Genasys Inc (GNSS) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to today's webcast. (Operator Instructions). At this time it is my pleasure to turn the floor over to Brian Harvey. Sir, the floor is yours.

Thank you, Dagma. Good afternoon and welcome to LRAD Corporation's fiscal second-quarter 2014 financial results conference call. My name is Brian Harvey and I am the Director of Investor Relations and Capital Markets for LRAD.

On the call with me this afternoon are Tom Brown, our Chairman, President, and CEO, and Kathy McDermott, our Chief Financial Officer. Mrs. McDermott will recap our fiscal second-quarter financial results which will be followed by a brief presentation from Mr. Brown. After their presentations, we will open the call to questions.

But before I turn the call over to them, I would like to take this opportunity to remind you that, during the course of this call, management will make forward-looking statements. Other than statements as to historical facts, statements made during this call that are forward-looking statements are based on our current expectations. During this call, we may discuss the Company's plans, expectations, outlook, or forecast for future performance.

These forward-looking statements are subject to risks and uncertainties and actual results could differ materially from the views expressed today. For more information regarding the potential risks and uncertainties, see the Risk Factor section of the Company's Form 10-K for the fiscal year ended September 30, 2013.

LRAD Corporation disclaims any intent or obligation to update those forward-looking statements except as otherwise specifically stated.

I will now turn the call over to Kathy for the fiscal second-quarter 2014 financial results recap. Kathy?

Thanks, Brian. So we had a strong fiscal second quarter of 2014 with revenues increasing by 69% to $5.4 million compared to $3.2 million for the fiscal second quarter of 2013. Year-to-date revenues through March were $9.2 million, a 49% increase over $6.2 million for the same period in the prior year. Revenues from our international market continue to drive the growth with strong sales in the public safety market to [foreign police], as well as international maritime and navys, energy facility security and some additional math notification installation.

With the exception of one $1.3 million order for national police in Southeast Asia, the other orders or moderate in size and diverse, showing a widespread penetration of our product.

Our third fiscal quarter is already off to a good start with the shipment of a $4 million order last week to the Middle East for border perimeter security. Our revenues will continue to fluctuate on a quarter-to-quarter basis based on the nature of our business and customer base.

Gross profit for the quarter ended March 31, 2014, was $2.7 million or 51% of net revenues compared to $1.4 million or 43% of net revenues for the second quarter of the prior year. Year-to-date gross profit was $4.7 million or 51% of net revenues compared to $2.8 million or 46% of net revenues. The increase was primarily due to the increased volume as well as favorable product mix.

Operating expenses for the second fiscal quarter increased 21% from $1.8 million to $2.2 million primarily due to a bonus accrual of $316,000, based on meeting targeted performance goals; an increase of $201,000 in salaries and consulting fees, primarily related to business development efforts; $91,000 increase in travel to develop our international markets and other increases, partially offset by a $319,000 reduction in legal and other professional fees incurred in the prior year related to the lawsuit.

Year-to-date operating expenses increased 18% to $4 million in the first six months of 2014 compared to $3.4 million in the first six months of the prior year. The increase resulted from $316,000 for bonus accrual, $428,000 for salaries and consulting, $103,000 for travel and other increases offset by a $340,000 reduction in legal and other professional fees.

We reported a net income of $526,000 or $0.02 per diluted share in the fiscal second quarter of 2014 compared to a net loss of $459,000 or $0.01 per share in the second quarter of 2013 as a result of the increased revenue and gross margin partially offset by higher operating expenses.

Year-to-date net income was $657,000 or $0.02 per diluted share compared to a loss of $560,000 or $0.02 per share in the prior year. Our cash balance increased from $15.8 million at September 30, 2013, to $18.5 million at March 31, 2014, primarily generated from collection of our accounts receivable from our strong fourth-quarter revenues of last year partially offset by a reduction in AP from our fourth-quarter purchases and an increase in inventories to support our strong sales forecast for the third quarter. Working capital is $24.6 million at March 31, 2014.

And with that, I will turn it back over to Brian.

Thank you, Kathy. I would like to turn the call over to Tom for a brief management presentation.

Thanks, Brian. Thanks for joining our call. As Kathy indicated, year-over-year first-half revenue increased by 49% and we generated our first-half net income versus prior year first-half loss.

As I indicated in the past, with the uncertain US budget situation, we would emphasize developing our international business and revenues. International sales have accounted for 74% of our first-half recorded revenues and we continue to see strong demand in these markets.

In our second quarter, we introduced a new product offering, the LRAD Mobile 360. The Mobile 360 is a fully integrated, self-contained, ruggedized trailer that has a telescoping, folding mast that can reach a height of 30 feet and contains a single or a dual stack 360 for clear communications where it is needed. Our primary markets are homeland security, FEMA, border patrol, military bases, and these are our first market opportunities that we are pursuing.

Disasters such as Hurricane Sandy, the tornadoes in Oklahoma where all infrastructure is decimated are examples of where this product can be effectively used to communicate instructions. In addition to the Mobile 360, we have submitted two large international proposals for our 360 mass notification system.

We are facing tough competition from established competitors, but we will continue to develop this market and continue to be aggressive as RFPs come up. We are still waiting to hear award outcomes on these projects.

On the [RF] side of our business, we are participating in two large well attended international trade shows. This week, we are exhibiting at SOFEX in Ammann, Jordan. SOFEX is a major Middle East trade show that showcases homeland security and peacekeeping equipment.

We are also participating in trials this week with the Indian Navy. As part of their RFP process, the Indian Navy is hosting trials for acoustic hailing devices. We will be in competition with at least two other suppliers, but the Indian Navy has purchased LRADs in the past and these trials should lead to future procurements.

In June we will be exhibiting at Eurosatory, which is billed as the largest exhibition of land and air land defense and security. Major trade show that we participated in last year and we saw some good results in the way of increased revenue. We will also be presenting at B. Riley and Markham investment conferences in the month of May.

As I indicated, we continue to see strong demand from international customers. We are working opportunities in all territories, Asia, Middle East, Africa, and South America. On the domestic side, we are working all branches of the military, law enforcement, and several government departments as year-end money becomes available.

As Kathy indicated, we will have a very strong third quarter and we are working to achieve a very strong fourth quarter and a strong year. So a key takeaway from this call is a very good first half with a better second half to come.

And with that, Brian, let's take some questions.

Thanks, Tom. We would like to now open up the conference call to questions for management. We encourage callers with questions to queue up with the operator as soon as possible so that there will be minimal lag time between each caller. Dagma, could you please instruct the callers how to queue up with their questions?

(Operator Instructions). Les Sulewski, Sidoti & Company.

Good afternoon. Tom, perhaps maybe you can help me out. First, what was the percentage of revenue from international? Was it 79%, did I hear that correct?

74.

74%, okay. And can you perhaps guide us through what you are seeing in each market. I know you mentioned that you are pursuing military, mass notification, public safety and et cetera. Can you walk us through what, significantly, are you seeing through each market and what kind of activity are you seeing there?

On the international space, Les, we are seeing primarily public safety as it is called which is -- their form of law enforcement. And some military sales. Those are the major activities that we are seeing. We are also -- we still have some mass notification that we are building out in Asia and we anticipate getting some additional orders in the second half for mass notification in the Asian market.

We have been successful in Asia. We are trying to break our way into a couple of opportunities that are in the Middle East.

But, normally, the way our track record has been, we normally see good domestic business in the second half, particularly in the fourth quarter when year-end money is available. So, it is not uncommon -- in the past it is not uncommon for us to see a slow start with domestic business, but we never had this strong international business in the past. The international business has been really -- has picked up and has been really good. So its customer base is really public safety and military.

Thank you. That is helpful.

And perhaps maybe just shipping domestic and can you provide us with an update on the RFI with the US Army? And then if that request does go through into the budget is it possible that we can expect some changes to the original plan? Guide us through that if you could.

Okay. In terms of the budget process, we have been going through this over the past several years. There is -- the President has submitted his budget to Congress. There is a line item in the budget for acoustic hailing devices. Not for LRADs, but for acoustic hailing devices. And there has been in the past -- however, in the past we haven't made it through the conference, the budget conference between the House and the Senate.

And we are at that stage again where the conference hasn't started, the Defense Appropriation Bill is not finalized. It should be finalized sometime in July. We are working very hard to try to see if we can keep that line item in the budget and we have done that in the past. And we haven't been successful, but there's still some very strong demand at the field level.

So we are hopeful that we can bring that demand into Washington and get some results and we will know in July whether we made it into the budget and we'll be very happy to announce that hopefully at the next earnings call.

Yes, that would be great. Perhaps one more high-level question and I will get into more on the modeling side.

With your growing cash base, what are some of the intentions for that use? Is our acquisitions in the picture? A continuation of the share buyback, a combination of both? What is your take on that, if you could?

Yes. On a short-term basis, we are doing a share buyback and we have made some purchases there. We have been looking at a couple of acquisition opportunities, small acquisition opportunities. Honestly we haven't found one that we are really interested in right now, but we have recently looked at two opportunities.

And I think we are also looking on a short-term basis of trying to get a little better investment return out of the cash flow we do have in addition to continuing on with the share buyback and, in addition, to continuing to look at -- look and see if there are good companies that we could blend into this organization.

Thank you for that. And then, Kathy, you mentioned you are expecting a third strong quarter. Is something that we can expect similar to this for as the second quarter was in terms of revenue? Is this the way to look at it?

Yes. We've shipped our -- we announced back in January we had a $4 million order. That has shipped this quarter. So that is certainly a good start to the quarter this early on. But we do have a pretty good backlog of orders in the pipeline. So the third quarter looks like it should be at least as strong as the second quarter, if not quite a bit stronger.

Great. Thank you. And for your SG&A run rates, $1.6 million second quarter. There were some increases you mentioned and is that a typical run rate moving forward?

We had added some business development personnel at the end of last year, so we are seeing some of the increase from that. And there was a bonus accrual related to the performance thus far this year.

But I would say that is probably a pretty good run rate going forward. Commissions are one of the areas that are pretty -- that could fluctuate quite a bit. First-half commissions were fairly low. In other quarters they have been very high so that could fluctuate a bit on our quarter-to-quarter basis based on especially with some of our international sales working through reps. Sometimes they go through resellers and it's still [tended] margins. Sometimes they are direct-sales and then we pay SG&A line down below.

So, that is hard to forecast or to model out because that is dependent upon the individual orders, but I would say from a base run rate that is probably a pretty good number.

Thanks. And one more for me and I will jump back into queue. Just one quick one. Was there any currency translation that affected sales this quarter since you had a significant impact from international sales?

We only deal in dollars, Les.

All right, that's helpful. All right, thank you.

Josh Nichols, B. Riley.

Hello. I was looking over and it looks like there has been a good amount of military sales that have been coming up this quarter or last quarter especially internationally. And I was trying to look at it from big picture looking at some of the macro stuff. What do you think for the largest growth opportunity? Are you leaning more towards mass notification, the military revenue could definitely be pretty lumpy and you are going to be subject to things like budget constraints in the US?

And then also really quickly the mass notification market is pretty big. It is probably about $2 billion-$3 billion, but I was wondering how you stack up competing with some more established competitors, maybe like Siemens and things like that who have been doing this for a while as far as what's your edge?

The first question, on a short-term basis, the military business, even on a longer-term basis, the military business is still a sweet spot for what we are trying to work towards. It's a -- once you get in an RFP, if you can win that RFP, you get into as long as you can provide a very good product, it becomes a recurring revenue. We can see that with the US Navy. When we won an RFP about seven years ago and we just competed in one, a second RFP from the Navy last year, so that can be a nice continuing piece of revenue in the military sales.

And military sales throughout the world are pretty significant. So we have a pretty good business, not just in the US, but internationally. So that-- short term that is a key focus.

But midterm and long term, I agree with you. The mass notification space offers us bigger opportunity. Problem is we are in the LRAD acoustic hailing device space, we are the number one company. We represent about 90% to 95% of the worldwide market.

When it comes to mass notification, we are an upstart. And we are dealing with some very established companies such as Siemens, such as Federal Signal, Weyland, there are a number of large established companies. But what we bring to the table is a better device. We have a much better communication tool.

Because most of the systems that are out there, these old-line companies, they developed sirens. And our device, while we can put out a loud deterrent or warning tone, we also put out very clear communications over long distances. So we have taken the LRAD technology and we have developed it into a mass notification system.

Now we have to basically build a market. So it is going to be difficult, but we are going be very aggressive because we feel we bring a much better product to the table.

Clearer voice communications is the key.

Yes, thank you very much.

[Lloyd Korten], Unique Investments.

Hello. Congratulations, obviously a great quarter. Just wanted to mention to you, by the way, I love what you are doing with your website. I know it is continuously being updated, but it has a great impact. So whoever is doing it, they're doing a great job.

I want to ask you guys, the National Guard and FEMA, could you give us an update? I see such a great opportunity with our mobile device. Can you give me some update as to any kind of progress we are making with them?

We are working very closely with the National Guard. I had a meeting with the California National Guard last week and we were in New York making a demonstration with the New York National Guard, also, last week. And we have been talking to all of the different Guard. Each state has its own Guard representation so we have been talking to the individual states. We are making very good progress with the Army National Guard.

But, Lloyd, also with the Air National Guard. So we are trying to work demonstrations and we will have our trailer -- the first trailer that we built we sold before it was completed, but we have another one under construction that we are looking to bring out to a number of the National Guard bases for demonstration.

We also are talking to the FEMA people. FEMA purchased three trailers in the past and we are looking to expand into that area because we think it is a perfect solution for some of the things that they have to manage. I am going to Kentucky at the end of the month to meet with the Adjutant General of Kentucky. So we are strongly working the Guard and we are hoping to pull in some year-end money from the National Guard as we fill our product is a perfect fit. And the feedback we are getting from the Guard is very positive. Because they have purchased product in the past and they like it. So, we are working that very, very strongly.

Great. I think that is an area where you guys are going to be successful. China, how are we doing in China?

Well, China is still developing. We have -- in the second half we have about $1.2 million in new orders that just came in from China that will be shipping before the end of September. We are working on some new opportunities in China. So China is developing very nicely. We are very pleased with it.

Well, good. I see it as a potential great market for growth. Have you considered a dividend at all?

Honestly, Lloyd, no, we haven't. We haven't considered a dividend. We are doing the buyback and we are looking to continue.

The Board gave us a direction to go ahead and purchase X number of dollars worth of stock and we are executing against that. But as of this date, we really haven't discussed doing a dividend.

(technical difficulty) there is not a ton of stock out there and whether $0.10 a share would be $2 million because you seem to be generating cash on a regular basis and something that we would love to see you consider as a long-term shareholder.

Yes, something we can think about, but I would like to see a little more -- I would like to see a little stronger balance sheet before we talk about dividend.

Helpful. Final question. (technical difficulty) percentages of customers that we are doing business with this last quarter or the last half, what percentage would you say is new customers versus customers who have had the product that are expanding it and buying more or different?

I would say for the most part, Kathy can also chime in on this, but for the most part I would say that it is recurring customers. We have some new customers that we are bringing on, but they are very, very small in terms of the revenue dollars. Because it takes a while and we sell small quantities in and then we develop the market.

But I would say that for the most part we have pretty -- as Kathy indicated, pretty diverse group of customers, but there is a lot of repeat buyers in that list.

Yes. And to that extent, several of our resellers and reps might be similar, but they are selling into new markets also. So, where we might work through a rep in the Middle East, he is entering in -- he or she is entering into different markets from there also. So it is still broadening the base, but working through many of the same resellers.

There are a number of new customers who also probably this year within the last several quarters versus prior year.

Thank you. Thank you, guys, for all you do.

Thanks, Lloyd.

Thanks, Lloyd.

Dan Scoville, Edison.

Couple of questions. One, you mentioned on the OpEx line some biz development. Is that new opportunity or just enhancing some existing stuff?

That is new personnel that we have added over the past year.

Is that a market expansion or just enhancing current pursuits?

Well, it is actually -- it was enhancing the existing team, bringing in some stronger players and also opening up some new markets. We are covering more of the globe now with the team that we have in place.

And (multiple speakers)

And it was also, Dan, to pursue the mass notification market as well. So it was a combination of deeper penetration into existing markets as well as entering some new markets.

Thank you, that is helpful. One other question here. I apologize if this is somewhat naive.

Is there an opportunity of I guess dive down markets into something that's cost-effective enough to be more of a discretionary spend rather than a capital spend? And maybe boost some volume and get rid of the lumpiness or is that just cannibalizing your own opportunity? I was just wondering what your thoughts on that issue are.

Well, we developed the LRAD 100X to graft to that discretionary spend. It is priced below the capital limits of most municipalities and law enforcement groups.

But, yes, we don't -- right now we really don't want to cannibalize the market. We want to -- we have a good structure financially and we just need to continue to grow that topline. You look at our margins and you look at our fixed cost, they are low. If we can grow that topline, we are going to deliver some very nice results.

Good, thank you.

(technical difficulty) Wagner, Wagner Financial.

Congratulations on a great quarter and again on what you guys are doing. So it is really looking good.

Thanks, Steve.

You're welcome. I have a few questions. First of all, on the buyback, Tom, can you say how far along you are in terms of where, what the authorization was and where you are right now?

I think I am going to let Kathy give you those numbers if she has them on (technical difficulty).

So, the first two quarters we just really began at the beginning of the fiscal year into the first quarter of the fiscal year. We bought back (technical difficulty) 133,000 shares for about $0.25 million. So that is where we were after the first two quarters.

We are buying more now. The price has been lower, so we have been buying quite a bit in the third quarter (technical difficulty).

So we are a long way away from the authorization. Appreciate that.

The other question I had, Tom, you mentioned in your remarks -- opening remarks that you were looking to, quote, try to generate more income on the cash that you have on hand. Can you be a little bit more specific as to what you are looking at there?

Yes. We just went through a Board meeting, Steve, and we got an investment policy approved. So we are looking at different investment opportunities to generate a little bit more income than we have been generating off of the cash that has been sitting in our bank account.

I think that is a good strategy, obviously, a few years ago (technical difficulty) a couple of companies got caught up in some really what they thought were safe cash-type investments and ended up getting in a lot of trouble. And I know you are very conservative, so that is not a concern of mine.

Are you looking at just and -- hiring an institution like a PIMCO or somebody like that to buy ultra short-term bonds or something? Is that what you are looking at?

Yes, that is exactly what we are looking at.

Yes.

All right, perfect. (multiple speakers) great.

(multiple speakers).

Excellent, excellent. You have also mentioned acquisitions and that, again, I bristle a little bit at that, but I do respect your conservatism and your judgment and I mean that. But it still makes me wonder, we are such a small company and you don't really have a lot of money. I mean it is a lot of money in relation to our debt, but it is not a lot of money in relation to a lot of money.

What kinds of acquisitions would make sense? I know you can't mention any names, but tell me a little bit about what you are thinking. What is it that is going to complement what you are doing right now that would be attractive?

Yes, I -- Steve, to be honest with you, we get approached by a number of different (multiple speakers) with acquisitions and I will look at them very carefully. If it were something that we could just add to the existing bag of the sales team, I would consider it. But usually I agree with you. Usually these acquisitions come with too much baggage and its (multiple speakers) they're ugly.

So, we are not going to turn anything down. We will look at everything. I am very open to seeing if we could expand our business, but you are right, I am a conservative guy and I don't want to take on anybody else's baggage and problems.

And I appreciate -- all of us shareholders appreciate that. I think you guys are doing a great job building what you are building and I don't know it is my own humble opinion, I think acquisitions are a long way away for a company like LRAD. When the stock price is a lot higher. Obviously if you can find something that is accretive, that is a different story and it directly relates to what you are already doing, but those are few and far between, otherwise they would be approaching you.

(technical difficulty)

Go ahead.

Let me just say something. My acquisition is this mass notification business. (technical difficulty)

Absolutely. And that is organic. That's organic, so great. I do have one other point and honestly this is more of a -- it is kind of a question to you and anybody else in the room that cares to comment on it, but it is also kind of a comment to all of the analysts that are on the call right now.

One of the things that is hurting LRAD Corporation is lack of analyst coverage. Lack of Wall Street visibility, lack of eyeballs looking at LRAD's ticker symbol on a daily basis and reading about the good things that are going on. I have been hearing for years year after year after year after year that it is just a matter of time. We have to build our business, we have to improve the quality, we have to get more even quarters. It seems to me you have done all of that stuff. And these are the excuses that these quote unquote analysts have been getting as to their reluctance to initiate coverage and again get the story out.

There is a lot of crap right now on Wall Street and they have got lots of coverage. Now I recognize the whole investment banking fornication that is going on with these firms, but at the end of the day, you analysts out there, write a report and if it is a good report and it's a good company and your clients make money, they are going to come back to you and they are going to want more reports on other companies. So, that is my message to the analyst on this call.

But I would like to hear maybe you, Brian, what progress are we making? You guys go to analyst conferences and yet nothing, nothing happens because you won't give them investment banking business. How can we get the story out there?

Well, you hit on it, I believe, Steve. And that is something we are doing. We are participating in a lot more conferences than we have in the past and on a daily basis I am reaching out to analysts and keeping dialogues open so that when the time is right, that they will be interested in us. And I think we are making progress. As you said, you have heard that story in the past. Well I am still relatively new here, but we are making progress and we had analysts out to visit our facility. We've done tours with these analysts out in our San Diego offices. We met with them all over the country.

And so, we are getting more and more eyeballs on the story. And I think as we show that there's not -- that we are not as lumpy as we had been in the past. That there is a growth trajectory and there is a large addressable market in the mass notification, it will become easier for Wall Street to get on board.

But I agree and we are making -- we are taking strides to do that where as Tom indicated in his notes, we are presented at the B. Riley conference in a week and a half. We are going to be presenting at the Markham conference at the end of May in New York. And we are looking into additional conferences.

So we are actively out there trying to get people interested and I am keeping in front of -- keeping people in front of the story every day.

And I appreciate that. But let me ask you a question, so let's take B. Riley for example, you go to their conference, they say, this is a great idea, but we want to do -- are they going to say we want to do some investment banking business that you don't need to do before we (technical difficulty) coverage? Or are they going to be more of the type of analyst that writes reports on behalf of their clients?

Well, I believe the analysts that we are speaking to at B. Riley in particular are sector analysts. So they cover a company in this sector and they cover companies in the San Diego area. So I think it is a natural fit and we'll see. Obviously they have got to believe the investment thesis and that we are going to be successful and we are hoping to prove that to them. In that particular case.

Fair enough. Fair enough. All right, thank you. Great job.

There appear to be no more questions in the queue.

Okay, we can wait and if anyone does call in, we will take them, but we do appreciate your listening and participating in LRAD's conference call. There will be a replay of the webcast available in about two hours at the link that was issued in the press release. So if you need to follow up, feel free to reach out to us or listen to the webcast link.

And I guess that is it, Dagma.

Okay. This does conclude today's webcast. We thank you for your participation. You may disconnect your lines at this time and have a great day.