September 30, 2022.

At this time, I will turn the call over to Centrex’s Chief Executive Officer, Saagar Govil. Please go ahead.

Saagar Govil: Great, thank you, operator, and good afternoon, everyone. I’m pleased to welcome you to today’s fourth quarter and full fiscal year 2022 financial results conference call. The fourth quarter was highly transformative for Cemtrex, divesting the non-core assets Smartdesk and VR subsidiaries to focus on accelerating our Vicon and AIS brands. We see escalating demand for these businesses and believe this shift in focus to capture significant near term opportunities will help us to reach positive operating income by 2024 and maximize shareholder value over the next several years. This restructuring is expected to result in an operating expense reduction of over $5.2 million per year on a go forward basis. We have also identified another million in corporate overhead from legal, accounting and development expenses that were incurred in fiscal year ’22 that will not be incurred in fiscal year ’23.

This will result in approximately $6.2 million in operating expense reduction to be realized going forward from November 2022. We believe our transformation will deliver a strong balance sheet and access to capital markets to execute our growth strategy. Our focus on Vicon comes at an opportune time as it is rapidly building a dominant security technology brands focus on V-SaaS solutions, leveraging AI and cloud technologies solutions for commercial, industrial and government applications. Vicon is seeing growing demand for its award winning roughneck cameras and Valerus video management software solutions. We believe Vicon can move towards $5 million in $10 million in recurring revenue over the next couple of years as a global leader in advanced security and surveillance technology to safeguard businesses, schools, municipalities, hospitals, and cities across the world.

The industry is rapidly shifting to SaaS solutions leveraging AI and cloud technology solutions for today’s highly dynamic environment. Allied Market Research is predicting the global V-SaaS and video surveillance market will reach over $83 billion by 2030, with a CAGR of 10.9% between 2021 and 2030. During the quarter, we were delighted to welcome Shane Compton as COO at Vicon Industries. Shane is an accomplished leader in the physical security industry bringing over 20 years of experience as a COO, CTO, and CTO and in the industry leading companies like Costar and Pelco. He’s now leading the company’s global sales support operations and engineering teams to deliver on operational excellence and deepen Vicon’s commitment to world class support and customer experience.

Shifting gears on our advanced industrial services business, we are also incredibly optimistic as the company is well positioned to monetize the increase in demand for predictive maintenance services reshoring and manufacturing back to the U.S. and increasing complexity and industrial equipment. With over 35 years in the industry and high repeat business, AIS has a strong reputation as a single source industrial contractor and premier provider of industrial contracting services. AIS is a significant source of cash flow and has a strong balance sheet empowering the ability to offer more comprehensive services due to inventory of equipment. As the industrial and manufacturing economy in the U.S. continues to thrive, we believe AIS has significant potential for expansion, particularly with bolt-on acquisitions.

To mark this important transformation, we have also taken the opportunity to launch a next generation Investor Relations website to better reflect our forward thinking approach to the Cemtrex brand and enhance communications with the investment community. We believe there’s a compelling investment case to be made to both current and prospective shareholders and the site will serve as an invaluable tool to keep our investors better informed of our progress and strategic vision. This site will be going live over the next few days and we will make an announcement accordingly. I’ll now turn the call over to Paul Wyckoff. Our CFO to discuss the financial. Paul?

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Paul Wyckoff : Thank you, Sagar. Our revenue for the full year of fiscal year 2022 totaled $50.3 million, compared to revenue of $43.1 million for the full year of 2021, a 17% increase year-over-year. The increase in revenue for the year was due to increased demand for the company’s products and services. The Advanced Technology segment revenues for the years ended September 30 2020 and 2021 were $29.1 million and $24.2 million, respectively, an increase of 20%. The Advanced Technology segment increase was due to an increased demand for security technology products under the Vicon brand. Industrial Service segment revenues for the full year 2022 increased by 12% to $21.2 million, primarily due to the increase in demand for their services.

Gross profit for the year ended September 30, 2022 was $19.1 million or 38% of revenues as compared to a gross profit of $17 million, or 39% of revenues for the year-ended September 30 2021. The decrease in gross profit as a percentage of revenues for the year-ended September 30, 2022, as compared to the prior year, was due to increased costs or revenues as a result of increased costs for goods and increased transportation costs for those goods. Total operating expenses for 2022 were $35.9 million, compared to $25.7 million with 2021. The increase in total operating expenses was primarily driven by increases in personnel costs, insurance, travel, legal, and research and development costs. Operating activities for continuing operations used $16.1 million for the year ended September 30, 2022, compared to using $10.1 million of cash for the year ended September 30, 2021.

Net loss for the full year of 2022 was $13 million, as compared to a net loss of $7.8 million in 2021. Net loss in the fourth quarter of 2022 totaled $3.2 million, compared to a net loss of $9.7 million in the fourth quarter of 2021. Cash and cash equivalents totaled $10.6 million at September 30, 2022 as compared to $11.4 million at June 30, 2022 and $15.4 million at September 30, 2021. Inventories increased by $3.9 million, or 68% to $9.5 million at September 30, 2022 from $5.7 million at September 30, 2021. The increase in inventories attributable to the company’s purchase of inventory to the security business of our Advanced Technology segment to maintain sufficient stock on hand for sales to overcome recent supply chain delays and issues.

I will now turn the call back over to cyber for a review of our 2023 outlook.

Saagar Govil: Thank you, Paul. In summary, with our restructuring complete and strong performance for Vicon and AIS, we are well positioned to create long-term value for our shareholders. Looking ahead, we believe revenues for Vicon Industries based on our current demand should increase by approximately 16% to $28 million for fiscal year ’23, given the launch of our AI-based analytics solution, more improvements to our core product Valerus, as well as additional sales opportunities. We also believe AIS will continue to expand revenues by approximately 3% to $21.8 million, driven by continued strength in the industrial services market. Additionally, based on steps that company has taken during this fiscal year 2023, gross profit margin percent for Vicon is expected to increase to approximately 48%.

Similarly, based on operational improvements made, we believe gross profit margin percent for AIS is expected to improve to approximately 34%, for the fiscal year 2023 for AIS. We have taken steps to reduce expenses at the Cemtrex corporate level as well to drive improvement in our overall operating expenses. With all the combined actions taken, we believe the operating loss over the next four quarters to be under $2.5 million. The effects of these changes will be partially demonstrated in our December quarter performance due to the timing of the restructuring, and we expect our March quarter performance to reflect the improvement more fully. We also believe that we can reduce inventory by more than $1.5 million over the course of fiscal year ’23, as we have seen supply chain constraints improve.

This will allow us to offset the cash loss from the expected operating loss over the next couple of quarters by the cash obtained from the reduction in inventory, reducing the burden on our overall cash position. With approximately $10 million in cash on hand and a dramatic reduction in expenses, we believe we have sufficient capital in the near term to focus on executing on our roadmap, both financially and operationally without the need for immediate capital. Our expectation is that the company reach a positive operating income in fiscal year 2024. We continue to work to position the company on a path to a sustainable financial model and for long-term growth, which we believe will provide long-term value for our shareholders. I look forward to providing our shareholders with further updates in the near term.

I thank you all for attending. And now we’d like to open it up for questions. Operator.

Q&A Session

Operator: Thank you. We will now be conducting a question-and-answer session. Our first question is from Jason Kolbert with Dawson James. Please proceed with your question.

Jason Kolbert: Thanks, guys. Thanks for the update and really appreciate some of the comprehensive detail in terms of the numbers. I just like to ask some big picture questions. When we think about Vicon versus AIS, it seems like the tremendous growth opportunity exists for Vicon, and AIS seems a little bit like a means to an end. So I’m just trying to understand how you’re looking at the business, how you’re looking at capital spending, and where you see the future growth coming from?

Saagar Govil: Yeah, sure. So with respect to organic growth, I think there’s no question that Vicon is the more compelling near term opportunity. The demand in the industry is pretty high for the need for physical security. And there’s a lot of disruption taking place due to incumbent technology being replaced by next generation technology, which creates an opportunity to take market share. So in a big picture, we see an opportunity to grow there more quickly. And I think in terms of where we’ll be focusing our investment that will certainly be driven on that side of the business. I think with respect to AIS, the opportunities will be more driven by acquisitions. I think that with respect to AIS, there’s more opportunity to gain scale, through finding good acquisition opportunities.

I think for the last couple of years, valuations have been unusually high relative to what we think is fair value for businesses of these types. And we’re starting to see valuations come down. So I wouldn’t say that we’re sort of exclusively thinking about Vicon. I think we’re looking at both businesses opportunistically and seeing opportunities to drive growth in both.

Jason Kolbert: Okay. That’s actually very helpful, because what it’s telling me is that you’ll be opportunistic on AIS, if you see the opportunity and it can build free cash flow, is that right.

Saagar Govil: That’s right.

Jason Kolbert: Okay. And can you talk a little bit in terms of the Vicon and really some of the camera and intelligence software products, what gives you competitive edge given the fact that you’re in such a highly competitive market? I’d like to understand a little bit about, how your installed base is looking at you? And what it’s going to take to get kind of some of the new, bigger contracts that are out there?

Saagar Govil: Yeah, absolutely. So Vicon has been in the industry for 55 years. So we have a strong brand. So a lot of customers know us in the industry. And that really helps with our credibility, in terms of when we compete with other folks in the market. So first and foremost, people recognize us. And then secondly, we spend a lot of the last three years investing in our product portfolio quite substantially. So our products, when you compare them against our competitors, they are right there as far as competitive advantage in terms of pricing, in terms of the feature set. And we continue to invest in the product line to ensure that it gets there. We’re also rolling out our AI analytics this month. And, that’s homegrown analytics that we’ve built, leveraging the latest AI technology out there.

So a lot of it is really just investments we’ve made starting to pay off and take advantage of the opportunities that are in the market today. So it’s a combination of doing that on an ongoing basis. And then we’ve also made investments in people, right. So over the last 18 months, we’ve hired a number of really talented individuals from our competitors. We made an announcement, near the end of the summer, where we brought on Hiam. So Haim is, a tremendous product manager has a great product mind, and helps to bring a lot of value from that perspective. And a number of the other folks that we’ve got, obviously, Shane, just recently joining as well. So all these guys have brought a lot of perspective and a lot of value from many of our competitors in terms of bringing best practices and helping us continue to chart a course that creates our own space in the market and competitive advantages.

So that’s, again, a lot of that. The other the other thing is that we really just sell end-to-end solution. So many of our competitors, they’re generally selling a portion, a portion of the solution. And Vicon is generally going to the market on a complete solution. And a lot of the market, especially in the enterprise world is looking for an end-to-end solution. And that’s really how we differentiate ourselves. So it’s really a combination of all of these things that is really helping us make be competitive in the market and continue to drive sales growth.