Genasys Inc (GNSS) 2010 Q4 法說會逐字稿

Welcome to LRAD Corporation's fiscal year 2010 conference call. I'm Robert Putnam, Investor Relations for the Company. Kathy McDermott, our Chief Financial Officer, and Tom Brown, our Chairman, CEO and President, are also with me on today's call.

After my reading of the Safe Harbor statement, Ms. McDermott will recap the financial year 2010 financial results, followed by a brief presentation from Mr. Brown. After his remarks, we will open the call to questions.

Except for historical information contained herein, the matters discussed 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 technologies and products; entry of competitors; the possibility our intellectual property protections will not prevent others from 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 from our current expectations. For more information regarding other potential risks and uncertainties, see the Risk Factors section of the Company's Form 10-K for the fiscal year ended September 30, 2010. LRAD Corporation disclaims any intent or obligation to update these forward-looking statements, except as otherwise specifically stated.

I'll now turn the call over to Kathy for the fiscal year recap. Kathy?

Hi, everyone, and thanks for joining us today. We're happy to report our first profitable year in the Company's history in fiscal 2010, which was a significant milestone for us to reach. Compared to fiscal 2009, revenues increased by 10%; gross profit as a percentage of revenues increased by over 6 points; operating expenses decreased by 13%; and we had $3 million of net income from continuing operations for the year, a $3.4 million increase over fiscal 2009.

These amounts represent our continuing operations only, and our HSS business is reflected in our consolidated statement of operations and consolidated balance sheets as discontinued operations, as a result of the spin-off of our HSS business on September 27, 2010. In addition, we closed the year with significant backlog of over $13 million deliverable in fiscal 2011, so we're off to a strong start for next year.

Our net revenues for the fourth fiscal quarter ended September 30, 2010 were very strong at $5.2 million, an 83% increase over $2.8 million reported for the same quarter in the prior year. The increase was primarily driven by sales to the US military as well as a large bird control and detection order, as we previously announced. Our revenues will continue to fluctuate on a quarter-to-quarter basis, based on the nature of our business and customer base.

For the fiscal year ended September 30, 2010, our net revenues were $16.7 million, a 10% increase over revenues of $15.2 million for the prior year ended September 30, 2009. The increase was in our LRAD product line, offset by a reduction in our SoundSaber product line.

Gross profit for the fourth quarter was $2.8 million or 55% of net revenues compared to $1.2 million or 41% of net revenues for the same quarter in the prior year. Gross profit for the fiscal year ended September 30, 2010 was $9.2 million or 55% of net revenues compared to $7.4 million, or 49% of net revenues for the same period of the prior year. The improvement in gross margin is due to the increased revenues, increased fixed cost absorption, lower product cost, favorable manufacturing overhead spending, and lower warranty costs.

Operating expenses for the fourth fiscal quarter decreased by $358,000 or 16% to $1.9 million from $2.2 million for the same quarter in the prior fiscal year. Bonus expense in the fourth quarter was $543,000 based on final year-end results, a reduction of $236,000 from $779,000 recorded in the fourth quarter of fiscal year 2009. In addition, we reported a reduction of $78,000 due to lower staffing; $52,000 for favorable third-party commission expense and other savings.

Operating expenses for the year ended September 30, 2010 were $6.7 million, a decrease of $973,000 or 13% from the prior year expense of $7.7 million. The reduction from the prior year was primarily due to $607,000 from reduced non-cash share-based compensation expense; $355,000 for favorable commission expense due to lower commissionable sales; and $85,000 for reduced legal, audit, and accounting fees. This was partially offset by an increase of $65,000 for product development.

We continue to closely manage our operating expenses and expect limited staffing additions to help support our growing customer base as product and service requirements.

Net income from continuing operations for the fourth fiscal quarter was $943,000 or $0.03 per share compared to a net loss of $1 million or $0.04 per share in the prior-year fourth quarter, an increase of $2 million. The net loss in the fourth quarter includes a provision for income taxes of $52,000. Net income from continuing operations for the fiscal year ended September 30, 2010 was $3 million or $0.10 per share compared to a net loss of $376,000 or $0.01 per share in the prior fiscal year. Fiscal 2010 includes a non-cash, unrealized gain of $748,000 for the revaluation of derivatives related to warrant instruments and a tax provision of $167,000. Fiscal 2010 includes $475,000 of non-cash share-based compensation expense compared to $1.1 million in the prior year.

On the balance sheet, cash and cash equivalents increased by $319,000 in fiscal 2010 -- $372,000 was generated through operating activities; $30,000 was provided by stock option exercises; and $84,000 was reinvested in the purchase of tooling and patents. In fiscal 2009, the Company increased cash and cash equivalents by $2.4 million, generating $2.6 million from operating activities; $10,000 from stock option exercises; and reinvesting $181,000 in tooling and patents.

Net inventory increased by $139,000 during the year. Our trade receivables increased quite a bit at year-end due to our strong revenues in the fourth quarter of 2010 compared to the prior-year's fourth quarter. Our trade receivable balance was $4.2 million at year-end or 74 days compared to $2.6 million or 46 days at the end of fiscal 2009. We had no reserve for bad debt at year-end as these receivables are all deemed collectible. At September 30, 2010, we had working capital of $9.8 million, which was an increase of $3.3 million over the prior year.

And with that, I'll turn it back over to Robert.

Thank you, Kathy. We'll now turn the call over to Tom for a brief management presentation.

Thank you, Robert, and thank you all for joining our call. I want to briefly go over our 2010 highlights and then open the call to Q&A.

As Kathy indicated, we increased [all] revenue year-over-year by 10%, our fourth consecutive year of double-digit growth. We accomplished this in a very difficult global economy. We achieved profitability for the first time in the Company's history with operating income of 14.7% of revenue.

We increased our working capital by 30%. We were awarded a contract with the US Navy for Shipboard Protection System Block 2 to provide our RX units -- this is our largest single order for RX to date. We were awarded an equipment and services contract with a foreign government in the amount of $17.6 million with $12.1 million to be delivered in the first half of 2011.

We spun off our HSS technology so that we can focus our resources on our core business. We continue to develop the various markets that we have created for our products -- military, law enforcement, Maritime, wildlife preservation, perimeter and port security on a global basis. 2010 was a successful year as the size of our orders and the global opportunities continued to grow. We anticipate that we will increase 2011 revenues and profits at a double-digit rate as we continue to develop markets and business opportunities on a global basis.

At that point, Robert, let's get some Q&A.

Thank you, Tom. We will now open this conference call to questions from management. We encourage callers with questions to queue up with the Operator as soon as possible so that there is minimal lag time between each caller.

Operator, please instruct the callers how to queue up with their questions, please.

(Operator Instructions).

Operator, please give us the first caller as soon as you are ready. For those listening, there may be a brief period of silence before our first caller.

Daniel Cardella.

Congratulations on a phenomenal quarter. How exciting to see the Company reach this milestone.

Thank you.

Thank you.

My questions pertain -- I have two questions. My first question pertains to the sales/staffing side and whether or not the Company, in your estimation, is positioned to take advantage of where you are now, and if the sales side is staffed up appropriately, and where their efforts are focused going forward?

Well, we have recently added two new business development professionals to our team. One is a retired person out of the U.S. Army who has already hit the ground running and is helping us develop our Army business. And another one is a professional from L-3 Corporation and he has been given responsibility for the Middle East and Africa. We feel that those are areas that have large opportunities for us.

So, in a staffing standpoint, we're trying to live within our means. We're trying to develop third-party representatives throughout the globe. We've done a pretty good -- we've done that pretty well over the last couple of years. We're still working on that, and we feel that, right now, we have enough feet on the street. We're looking to always try to expand that base, but right now, we feel like we're pretty well-positioned with these two additional people that we just brought onboard.

I see. And a related question, could you give us some color -- again, just general commentary, as to which product you're gaining the most traction on? Where you're seeing the most uptick?

Well, the good news is we're seeing some very good market response from all of our products. We came out with a complete product line going from a handheld unit to 100X all the way up to a remotely controlled unit, the RX. And the SPS Block 2 award was our biggest order for RX to date. And we feel that that's a product that we're trying to strongly promote for port security, perimeter security, and large Maritime applications.

So right now, we feel pretty good because all of our product line is selling pretty well. We see increases across the board.

Fabulous. A question apart and separate to this, though, that has some relationship and some bearing -- is the Company at all interested in raising equity capital at the moment? Is there any desire to strengthen the balance sheet by bolstering the book equity in the way of financing?

Well, we feel like we've been bolstering our balance sheet pretty well through operations over the last couple of years. We increased working capital by really about 40% over the prior year. We have some very good orders in-house that we're working on for the first half and that's going to generate some positive cash flow into the Company. So at this point, we feel we have adequate financial resources to continue to grow this business.

I see. Congratulations again, guys. I'm looking forward to following you going forward.

Alright, thank you very much.

Thank you, Daniel. Next question, please, Operator.

I'm showing no further questions at this time. We have another question from [Aaron Martin].

Congratulations, again, [to this point]. I just wanted to go on to the press release issued last night -- a very impressive backlog number. I don't know if there's any way we can review it? Because, I mean, I assume -- that number was as of September 30, not as of today, correct?

As of September 30.

Okay. Any idea of how much of that is going to ship since then?

Well, we will ship all of it within the first half of this fiscal year (multiple speakers). All of it will be shipped (multiple speakers) --

Basically, it's all the, you know, the foreign order.

It's the foreign order plus some additional orders. And we also have -- we've booked some additional orders since September the 30th. But everything will be shipped within the half.

Yes. I have a question, in terms of that foreign order on the maintenance, obviously, that's a multi-year thing; but will it be front-loaded in the sense -- because, obviously, if you're putting offices over there or wherever it is, maybe the start-up costs are higher than the continuing costs?

The start-up costs are going to be higher than the continuing costs; you're correct. We do have to staff some offices, get some people on the ground; we have to do some training. But in terms of the opportunity, by putting people in place and providing quality service, we feel that that will generate additional revenue down the road on that agreement.

Yes, that was my next question in terms of after the next four months when you finish this first initial order, do you see more orders coming from this?

We're hopeful. We're very hopeful.

Along the same sizes?

Along the same -- well, it might not be as large but it will be pretty significant given -- you know, relatively speaking.

This is something that we've been working on for a number of years, trying to get longer-term commitments out of our customers, longer-term, get some recurring revenue from each one of our sales. So we're very excited about this deal and we feel that it will yield additional revenue, hopefully, within the short-term.

Okay. And did you count any of the maintenance in that backlog number?

No, that's not included in that; that's in future years.

No, I'm saying for whatever maintenance -- I'm assuming there's some sort of start-up, which would be slightly more significant than the rest of the ongoing costs. Was that included?

Well, it will be included in our first half financial results; but in terms of --

But you didn't include that in the -- I mean, the $13 million is not including that?

No, that's just pure revenue. And the financial results will reflect the expenses as we book the revenue, but this is still a very nice, profitable contract for us.

Then in terms of -- obviously, we talk about looking forward for the entire year to have double-digit growth, which I guess, looking right now isn't very hard to see, considering we have that large order. If we were to take out that $12 million, could we see growth as well?

That's what we're here for. We're looking to continue to grow this business. We've done it for the last four consecutive years double-digit growth and we -- even without this order, we feel pretty confident that we can continue to grow this business. The only (multiple speakers) --

I mean -- let's say -- not saying -- just chopping it out, chopping out that $12 million from fiscal 2011 numbers, would we still hopefully see growth there?

Yes, that's what I'm responding to. I think we will. The only caveat I have is, hopefully, the US government gets their budget in place very shortly so that we can see some dollars flowing out of the government. Because right now nobody is spending any money because the government hasn't approved the budget.

Understood. And in terms of the fourth quarter, is there any sort of breakout how much of that was US government?

We had quite a few orders to the Navy and the Army, so it was -- more than 50%, I would say.

More than 50%. And also, I had trouble just backing it out because of the discontinued operations. What was the gross margin for the fourth quarter?

Gross margin for the --

Gross -- in terms of dollars, it was about -- I think I [adjusted out that it's] $2.8 million for the quarter.

So, it's --?

So from a percentage standpoint, it was 55%.

Oh, 55 -- I mean, are you talking about -- is that for fiscal 2010 or was that for the fourth quarter?

That was for fiscal 2010 -- I'm sorry, fourth quarter of fiscal 2010.

Okay, fine. And in general, it wasn't very much, but even, let's say, $600,000 of -- call it, dead revenue, is that going to -- without having that going forward, are we going to see slightly typically higher gross margins or operating margins?

The financial statements that we've recorded don't include the discontinued operations in that revenue or gross margin number. (multiple speakers) They're included (multiple speakers) [down below].

Yes, understood. I'm talking about looking back historically when it was included, when we got 53% gross margins or as it moved around, can we see looking back -- looking forward, if we're not including this small amount of revenue, a small uptick in the gross margin?

Well, the thing is, it's such a small number in comparison. The gross margin will be improved by taking that business out because the margin on that product line was very, very low. And the bottom line is going to be improved, because we have yet to make any money on that product line.

Okay. Understood. Alright, I guess, congratulations and I'm looking forward to watching the story unfold.

Tom Brown. Thank you.

Thank you, Aaron. Next question, please, Operator.

[Carter Christopher].

Yes, congratulations, gentlemen. My question pertains to a current open solicitation from the Army. It looks like there's an order out there for what appears to be 6,300 units of AHD product. Are you guys -- can you talk about that order at all? I understand you can't tell me everything, but just whether you may have responded to it and whether you would even be in a position to produce product at that kind of level of unit volume?

Well, the RFI was put out by the U.S. Army. It's for 6,350 units. We did respond to the RFI on time and this is a result of an RFP that we won back in 2007, and we provided product. That product has been thoroughly tested. And we were expecting this RFI to come out -- actually expecting a little bit earlier, but it came out in November. And we responded; we'll have -- an RFP should follow and it's for the budget year 2012. So that's October of 2011, that's when it begins.

And could we produce those units? Right now our understanding is that maybe over a five-year period; but if it were over a one-year period, the answer is yes, we can do it.

Great. So if you take your average sales price for your products, I don't know what products would be sold that you currently offer into that solicitation, but that looks to be -- that would be like your -- just an idea, a ballpark, but wouldn't that be the biggest single piece of revenue you've ever had?

That would be larger than the total cumulative revenue of this Company fiscally. We're talking about something that would be on the -- with different accessories, it could be anywhere from $100 million [to $150 million].

Yes, that's what I -- that's kind of where I computed it too. It's exciting. We'll all be waiting with -- and to that point, I mean, with those kind of things out there as possibilities, I don't know how realistic it is, but is the mood around the Company -- do you have employees that are real excited right now? Can you talk a little bit about the culture, given the growing pains that you've had in developing, really being a developmental company for a number of years and now transitioning more into a commercial organization -- what's the mood around the business park there in San Diego?

Well, I'll speak and maybe I'll let Robert -- Robert's our historian. He's been here forever. But my last four years -- even in the difficult times when we were trying to turn this company into a profitable business, the mood has been good because everybody saw the potential. And we've been changing the corporate culture, changing the product line, which was something that we had to do because we couldn't live with the old product.

And now I'd say that on that, when you start to see positive results -- when we started to see this last year when we generated positive cash flow, when you start seeing positive results, you have people who can get behind that and we're looking at opportunities. We're very busy. We're building a lot of products, so I would say things are pretty positive right now.

Robert, you've been here forever; do you have --?

And I would wholeheartedly agree. And just to chime in with what Tom is saying there, Carter, I mean, he -- Tom and the management team have brought in a tremendous professionalism, really put control into the operations, accentuated affirmative product development, better customer relations just across the board. And the esprit de corps in the working environment around here is exciting. And also to be able to be a part of something that is growing and to be able to create a new market that we're selling product into is something that's very gratifying. So, in all my years here, this definitely is the most exciting time I've seen for the Company.

Yes. I appreciate it, guys. Best of luck to you. And many of us watch what you do on a daily basis, so we're -- there's a lot of people out in the investment community who are rooting for you. So good luck.

Thank you, Carter.

Thank you. Yes.

Next question, please, Operator.

[Steven Wagner].

Hey, gentlemen, congratulations. And as you know, we've been long-time shareholders, so this is very gratifying for us, but I can just imagine how you folks feel.

The last questioner really took most of my questions, but I did have a follow-up -- not a follow-up, a separate question regarding the investment community and how you guys are going forward and positioning yourself. Can you give us any updates and highlights on meetings you've had with institutions? Is there any potential coverage via a reputable research firm that we can expect any time soon?

Well, one of the things that we have been doing over the last 3.5, four years is putting a foundation, Steve, so that we could go out and not talk about what we're going to do but point to what we have done with the basis of what we're going to going forward -- like the RFI that we just discussed.

And so we have begun to do that. We were -- we've had great support from our institutional and retail shareholders, and some of our investors back east, their institutional and variety set us up with some meetings in New York in early November that I think went very well. And following up with that, we're going to continue to do those type of meetings both here on the West Coast and other areas -- meeting with institutional investors in particular who have an interest in defense and aerospace companies, which is kind of the sector that we play in.

And so we do expect to be a lot more proactive now that we have got some results, especially with the results that we put out yesterday, and based on what we expect to happen in fiscal year 2011.

Great. Fabulous. And just a question with regard to the markets that you're addressing right now. Obviously, all the excitement is regarding these foreign orders and the potential continued military stream.

But some of these other commercial areas, can you comment on how that's progressing? And I'm talking specifically about some of the things we've talked about before, with regard to oil rig protection, some of the stuff that you guys are doing through DeTect with the mines and the windmills -- what can you comment on that, on how that's progressing maybe more specifically?

Well, all those areas are progressing -- they're progressing well. They're progressing slowly like anything. We have a product that -- you know, these selling cycles are long. The foreign government order that we announced took over four years. Most of it was -- I was involved directly for the four years of trying to get that order to come in the door.

In terms of wildlife preservation, as Kathy indicated, in the fourth quarter, we made another shipment of products that will be deployed to basically keep birds away from some tailing ponds and protect them from those tailing ponds. And we also just put out our first couple of RX products for port security.

So we just put a product out in Port of Corpus Christi in Texas and we just put a couple of products into a Middle East port that is an area that has a lot of potential for us. And these deals take a long time to develop, a long time to sell, but we're making progress in these areas. And again, these are markets that we're creating. So when you're creating a market with limited resources, it takes some time, but word-of-mouth and success sure starts to generate more success. So we feel good about things.

Are you still primarily dealing through DeTect? Or are you doing any of these types of marketing direct as well?

We are doing both. DeTect is a good partner for us but we're also working directly and we have some opportunities going on internationally right now that we're working with other partners. So this is an area where LRAD definitely has a strong application.

Okay. And kind of just maybe talking specifically about one of the products, the handheld device, the LRAD 100, I mean, obviously, in the past, you guys have talked about the potential for law enforcement; you've got some great stuff on your website with regard to how it can be used and is being used. Are you seeing any further interest there? I mean, is there any potential for some more orders of size? Say, for example, with -- for riot gear, that kind of thing? Can you talk about that?

Actually probably our biggest customer with the 100X to date has been the US military. They like the unit; they can put it in a backpack and put it on someone's back, they can communicate.

Law enforcement has come along. They're -- most city budgets are strapped, so right now they're going for federal grant money and the grant money is coming out January 1, so we see the pickup in law enforcement. But we just sold some product -- we just received an order this week from a power plant that wants to install these as part of a perimeter security system and that's an area that we're working on. That's something in 2011 that we'd like to continue to work on and develop a -- you know, right now you have a lot of cameras around a perimeter security system, but LRAD can work -- this LRAD 100X specifically can work very well into those types of perimeter setups.

Excellent. And one last question with regard to R&D. I mean, obviously, you've, over the last few years, done a fabulous job in making the LRAD product better, developing new LRAD around the original one. What about new products? I mean, what are you guys doing for the next 12 months in R&D?

Well, all of R&D is still focused on LRAD product. You know, we have -- as you heard, we have a lot of large opportunities that we're chasing and these opportunities that are based on our marketing and developing these areas. And we're still working on our product because our whole focus is on bringing these opportunities home. So that's where we're going to be for the next year.

Well, here's the reason I asked that question. At the last annual shareholders meeting, you made a comment that kind of took me a little bit by surprise. You talked about annual revenue projections and goals, that you'd like to see $35 million to $40 million a year in annual revenue. At that point, you felt that you'd have to have new products. Based upon what's occurred here in the last six months, has that changed your mind at all?

No. No, I would like to see us get up to that level of revenue, obviously, as soon as possible, but in terms of -- first, we have to get there, Steve. And once we get there, then -- we have some things on the drawing board, but I don't need to take my engineers, because I have a very small team, but they're very good; I need to keep them focused on what we're doing and try to enhance a few of our products so that we can continue to be successful in the market.

Oh, indeed. Thank you, guys, and again, congratulations. We'll forward to more developments soon.

Thank you, Steve.

Next question, please, Operator.

Matt Spratford.

Just had a quick question on -- I was just curious about that Army RFI. I mean, what sort of margin do you guys think is realistic on a large order like that? Do you think your technological position allows you to charge a premium?

Well, an order of that size, Matt, there's going to be a lot of pencil sharpening. But, hopefully, we can also drive down a lot of our costs at the same time. So we're looking to try to keep that 50% profit margin because that's a good number to always target. And we've been able to achieve it and we'd like to keep that. So while we may have to reduce our selling price, we'll definitely be able to reduce some of our component costs.

Got you. And then just sort of a follow-up to that -- I don't know if you guys can comment, but can you give us any sort of idea maybe what you guys target as an internal operating margin?

Kathy, do you want to --?

Operating margin in terms of --?

Well, this year, we achieved 14.7% of operating profit. I'd like to see us stay in that range with a much higher revenue number.

I got you. So you do feel that this quarter -- or this year is kind of representative? It's -- do you feel that's sustainable?

My feeling is right now, yes. I think 2011 is going to be a very good year for us based on the start that we have. And like I said, we're hoping that budgets get approved in Washington and we can get on with our business here, because there is a lot of demand for our product in the military. The problem is we need a budget to be approved.

Right. That makes sense. That's it for me. Thanks, guys. Good luck with everything.

Next question, please, Operator.

I'm showing no further questions at this time.

If we have no other further questions, we thank everyone for listening to and participating in LRAD Corporation's fiscal year 2010 conference call. A replay of this call will be available at approximately 24 hours through the same link that we issued in our November 23rd press release. Thank you, everybody.