Genasys Inc (GNSS) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2014 financial results conference call. (Operator Instructions) At this time it is my pleasure to turn the floor over to your host Brian Harvey. Sir, the floor is yours.

Thank you, Catherine. Good afternoon and welcome to LRAD Corporation's fiscal third-quarter 2014 financial results conference call. I am Brian Harvey, the Director of Investor Relations and Capital Markets for LRAD, and 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 third-quarter financial results, which will be followed by a brief presentation for 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 of historical facts, statements made during this call that are forward-looking statements are based on our current expectations.

During the 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 potential risks and uncertainties see the Risk Factors 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 third-quarter 2014 financial results recap. Kathy?

Thanks, Brian. Good afternoon, everyone, and thanks for joining us today. Our fiscal third-quarter results were very strong. Our revenues for the quarter were $8 million, significantly exceeding revenues of $2.2 million for the fiscal third quarter of 2013.

Third-quarter results were primarily driven by a $4 million order in the Middle East for border and perimeter security. Much of our growth continues to be generated in international markets with 82% of our year-to-date revenues shift to international customers. This is more than offsetting a decline in revenue from the US military.

In the third quarter we continued to sell into many diverse markets including international police and public safety, bird mitigation for a mining concern, international defense in navies, and maritime applications. Year-to-date revenues through June were $17.2 million, more than double our revenues of $8.3 million for the same period in the prior year and in the first nine months exceeding our full-year revenues for fiscal 2013. Our fourth fiscal quarter looks to continue strong, although it's difficult to predict if year-end defense spending will be available, and if so, if it will be at the same level as our fiscal fourth-quarter of 2013.

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 June 30, 2014, was $5 million, or 63% of net revenues, compared to $915,000, or 42% of net revenues, for the third quarter of the prior year. Year-to-date gross profit was $9.7 million, or 56% of net revenues, compared to $3.8 million, or 45% of net revenues. The increase was primarily due to the increased volume, favorable channel mix, and increased fixed overhead absorption.

The higher gross margin is partially offset by increased commission expense to our third-party sales reps that's reported in operating expense. Operating expenses for the third fiscal quarter increased 53% from $2 million in the quarter ended June 30, 2013, to $3.1 million in the quarter ended June 30, 2014, primarily due to increased commission expense to our third-party sales reps and bonus accrual based on meeting targeted performance goals, partially offset by reduced legal and other professional fees incurred in the prior year related to a lawsuit.

Year-to-date operating expenses increased 31% to $7.1 million in the first nine months of 2014 compared to $5.5 million in the first nine months of the prior year. The increase resulted from increased bonus accrual, commission expense, and salaries and consulting expense primarily due to increased business development personnel, partially offset by a reduction in legal and other professional fees.

We reported a net income of $1.9 million, or $0.06 per diluted share, in the fiscal third quarter of 2014 compared to a net loss of $1.1 million, or $0.03 per share, in the third 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 $2.6 million, or $0.08 per diluted share, compared to a loss of $1.7 million, or $0.05 per share, in the prior year. We currently have no income tax liability due to prior net operating losses.

Our cash balance increased by $5.4 million year-to-date to $21.2 million at June 30, 2014, primarily generated from net income, collection of our accounts receivable compared to prior year-end, and increased accrued liabilities primarily due to accrued commissions and bonus expense, partially offset by a reduction in accounts payable compared to our September 30, 2013, balance. Working capital is $26.6 million at June 30, 2014.

And with that I will turn it back to Brian.

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

Thank you, Brian. Thanks for joining our call. Great quarter.

As I have mentioned on previous calls, in May 2013 we restructured our sales and business development team and at June brought on several members. Since these changes, if you look at our trailing 12-month results, our sales exceed $26 million and we have generated $5.5 million of profit, a greater than 20% return.

We are extremely pleased with our team, feel real good about our business and its future potential. We are off to a good start for our fourth quarter and we are on target to achieve one of our best financial performances in the Company's history.

As Kathy indicated, international sales continuing from last year have been strong and remain strong. Demand for our products in Asia, the Middle East, and Africa continues to grow.

From an overall standpoint, yesterday we responded to an RFI from the US Coast Guard R&D center. We have been working for more than seven years trying to obtain business from the Coast Guard. Acoustic hailing devices are a perfect tool for their mission set and we have provided product to the Indian Coast Guard, the Japanese Coast Guard, and the Chinese Coast Guard. The US Coast Guard has not purchased product, so hopefully this RFI is assigned that they are beginning to consider acoustic hailing devices for their fleet.

On Tuesday of this week the US Army put out an updated RFI for acoustic hailing devices. The original RFI from the US Army came out in 2010 followed by issuing the same RFI in 2011. Unfortunately, both of these RFIs went unfunded. We are very optimistic that this RFI should, could lead to an RFP.

All internal DoD program paperwork has been completed and the prepared defense budgets -- the President's, the House, and the Senate -- provide for 2015 funding for this program. In all likelihood, my opinion, the 2015 budget will not get approved until after the midterm elections. Hopefully, we will see an RFP for the program in early 2015.

On a positive note, we have received recent orders from the US Army for the LRAD 500X which are being shipped to Afghanistan for deployment. Field demand is there for this product.

Another positive development in the US is that the House has included acoustic hailing devices as authorized equipment for NGREA funding. NGREA is the National Guard Reserve Equipment Account with a budget of approximately $2 billion. We are seeing strong interest from the various state and National Guard units for our product and this will help facilitate future purchases.

I want to talk about some deployments and developments in mass notification. We continue to receive orders from Japan and anticipate some additional orders over the next couple of months for certain small cities working with our Japanese rep.

We have responded to two large RFPs for two large cities in the Middle East. The bids have been received and the bidding process is closed. We have been informed that we are one of the finalists in both cities and we feel fairly confident that we are well-positioned on one of these bids.

Ramadan has just ended. The process is that the proposals go through a technical review, then a financial review before being submitted to the minister of interior. Timing of the awards would be sometime in November or December this year for delivery in early 2015.

We were very aggressive with our proposal. We feel we have the best product offering and are very helpful. We see mass notification as a major growth area for our company and anticipate strong growth in 2015.

2014 has been a very successful year and it will be our sixth consecutive year of positive cash flow; fifth consecutive year of reported profitability. With our new teams, new product offerings, especially in mass notification, we are very excited to end the year on a positive note and look forward to continued growth in 2015.

With that, Brian, let's go to Q&A.

Okay, thank you, Tom. We'd like to now open the conference call to questions for management. We encourage callers with questions to queue up with the operator as soon as possible so there will be minimal lag time between each caller.

Catherine, would you please instruct the callers how to queue up their questions?

(Operator Instructions) Les Sulewski, Sidoti & Company.

Good evening, gentlemen. Thank you for taking my questions.

I think we slaughtered your name there Les.

Yes, well, that's okay. So I just wanted to look at last year's quarter. Do you have the percentage of total revenue from international?

For last year's same quarter?

Yes.

Or last year year --?

Third quarter of last year.

Last year -- for the total year for 2013 it was about 59% international compared to we are up to about 82% for a year-to-date this year. The year prior to that it was less; it was more like in the 35%, 37% or so.

Year prior to that, though, we had a large international MOD order which spiked it up quite a bit in 2011. So it does fluctuate a little bit, but the last several years has been steadily increasing.

Okay. Then in this quarter the $4 million order that came in from the Middle East, any of it remaining to flow into the fourth quarter?

From that order, Les, no but we are anticipating some additional business from that country. Probably we will see something in our first quarter, but the product has been well-received and we did a complete one-week training session here in San Diego for the team that is going to do the installation. It went very well and we anticipate some additional business coming from them.

Okay. And your visibility on the fourth quarter then, do you have a backlog number perhaps? I know you mention it, I believe, for a year-end. You don't do any quarterly backlogs do you?

No, we don't. We only do a backlog at the end of the year.

Okay, so you have an internal one; nothing to give us though, right?

No, nothing that we give out. The only thing we can say is the fourth quarter is off to a good start, and it's a timing issue because we do a lot of build to order. If the orders get here in time and we can get them built and shipped, we can recognize the revenue. Otherwise, it will slip into the first quarter.

But we are not losing any revenue; it is just a matter of timing of getting them in and out the door.

Okay. So if I understand your prepared remarks clearly, you are looking at a strong quarter in the fourth quarter, yet it could be maybe not as strong as the fourth quarter of 2013. Is that kind of a good way to look at it?

The fourth quarter of 2013 is a real tough comp because we did --

Right.

-- $9 million of revenue and a $3 million bottom line, but we are looking at a very positive fourth quarter so we are not --. And there is still some orders that we are working on. And, again, as I said, timing. If the timing is positive, it will be a very good quarter, but right now it is going to be a good quarter.

Okay. I mean that's helpful somewhat. And then just one last one for me. What was the legal expense from regarding the lawsuit and how much was it for this quarter?

Actually it was last year, Les, and Kathy can give you the (multiple speakers).

It was from last year and so this year we have got probably about, on the quarter, about a $400,000 reduction in expenses that we had last year that we do not have this year.

Okay, I see. That's helpful.

Then year-to-date it's about $745,000 that we are down.

So a run rate typically on the $8 million revenue line would run somewhere around that 31%, you would say, in SG&A moving forward?

One of the things that fluctuates quite a bit is the commission expense, so commission, depending on whether we sell direct to our customers or we sell through resellers, it has an impact on our gross margin on the top line. And then it also affects our operating expenses. So that number can fluctuate a bit and also the bonus expense can fluctuate, depending on where we are on hitting targets and so forth.

So those are kind of the two big variables. A lot of the base expenses, though, are pretty steady.

Okay. Maybe just one more then to follow-up on that. What was the percentage that you sold through third channels?

We don't really have that broken out. We do have like, for example, the $4 million was a direct sale so we did have some additional commission related to that so that's where we are reporting higher operating expenses as a result of commission. That is a big piece of that.

Gosh, it's hard to say. It's hard to really break out what percentage is direct versus reseller because it will vary on a quarter to quarter basis. It all depends on who the customer is and what country.

Okay. No, that's -- I understand. Okay, thank you. I appreciate that.

Jonathan Manela, Rainmaker Associates.

Thank you. Hey, guys, great quarter. I apologize in advance if my cell phone cuts out. Kathy, did you mentioned share repurchase for the quarter?

We did report that. The repurchases for the quarter was 123,000 shares, $227,000 worth of stock. And year-to-date 256,000, almost $0.5 million we have bought back so far.

Okay. And Tom can you talk about your expectation for the mass notification business for 2015 as your expectation maybe as a percentage of total business? Or could you talk about expectations in terms of top-line revenue as it relates to the opportunity for 2015, just maybe some structure around that?

Well, Jonathan, the one city that I mentioned in the Middle East, if we are successful -- and we do feel confident right now, but if we are successful we will find out in the first quarter -- we are talking about somewhere between $6 million to $10 million just for that one installation. And our expectation right now -- we haven't put together our plan for next year. We are working on that in the fourth quarter, but our hope is that we can get somewhere above $12 million next year for mass notification.

We are -- I am working on a -- there is going to be on RFP coming out within this month for a Southeast Asian country for a tsunami warning system. I have meetings with our rep on Monday, so we are working that and that is very sizable. So the mass notification business is really -- the installations are, for the most part, really large.

The two cities -- if we can dream, the two cities would total almost $20 million of revenue so that we could blow away that $12 million. But we are looking at realistically conservatively $12 million and we think we will continue to grow our LRAD business. We are getting very good response internationally and hopefully the Army is finally going to come through for us. There is a budget this time, which we haven't had in the past, so we are feeling really good about the business.

We are excited about 2015. We think we can grow it pretty substantially. We grew it substantially this year and we think we can do it again, so we feel real good right now. And we have a real good team, which is a big change.

Well, it sounds exciting. It sounds exciting, Tom. Keep up the good work.

Thank you, Jonathan.

Anne Margaret Crow, Edison Group.

Good evening. Thank you very much for taking my call and congratulations on another great quarter.

I've got a couple of questions. Looking back through my notes from some while ago I guess, about nine months or so, you were very positive about what was happening in China and within the oil sector, and also very positive about the prospects for Brazil. I was wondering what has happened in each of those three sectors over the last six to nine months.

Well, China we are still very excited about and we have achieved -- by the end of this month we will have achieved -- over 10% of our business will be in China. And we have growing business; we are looking at a couple of good opportunities for the beginning of next year in China. So China has been very good for us and it continues to grow.

In terms of oil platforms, we did submit and deliver a number of our units for a Nigerian oil company and we just delivered some units this past quarter for off the coast of Australia for another oil platform operation. And we are bidding on a couple right now. So that business is still growing and it is looking good.

In terms of Brazil, we are very disappointed. We felt that we had an opportunity to get product into the World Cup and unfortunately that didn't happen. But we are meeting with the Brazilian Army next month for an exercise and we've made some inroads with the Brazilian police.

Unfortunately, a lot of these business development opportunities take a long time. As I mentioned on the call, we have been working the Coast Guard for over seven years and finally it looks like they might be getting interested, but it takes a long time to develop these opportunities. Brazil was a disappointment, but we have the Olympics coming up so there is still some opportunities in that country.

Right, okay. And I've got another couple of questions. Has there been any change in the competitive environment over the last six, nine months because clearly this is a good space to be in; you are doing very well. So I was wondering if that had attracted anybody else into the market?

Well, we do have some competitors, but we haven't seen any big changes there. There is a couple of smaller companies that have been in the space for a while. We still -- we have some competitors in China, some knockoff companies in China, but still our business in China is growing pretty strongly so we have to stay ahead of the game.

Competition is good. It makes us more competitive and keeps us on our toes so that we keep on improving our product offerings and try to stay ahead of anybody who tries to enter. But right now we still have over 90%-plus of the worldwide market and, unfortunately, we are at 17 million through nine months, so it is still -- we are growing this market.

We are the pioneers. We are the guys who started it and we are the guys who are trying to continue to develop it. So we are making progress, but I don't think we are at a level that is going to generate any large companies from trying to jump into this space right away.

Although the RFPs, if they do come out, I think we will see some additional competition if we see an RFP from the Army early next year. (multiple speakers)

Then my final question. I was looking through the Q1 commentary actually and it mentioned that there had been a delay in an order from a national police force in Southeast Asia because of a component supply issue, which of course isn't something you can do anything about. And it was saying that you were hoping to ship the order during Q2. Did that happen?

Yes, it did. Yes, it did and we are working on a future order from that same country.

Excellent. Thank you very much.

(Operator Instructions) There appear to be no further questions at this time.

Give it a minute.

Sure.

If there is nothing further, we'd like to thank everyone for joining us today and, if they have any follow-up questions, feel free to reach out to any of us in the coming days.

There appear to be no questions at this time.

Okay, thank you very much.

Thanks, everyone.

Thank you for joining the call.

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