Knightscope's New CFO Weighs in on 2024 Roadmap

February 10, 2024

As outlined earlier this month, Knightscope’s goal in 2024 is to pursue profitability.  To accomplish this aggressive goal, we are evaluating all aspects of the business for opportunities.  At a high level, it will come down to the following main areas of focus:

Profitable Growth – increase gross margins on all products and services
Lower Operational Costs – eliminate at least $1 - $2 million from the P&L
Execution – sell, build and ship faster

Read on for more about each item in detail.

Profitable Products – Increase Gross Margins

Knightscope is already seeing increased revenues across both the emergency communication device (“K1B”) and Autonomous Security Robot (“ASR”) businesses as we continue to sell to new clients and expand existing ones.  If you look back to 2021, we did about $3.4 million in top line revenue, then grew that to $5.6 million in 2022.  I’m comfortable in saying we are in range of the guidance we had prior given for 2023 in the $12M - $13M range.  That is consistent double-digit growth and an exciting part of the Knightscope story… a growing technology company.

Regarding profitability, I’d like to give you some data points that may help better understand our business model and our strategy.  We do not sell our autonomous robots but instead provide a subscription-based service to our clients.  This Machine-as-a-Service (“MaaS”) model benefits both our clients and the Company.  Our clients receive an all-inclusive service, competitively priced for as low as $0.75 per hour to $9.00 per hour.  Not only do clients avoid large upfront capital costs, but their subscription also gives them access to our proprietary online tools, 24/7 US-based support as well as ongoing maintenance services.

For Knightscope, this model provides the Company with long-term recurring revenue, reduced client acquisition costs, continuous engagement with our end users, and a pipeline of existing clients with potential future monetization opportunities.  In the long run, all these benefits yield improved client lifetime value for both parties.  It is, however, important to note that we are still at the early stages of our growth journey and so, like most subscriptions or recurring revenue business models, it requires some time to ramp up and scale.

For long-term investors, this is all good news because it allows you to participate in the Company’s growth.  Here’s an exciting point that I believe investors really need to hear: an internal analysis of existing clients who renew every year shows that our ASRs begin to generate margins by the second year of the subscription.  In fact, our highest performing clients have yielded the company close to 60% in profit margins over the course of five years.  I think this is a very important operational result that we need to expand, then rinse and repeat.  We still have a lot of work to get to repeatability at scale, but we believe that it is very achievable.

By the way, we’ve already announced clients that have renewed for 4, 5, 6, and 7 years, and this quarter we have a client that has renewed for the 8th year in a row!  As we continue to do that over time, these recurring revenues start layering on top of each other in a lucrative manner.  This is why scaling up is important.

On the K1B side of the business, we have other opportunities we are exploring.  We already have positive margins on product sales and believe there are opportunities to improve them.  At the same time, the service side of the business requires a significant re-tooling that includes optimizing resource allocation, improved use of diagnostic tools to drive operational decisions, and overall efficiency.  We believe that we can replicate this success across all clients over the long-term as we scale up.  I’m excited to be joining Knightscope at this inflection point and looking forward to driving the growth with the team.

Historically, given the cutting-edge nature of Knightscope’s technologies, we’ve focused on revenue growth without placing a lot of pressure on ensuring high margins.  But now it is time to optimize and tackle costs and margins. We have a foundation of talent, technology, and traction to build upon.  The team has spent the last ten years building a solid foundation for Knightscope, and we plan to spend the next ten years focused on layering the business on top of it.

As a technology start-up integrating software, hardware, telecommunications, electrification, and artificial intelligence (“A.I.”), we’ve faced several challenges that have impacted our ability to generate solid gross margins.  The first of which would simply be scale.  There is a basic cost of doing business to consider.  For example, we need to monitor all the machines across the country and that requires a 24/7 staff – but that doesn’t mean as we add more and more clients, we necessarily need to increase that staff proportionately.  Nor would we have to add more buildings, engineering or legal and audit costs.  But you do need that critical mass to get going, which we now have in place.

Second, the prior generation of machines required a highly specialized technician to build a single machine in a single work cell that took well over 100 hours to complete – one at a time.  We have now begun implementing a much different approach with component and system testing built into the production process of sub-assemblies and can more effectively build and test in batches, dramatically speeding things up.  Still much more to do here, but I’m encouraged to see the changes.

As I’m personally analyzing the myriad of items putting pressure on margins (changes in commodity prices, shipping costs, telecommunication costs, facilities, supply chain, timing of revenue recognition, etc.), I am excited about the numerous opportunities to cut costs throughout the entire operation.  But this gets me genuinely excited where the finance function can really help drive change partnering with the entire organization – driven by data.

Lower Operational Costs – Increase Net Income

Below the Gross Margin line, we have an opportunity to lower our OpEx by taking out costs where possible.  One of the first ways we will do this is by optimizing our headcount to focus on supporting functions that will drive revenues and margins.  This includes investment in marketing, sales, facilities and our backend support systems such as the enterprise resource planning (“ERP”) system.  Simultaneously, we have identified areas for cost reduction that include footprint consolidation, better engaging with our suppliers, purchasing procedures, outsourcing and reducing costs on tasks that are not value add to the Company, and prudent expense management throughout all departments.

Execution and Teamwork

Last, but not least, for us to achieve these goals we’ve set out, we must reimagine how we can operate as a cohesive team.  To do so, we’ve made some talented hires who bring in operational expertise, we’ve re-aligned our business to optimize business processes and functions and we’ve already begun work to build strategic partnerships with third parties that will enable us to grow and scale faster in the long run.  And we are very proud to be growing our in-house talent – as the Company grows, so do our relentless people.

Overall, the entire Knightscope team is focused on the bottom line.  We realize that as much as investors like to focus on hockey stick growth, they also reward effective and efficient growth.  As Knightscope steps into its second decade of existence, we are hard at work to build atop the foundation that will enable long-term success while allowing us to deliver long-term value growth for our team, our clients, our investors, our supporters and our stakeholders.

Apoorv S Dwivedi
EVP & Chief Financial Officer
Knightscope, Inc. (NASDAQ: KSCP)

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