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Genasys Has Reached An Inflection Point

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About: LRAD Corporation (GNSS), Includes: EVBG
by: Sergio Heiber
Sergio Heiber
Special situations, event-driven, newsletter provider, small-cap
Summary

GNSS will present its fourth consecutive quarter of record revenues next week.

The company has a virtual monopoly on acoustic hailing devices which provides a barrier to entry for competitors in the mass notification market.

The company name has been changed to align the company with its strategy of becoming a prominent mass notification solution.

The selloff after the third quarter report has created a buying opportunity.

The company's effort to capture market share and gain dominance in the mass notification market has resulted in early wins.

Genasys Corp. (GNSS) has grown from dominating the acoustic hailing device market to positioning itself to dominate the mass notification market. The company will present its fourth consecutive quarter of record revenue next week, but this is just a beginning. GNSS has reached an inflection point. It is at this time where we will see if the strategy to become the dominant player in the mass notification industry, which I have discussed in previous articles, is taking hold.

Federal Communication Commission Emergency Alert System logo

Source: FEMA

Genasys is the only company that offers long-range voice broadcast systems and digital, Critical Communications as a Service ("CCaaS") mobile mass messaging through a unified platform. It is important to understand that the sound clarity delivered from the company's long-range acoustic device (LRAD) is unparalleled and there is virtually no competition. I don't know of any other company that offers a portable device that can deliver clear voice for up to 5.5 miles. This is a barrier to entry for any potential entrant in the huge market opportunity that GNSS is pursuing in mass notification.

I have discussed the addressable market for both the LRAD side and the mass notification market as well as LRAD's position in both areas in previous articles and don't want to repeat that information here. I urge interested readers to include reading my earlier articles in researching this stock. In this article, I want to focus on what I consider an inflection point for this company.

Source: Company website

Inflection Point

Hardware sales, the LRAD units, are predominantly sold to governments and, therefore, lumpiness is guaranteed. LRAD has done a great job of alleviating the lumpiness in their hardware sales by expanding sales internationally and not depending solely on the U.S. and by establishing multi-year contracts. The inflection point is on mass notification system sales, which is a much larger, higher margin market and provides steady recurring revenue.

The company entered the mass notification market in January 2018 with the acquisition of a software company that is involved in the Australian countrywide mass notification system. GNSS has integrated the hardware and software products into a unified platform and has enjoyed early success winning a Federal Emergency Management Agency ("FEMA") sponsored contract for a system for Puerto Rico just nine months after its software acquisition.

Management has recognized that this is a critical moment in its 27-year history and it has changed its name from LRAD Corp. to Genasys Inc. in order to rebrand itself as a critical communications systems company. I'm glad for this action as there were many investors who saw the name LRAD and were immediately turned off by the company's prior history of lumpy sales, despite the current success that the company is enjoying. This stock needs to gain fresh eyes to achieve price appreciation and the rebranding is a good move in that direction.

Technical Picture

GNSS reported record revenues as well as future success expectations in August, but the stock sold off. Investors who follow the company were shaken by the miss on analyst estimates. The short-term sell off bottomed out in Sept. and the stock price has been climbing again. It should be at record highs!

Source: Finviz

This Time It's Different

In the summer of this year, GNSS replaced their investor relations person, Brian Harvey, with Darrow Associates. Oppenheimer initiated coverage on GNSS just prior to the third quarter report in August. Brian would have notified Oppenheimer in advance of the earnings announcement so that an estimate revision could be made along with an explanation that there was a slight delay in expected revenue. I don't fault Darrow as they were just becoming familiar with the company, and I am disappointed that Brian wasn't retained and continued to do his work alongside Darrow. IR's main function is to attract institutional investors, and in this regard, Brian had done a wonderful job. This is the only complaint I have with current management.

I am sure that the upcoming fourth quarter report will be stellar and not disappoint and have taken the opportunity to add shares. Admittedly, I was surprised as to how extensive the selloff was, but I believe that this was in tandem with small caps, in general, and not exclusive to GNSS.

Inflection Point Focus

The strategy to establish the company in the mass notification industry is focused on California, where the company has been awarded three contracts. California recognizes its need for a wildfire notification system and has established Alert Wildfire which has positioned cameras in fire prone areas as well as an unmanned drone system to monitor fires from the air, but recognizes the lack of a unified system. GNSS has been working with the California legislature and the Governor in order to inform of the critical gaps in emergency notification as well as to petition for legislative change and, hopefully, win contracts. CEO, Richard Danforth has said in conversation with me that he expects that GNSS will win new contracts in California as well as expiring contracts from competitors such as Everbridge (EVBG).

Risks

Genasys claims to be the only one platform emergency communication company, and I believe that it is. But others, such as RAVE Mobile Safety, a private company, claim the same ability. RAVE recently was awarded a Pike County, Kentucky emergency communication award. Sure enough, it's a one platform system, but I did not find that the RAVE system offers voice communication.

Pike County selected the RAVE system based on costs as it was cheaper than the system it is replacing as well as being more up to date. This illustrates that city and county budgets may not be able to afford a full system that includes voice communication as Genasys offers and it remains to be seen if Genasys software is as superior as their hardware so that the company can succeed in selling software-only systems in competition with countless software companies.

I believe that management is aware of this issue and brought on Paul Neyman to fill the newly created position of V.P. of Software Sales and Ly Tran as a strategic adviser. Mr. Neyman was previously employed as a Director of Sales for Blackberry AtHoc. Ly Tran is the co-founder of AtHoc and former senior vice president of Blackberry AtHoc. It is also notable and favorable that GNSS has aligned with FEMA where local governments can apply for grant assistance and more easily afford a full service system.

Acquisition

I've mentioned in previous articles that GNSS is likely to be an acquirer of another software company in the near future in order to enhance its system abilities, but there's a good possibility that GNSS itself could be acquired. It's the early innings of the mass notification market. GNSS is profitable and has no debt. If it can establish itself as a major player in mass notification, it will be the only company that offers a one platform solution. Its balance sheet, as well as one of a kind status, would make it an acquisition target for a larger company.

Conclusion

GNSS will report next week for the first time under its new name. It will be the fourth consecutive quarter of record revenues and will attract investors to learn about this company without seeing the name LRAD and associating it with lumpy sales. I focused this article on California being the inflection point for the company strategy in becoming a dominant player in the mass notification market, but there are many other places where the company is succeeding and results are demonstrated in record revenues being reported. With the sale of mass notification systems comes recurring revenue, which will eventually overtake hardware sales. Recurring revenues along with long-term contracts and expansion into international governments will make lumpy earnings a distant memory for veteran investors in this stock and a non-event for newer shareholders.

I write mostly about small-cap stocks and stick with the stocks I follow. Conversation is welcome and please click to follow me if you are interested in likely follow up.

Disclosure: I am/we are long GNSS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.