Genasys Inc (GNSS) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the American Technology Q1 2008 conference call. (OPERATOR INSTRUCTIONS). As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mr. Robert Putnam.

Thank you. Good morning, everyone. Welcome to American Technology's Q1 2008 conference call. Present today is Elwood G. Norris, our Founder and Chairman, Tom Brown, our President and Chief Executive Officer, Kathy McDermott, our Chief Financial Officer, and I'm Robert Putnam, Investor Relations.

Before we begin I would like to read our Safe Harbor statement. Except for historical information, the matters discussed on this conference call are forward-looking statements within the meaning of Section 21E of the Securities and Exchange Act. You should not place undue reliance on these statements. We base these statements on particular assumptions that we have made in light of our industry experience, the stage of product and market development, as well as our perception of historical trends, current market conditions, current economic data, expected future developments, and other factors that we believe are appropriate under the circumstances. These statements involve risks and uncertainties that could cause actual results to differ materially from those suggested in the forward-looking statements, including, but not limited to, the performance of our management team, market acceptance of our directed sound technology and products, entry of competitors, the possibility our intellectual property protections will not prevent others for marketing products similar to or competitive with our products, potential technical or manufacturing difficulties that could delay product deliveries or increase warranty costs, and other risks identified and discussed in our filings with the Securities and Exchange Commission. These forward-looking statements are based on information and management's expectations as of the date hereof. Future results may differ materially for our current expectations. For more information regarding other potential risks and uncertainties, please see the risk factors sections of our Form 10-K for the fiscal year ended September 30, 2007 and Form 10-Q for the quarter ended December 31, 2007. American Technology Corporation disclaims any intent or obligation to update those forward-looking statements except as otherwise specifically stated.

At this time I would like to turn the time over to Kathy McDermott for our financial presentation.

Thank you, Robert, and thank you, everyone, for joining us today. Our net revenues for the quarter ended December 31, 2007 were 2.5 million, down 35% from net revenues of 3.9 million for the same quarter in the prior year, and up 60% from net revenues of 1.6 million from the immediately preceding quarter ended September 30, 2007.

Our first-quarter revenues last year included a large US military order for 979,000. Our quarterly revenues often fluctuate like this due to the timing of large orders from a limited number of customers. In the quarter ended December 31, 2007, net revenue of our LRAD products was 2.2 million, or 86% of total net revenue, compared to 3.2 million, or 82% of total net revenue in the prior year, and 1.2 million, or 74% in the immediately preceding quarter. LRAD-R products have been very successful in helping to expand this product line.

Gross profit for the quarter ended December 31st '07 was 1.2 million, or 46% of net revenues, compared to 2 million, or 50% of net revenues for the same quarter in the prior year, and up from a gross loss of 670,000 in the immediately preceding quarter. The gross margin percentage is slightly lower to last year's first quarter due to product mix. The prior year gross margin included a 1.2 million obsolescence charge.

Operating expenses for the quarter ended December 31st '07 increased 286,000 to 2.8 million from 2.6 million for the same quarter in the prior fiscal year, and up 529,000 from 2.3 million in the immediately preceding quarter. The increase in expenses compared to the prior-year first quarter is due to the increased non-cash share-based compensation by 396,000, increased product development spending by 156,000, and increased audit fees by 202,000 for the year-end audit, offset by a reduction of professional fees of 425,000 for the stock option review in the first quarter of last year.

The increase compared to the immediately preceding quarter was due to increased audit fees due to the year-end audit of 302,000, product development costs of 82,000, and increased bad debt expense of 103,000 due to a reversal in the prior quarter.

Net loss for the first fiscal quarter was 1.7 million, or $0.06 a share, compared to a loss of 514,000, or $0.02 a share in the prior-year first quarter, and a 2.9 million loss in the immediately preceding quarter ended September 30th '07. The current quarter loss includes 547,000 of non-cash share-based compensation and a $109,000 accrual from [liquidated] damages due to the late filing of our 10-K at year-end. Compared to the prior-year first quarter, the reduced revenue and increased operating expenses are driving this increase in net loss. Compared to the immediately preceding quarter, the decreased loss is due to increased revenue and the obsolescence charge of 1.2 million in the prior quarter, partially offset by increased operating expenses.

The Company continues to maintain a good balance sheet. Cash and cash equivalents decreased by only 59,000 in the first fiscal quarter to a balance of 6.4 million as of December 31, 2007. We generated positive operating cash flow of 65,000 during the quarter, offset by (inaudible) investment for new products.

Net inventory decreased by 487,000 to 3.3 million at the end of the first fiscal quarter. (inaudible) trade receivables at December 31st represented approximately 46 days of revenue, compared to [55] days of revenue at September 30th '07. At December 31, 2007 we had working capital of 8.6 million, compared to working capital of 9.8 million at September 30, 2007. This reduction is primarily due to a customer deposit that we received of 540,000, the $109,000 liability for liquidated damages, and increased accounts payable of 397,000.

With that I'd like to turn the call back to Robert.

Thank you, Kathy. At this time we'd like to turn the time over to Tom Brown, our President and Chief Executive Officer.

Thank you, Robert. I just have a couple of highlights to discuss in our first quarter. In October we received the [SPS Block 0] award from the US Navy, which was acoustic hailing devices for large vessels. There was a protest filed by the competition against this award, and that protest was denied in January, and we will ship units against that award in this quarter. Also in December, we received a large order from the UAE for critical infrastructure protection. That is an order for LRAD-R's, which is the major focus of our current year. Also this quarter we will ship our first units against the acoustic hailing device award that we won last summer for small vessels and small vehicles.

So those are major highlights for the quarter. And at this point I'll turn it back over to Robert for questions and answers.

Thank you, Tom. We'd like to get right into the Q&A while people are queuing up with the operator. There are some questions that have come in over the e-mail, and we'd like to start off with those.

First question that we have. It says it's been several months since the announcements about LRAD's approval by various military wings. Yet, in my opinion, the revenue generated has been quite small. What is it going to take, in your opinion, for the revenue numbers to be more in line with the overall potential for LRAD and the military?

Actually, against the two awards that we were given in the previous year, we actually received no revenue to date because of protests that we are put in place by competition. So since the protest was denied in January, we will start shipping against purchase orders that we have received from both the US Navy and the US Army and US Navy for small vessels, small vehicles in this current quarter. So we've received a purchase order in excess of $0.5 million, which we are shipping next month, and we've also received another purchase order for $200,000 that we will be shipping against next month. So we are starting to see revenue being generated from those two awards, and we expect additional future revenues this year. The acoustic hailing device award, the SPS Block 0, is for a $6 million award over a five-year period. So we're starting to ship against that this year, actually this quarter. So we're expecting to see some good revenue be generated from those two awards.

Another question we received. It says overall gross margins seem to be improving. This e-mailer is interested in knowing what is going on with HSS. Are we getting close to a point where HSS can be priced to sell while still providing reasonable margins?

In terms of gross margins, one of the goals for the prior year was to improve our gross margins by driving down our product costs. And we accomplished that. If you take out the -- as Kathy noted in her presentation, if you take out the obsolescence reserve that we recorded in the fourth quarter for slow-moving stock, actually, our gross margins were closer to 50% for last year. And the reason for that is not -- it's product mix. But the main product mix that's driving the improved gross margins is the LRAD product. A focus of mine has been to improve our LRAD sales year-over-year. And if we take a look at last year, LRAD sales, overall sales were up 10% year-over-year for the year ended September 30, 2007. But if you take a look at our LRAD sales, LRAD sales were up over 37%. And we're looking to significantly improve that in the current year, because the LRAD product line offers us higher gross margins than the other product lines that we offer.

HSS sales were down significantly year-over-year. We are working on a number of HSS product offerings with a couple of large customers, but nothing has materialized as of yet. The digital signage market hasn't really taken off to the level that everybody was anticipating. But we do see some improvements in that product line in terms of the cost structure. We've reduced the price, and we're hoping to generate some additional sales in the current year.

Thank you, Tom. Another question that we have from a few e-mailers is rumors concerning resignation of Mike Kaufhold, who was brought in in October to oversee some of the sales and marketing. This person asks -- in view of his high position with the Company and resume, I'm concerned as to why he resigned.

The main focus for this company is to generate increased revenue. And we have been working very hard to try to drive our revenue. We are looking at bringing on professionals to help us increase that revenue. Unfortunately, it was not a good fit for either one of us. We brought a person on who had some large company experience, and the hope was that that large company experience would generate some large company opportunities for us. And in a very short period of time, we realized that that wasn't going to pan out. So we decided that it was best for the both of us to move in different directions.

At this point we're willing -- we're open to taking questions through the operator. So if you could queue up the first question, we would begin the Q&A live session here.

(OPERATOR INSTRUCTIONS). Joel Achramowicz.

Can you perhaps give us some color, Tom, on the commercial side of the business? Obviously, the military side is -- it seems like it's firming nicely. How about the outlook and opportunities in the commercial sectors, for LRAD in particular?

The one order that I discussed very briefly, the order with the UAE, is a commercial installation; it's for critical infrastructure protection. We are working with a number of large oil and gas companies. We have -- we announced some sales into Russia last year. So those are being installed on a commercial basis, as well as public safety basis. So we see major opportunities in the commercial space. We're working with a number of integrators to increase the revenue in that area, but it's a major opportunity for us, and we're working very hard to continue to drive that business.

It sounds like you've got some visibility, obviously, into the second quarter. You're seeing -- you're expecting a sequential improvement in revenues. Kathy, is that --

That's right. We do expect, based on our projections for the year, that we should have a stronger second quarter than first.

Could you just describe or give us some additional color on the liquidated damage issue because of delay? What was that?

Because we filed our 10-K four days past the required submission date. And what that did was the S3's that we had filed for private equity financings in 2005, 2006 had clauses in the registration rights agreements that allow for liquidated damages if there is a period of time where they can't transact. So we just yesterday -- or I guess stated today, filed S1's that will replace the S3's that were out there in (technical difficulty). And once those are approved by the SEC, then the investors will again be back in compliance. So during that period, we have a clause in the registration rights agreement to pay some liquidated damages.

I understand. So generally, overall, the business seems to be firming. Your thoughts on the Company going forward, Tom, maybe in summary?

In summary, we're very positive. We see some very good opportunities. We see the LRAD business continuing to grow. We also -- I haven't mentioned, but we also see some very good growth in our NeoPlanar business. Mass notification. We're focused on enhancing that product line, because the mass modification market is growing, and we have a product that fits very well into that space. So we're working hard in that area. In LRAD, the LRAD-R is taking off. So we're getting very good responses from a lot of the major integrators on our products. So we see a lot of positive opportunities; it's just a very, very slow selling cycle, and we're struggling our way through that.

To expand on that a little bit, too, is the -- on the NeoPlanar side for mass notification, we are seeing a lot of opportunities out of that, especially working with ADT on college campuses. Unfortunately, yesterday with what happened at Northern Illinois, and what continues to seem to be a trend, a troubling trend, these college campuses and other areas need to have the ability to quickly communicate with a lot of students or teachers very quickly. And the NeoPlanar technology lends itself to that, and we have installed on a few college campuses, and expect to have that business ramp up through the year.

Obviously, a terrible thing there. Just finally, Kathy, we can expect that gross margins will remain stable, or at least perhaps creep up in the expectation of additional sequential growth in revenues?

Gross margin should be stable or improved, probably, for the balance of the year.

It depends on the product mix. With the focus on LRAD, we anticipate that we'll be able to make (inaudible) gross margins. But as we see sales coming out of some of the other product lines, unfortunately, we don't share the same gross margin across the board.

Very good. We'll look forward to additional progress. Thanks for the call. It's good to have this kind of forum. Thank you.

Michael Ciarmoli.

Thanks for taking my call. I guess if you could help me with the visibility into future revenue streams. You announced some orders at the end of last year with some Indian oil and gas companies, I think, the Sacramento Sheriff's Department. Can you kind of outline what the delivery roadmaps for those opportunities look like? Some of them clearly seem to have some sizable revenue potential. I'm just trying to get a handle on how we should look at the remainder of '08 and into '09 in terms of this revenue ramp here.

Specifically with the Indian oil and gas, we have not shipped that product. We're shipping that product this month, by the end of this month. It's a pilot program. And we anticipate that if the pilot goes smoothly, as we anticipate it, we should see some significant orders coming out of that group because they have about 127 oil platforms and a number of vessels that feed into those platforms. And that's what they're piloting our product on. So the potential is there. But again, we have to go through a pilot, and some of these pilots tend to last longer than we would like.

Is there any criteria that they're looking for in these pilots that would -- are they benchmarking your product against other competing products? If you could walk me through that process.

In this case they're just benchmarking us against ourselves, basically. There is no other product in the mix. It's just taking our product, putting it out on platforms. In this case they're buying a LRAD-R, which is an LRAD on a (inaudible) remotely controlled. They're putting it on an oil platform, and they're going to test it out and get feedback from the operators of the platform. And if it goes well, keeping fishermen and other intruders away from the platform, if that goes well, then we anticipate that we will see some significant add-on orders.

The other revenue streams we -- this order that we received from the UAE, we anticipate there's going to be additional orders coming from that initial order. And we've already been given some indications from the UAE that the potential is much larger than this initial order. And we're also -- we're seeing some additional orders coming out of Russia, and we are also seeing some additional orders coming out of China. So the revenue streams are there. Probably the biggest revenue stream that we see right now is with the US military, which is very positive.

Do you sort of have any feeling or roadmap? I know you mentioned earlier the Navy opportunity over I guess it was a five-year period. Do you foresee any additional opportunities beyond that initial order?

We do. Actually, we do. Actually, we see some strong short-term opportunities with the Navy on that order, because we just had a demonstration with the US Navy last week, and it was very well received. And they're talking about some additional short-term orders that were not anticipated at the time. So it's very positive.

Can you quantify those opportunities at all?

We don't like to quantify anything. We'll quantify it when we actually have the PO in-house.

(technical difficulty) as you can see from the financials is that the timing of the delivery, the timing of the orders and the timing of delivery tends to fluctuate quite a bit. It never comes quite as quickly as we want, but then (inaudible) we do get quick orders. So it's difficult to forecast.

The one thing that you can look at, Michael, if you look at our balance sheet, we've cleaned up our inventory quite a bit. And we are looking at providing an eight to 12-week leadtime on any orders that we receive. So we have the process of a very slow sales cycle. But once we receive that order, we're now taking a little bit longer to produce against that order because we don't want to be stuck with a lot of excess inventory on hand.

Fair enough. I'll jump back in the queue and come back on. Thanks.

(OPERATOR INSTRUCTIONS). Robert Smith.

Could you share with us just what is it about the HSS technology that has prevented its adoption and realization of its promise, as we saw so long ago?

I think the main thing, as we've talked about before, is right now, the prime market for HSS is digital signage. And this has been a market and an industry that has been also touted with a lot of promise, probably for 20 years, that's been very slow to develop. I think the other thing that's also going on out there is most people don't realize that it's not supermarkets, it's not banks, it's not the host stores that pay for these things. They don't pay. They get paid to put those digital signage networks into their facilities. So the people who have to front these costs are integrators. And to date, most of these integrators are small and cash-strapped. These integrators have to put together the deals with the host stores. And they have to buy all the equipment, they have to front all the installation costs, and then their money starts flowing once they get an ABC Family Network or somebody like that, who puts together broadcasting that basically loops every 10 or 15 minutes. Then they broadcast it to those stores all day. And it's a mix of entertainment, local news, advertising, programming and so forth. That's the mainstream of digital signage today. Unfortunately, again, these small integrators are cash-strapped. IBM and NewSight in particular are the companies that we rolled out within 2006, and expected last year to have a lot more orders from them through Kroger and Meyer and others -- basically ran out of funds, and to this day they're still looking for funds. We have gone beyond these companies and are working with others, but we're down the stream a little bit as far as getting these things out, improving in test and trials, and also getting them rolled out into the areas that these companies are looking at.

We are heartened to see that some larger companies are starting to look at this space, companies that have natural affinity to digital signage, companies that supply the LCDs or provide networking equipment. These are the types of companies that if we are able to sell our HSS with into their digital signage networks, they can roll it out and support it financially. So really at this point, HSS, I think, as far as a price and performance point, works well for many of the digital signage applications. And that, frankly, is the biggest market opportunity. But we are at the timetable of how quickly that rolls out.

How about all the other areas that were once mentioned? Tom comes from a really major business enterprise background. Isn't there any way to move this toward a major acceptance?

I think the main thing, too, is on the -- we are working with large Asian manufacturers of LCDs and plasma screens who are interested in HSS, but it still is a cost and performance point. And what will they pay for audio? And I think we continue to work with these companies. We continue to look at where we can cross over at a point where they would be willing to take a license and roll this out. But as far as consumer applications, we're still too high for the mainstream consumer applications today, as far as the price point.

Thank you.

(OPERATOR INSTRUCTIONS). I'm showing no further questions at this time.

We thank you for your participation in the conference call, and this concludes the American Technology Corporation Q1 2008 Webcast and conference call. Thank you, everyone.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may now disconnect. Everyone have a great day.