VerifyMe, Inc. Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Gross Margin: Improved in 2024 vs 2023; Q3 2024 gross margin was 35% vs 37% in Q3 2023.
• Precision Logistics: Proactive services revenue grew in Q3, and proposal activity increased after expanding the sales team. Total year-to-date shipments for existing customers and proactive services were down 4%, but execution and differentiation are expected to navigate headwinds.
• Authentication Analysis: Lack of growth in 2024 led to a thorough evaluation, resulting in the decision to exit the code portion of the segment. A $2.3 million goodwill and intangible asset impairment was recorded due to this evaluation.
• Trust Codes Acquisition: Acquired in 2023 to reduce reliance on third-party tech providers, but integration and sales efforts didn't yield expected growth in 2024.
• FedEx Impact: FedEx insourcing of services to a premium customer negatively impacted 2024 revenue, but direct premium customers are growing.

Segment Performance

• Precision Logistics: In the third quarter, proactive services revenue grew, but total year-to-date shipments for existing customers and proactive services were down 4%. Premium revenue decreased by $0.5 million due to a discontinued customer, while proactive services revenue increased by $0.4 million. Proactive services make up a significant portion of Precision Logistics' revenue.
• Authentication: Revenue did not grow in 2024 as anticipated. A thorough analysis led to the decision to exit the code portion of the Authentication segment, resulting in a $2.3 million goodwill and intangible asset impairment. The Authentication segment currently contributes a small percentage to total revenue, and its code-related activities are being evaluated for exit.

Guidance

• Revenue: Anticipates 2024 revenue to be slightly below 2023 revenue.
• Cash Flow: Total year-to-date net cash is slightly down, but expects net cash flow neutral for 2024.
• Gross Margin: Full year 2024 gross margin expected to exceed 2023, but Q4 margin to be below Q3 due to seasonality.
• Authentication 2025: 2025 revenue from Authentication segment not expected to be material.
• Code Strategy: Requires approximately $1 million per year in cash investment from 2024-2026, but evaluating other strategic opportunities for better shareholder return.

Risks

• FedEx Insourcing: Impact on premium revenue due to FedEx insourcing of services to a customer.
• Authentication Growth: Lack of growth in 2024 and complexity of traceability sales in the U.S. market.
• Amazon Transparency: Not providing expected tailwinds for the Authentication segment.
• Cash Investment: Significant cash investment required for code strategy with limited shareholder value return.

Question and Answer

• Q: Remaining Authentication business adjusted EBITDA status? A: Currently adjusted EBITDA negative at the start of the year, but aiming for adjusted EBITDA positive in 2025 depending on backlog revenue.
• Q: FedEx premium business outlook? A: Direct premium customers are growing, indirect premium work with FedEx is stable for now; FedEx's AI product may impact indirectly but no near-term impact.
• Q: Precision Logistics sales team addition? A: Added a sales/marketing person in Q3, and evaluating further bolstering of sales team as investment dollars are redirected.
• Q: Investor Day plans? A: Q4 earnings call likely extended to discuss 2025 strategy in detail, providing more insight into the company's go-forward outlook.