Genasys Inc. (GNSS) Q2 2017 Earnings Report, Transcript and Summary

Good day ladies and gentlemen and welcome to today's webcast. All lines have been placed on a listen-only mode and the floor will be open for your questions and comments following the presentation. [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 Dagma. Good afternoon everybody and welcome to LRAD Corporation's fiscal second quarter 2017 financial results conference call. I'm Brian Harvey, Director of Investor Relations for LRAD. On the call with me this afternoon are Kathy McDermott, LRAD's Chief Financial Officer and LRAD's Chief Executive Officer, Richard Danforth. In just a moment, Mrs. McDermott will open today's call with a recap of our fiscal second quarter 2017 financial results. Mr. Danforth will then provide an update on our business. Afterward, we will open the call to questions. But before I turn the call over to Kathy, 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 potential risks and uncertainties, please refer to the Risk Factors section of the Company's Form 10-K for the fiscal year-ended September 30, 2016. LRAD Corporation disclaims any intent or obligation to update those forward-looking statements, except as otherwise specifically stated. I would now like to turn the call over to LRAD CFO, Kathy McDermott. Kathy?

Thanks Brian. And hi everyone. Thanks for joining us today. So fiscal Q2, 2017 was a strong quarter for LRAD in many aspects. Our revenues for the quarter were $5.7 million, a 59.4% increase over $3.6 million reported in the second fiscal quarter of 2016. Year-to-date revenues were $8.7 million, a 35.2% over $6.4 million reported in the prior year-to-date. Our revenue for mass notification is Q2, 17 improved by 270% over Q2 over the prior year, primarily driven by a $1.3 million order for mobile mass notification units for Eurasia. Revenues of our directional products increased by 20%. International revenues grew by 138% in Q2 2017 versus the prior year Q2 driven, by the 1.3 million mobile mass notification order, as well as increased shipments to China and Japan which have declined in fiscal year 2016. We shipped a $600,000 order to a Canadian oil company for [Indiscernible] during the quarter. We shipped four orders to navy's in four different countries this quarter. We also shipped an nice sized order for a luxury super yacht in Europe. Our backlog at March 31, 2017 seems to be scheduled for shipment and fiscal year 2017 was $3.7 million, prior to announcing a follow-on order of $1.6 million for mobile mass notification units for the same customer in Eurasia, which we hope to ship most if not all this fiscal year. Our quarters will continue to be uneven due to the timing of approvals or budgets. Gross profit for the quarter ended March 31, 2017 was $2.9 million, or 51.1% of net revenues, compared to $1.6 million or 45.3% of net revenues for the second quarter of the prior year. Gross profit for the six months ended March 31, 2017 was $4.2 million or 47.9% of net revenues, compared to $2.9 million or 45.6% of net revenues for the same period in the prior year. The increase was primarily due to the increased volume as well as higher margin percentage due to the favorable product mix, and fixed overhead absorption. Our operating expenses for the second fiscal quarter decreased by 13.1% from $2.9 million in the second fiscal quarter of 2016, to $2.5 million in the second fiscal quarter of 2017. Our operating expenses in Q2 '16 included $836,000 of onetime expenses related to a proxy contest initiated by one of our stockholders and separation cost related to the departure of our CEO, that were not repeated in the current quarter. This favorability was partially offset by an increase in commission expense and increasing accrued bonus based on the Company's expectation for meeting current year financial goals, increased consulting cost for business development and other increases. Operating expenses increased by 3.2% from $4.9 million in the six-months ended March 31, 2016 to $5.1 million in the six-months ended March 31, 2017. In addition to the reduction of $836,000 of one-time expenses and other increases as I discussed for the quarter, we incurred a one-time charge in Q1 '17 of $307,000 for non-cash share-based compensation expense for the modification of stock options, in accordance with a separation agreement and general release related to the 2016 departure of the Company's prior CEO. The Company reported net income of $298,000 or $0.01 per diluted share for the second fiscal quarter, compared to a net loss of $665,000 or $0.02 per share for the second fiscal quarter of the prior year. We recorded income tax expense of $169,000 in Q2 '17 compared to income tax benefit of $547,000 in Q2 '16. Year-to-date, the Company reported a net loss of $514,000 or $0.02 per share, compared to a net loss of $1 million or $0.03 per share for the prior year-to-date. We recorded income tax benefit of $317,000 in the six months ended March 2017, compared to $856,000 for the six months ended March 2016. On our balance sheet, our cash and cash equivalents as of March 31, 2017 was $14.6 million, compared to $13.5 million at September 30, 2016. The $1.1 million increase was primarily due to increased liabilities for accounts payable for inventory purchases, commissions and bonuses. Working capital was $23.6 million at March 31, 2017, compared to $23.1 million at September 30, 2016, due to the increase in cash and cash equivalents and a transfer of marketable securities from long-term to short-term, partially offset by an increase in liabilities. And with that, I'll turn it back to Brian.

Thank you, Kathy. And I'll turn the call over to LRAD CEO, Richard Danforth, so he can provide additional color on the LRAD business. Richard?

Good afternoon and thank you everybody. Let me begin with a brief recap of our financial results for the first six months of fiscal 2017, as compared to the first half of fiscal 2016. Bookings are up 27%, revenues are up in all geographical sales regions a total of 35%. Operating income was up 55% and cash generation was a positive $1.1 million ahead. The increase in revenues came primarily from a 233% increase in mass notification revenues, which included a $1.3 million global mass notification system for a large oil and gas company. The initial deliveries of the system are for a major U.S. maritime port, several shipments for tsunami warning systems in Japan and a systems and accessory order for a National Guard state headquarters. Mass notification bookings for the first half of 2017 has increased nearly 60% over all of fiscal 2016. More orders are expected as was demonstrated by the $1.6 million mobile mass notification order we announced last week. And financial orders accounted for 72% of the fiscal first half revenue, which included large orders for both insurance and preservation in Canada, public safety in Asia and a Latin American navy. U.S. revenues were improved with orders for perimeter safety and security for a utility infrastructure and orders from the United States Marine Core, and a follow-on order from the U.S. Navy. Over 500 LRADs have been deployed throughout the U.S. Navy fleet, which includes 2 to 5 LRADs on board every naval surface patent for the U.S. After operating under a continuing resolution since October 1, the FY 2017 Defense Appropriation Bill is expected to be signed into law before the end of this week. With the passage of the FY 2017 Defense Appropriation Bill, we anticipate a meaningful order against our army program this fiscal year. We also anticipate a significant Army RFP will be released for acoustic handling devices later this year, for a 2018 to 2022 procurement. Regarding the domestic homeland security, our work and discussions with primes, DHS leadership and the relevant congressional communities to get that technology into DSS for the plan continues. We also remain engaged with CBP senior leadership on perspective LRAD procurements for facilities, vehicles in Marathon [ph] applications. During the first half, we released five new products, incorporating in four of them our dual driver technology and made significant progress with our mass notification software development. We believe expanding our product line to include more systems and accessories, and several price and broadcast area coverage options, enhances our competitive advantage in the large and growing worldwide mass notification market. Based on a solid first half, the expected approval of the 2017 defense appropriation bill and a robust booking pipeline that experienced growth in mass notification and directional market segments, and growth in all geographic sales regions, we are positioned for a strong second half. And with that, I'll turn it over back to Brian.

Thank you, Richard. And we'd now like to open the conference call to questions. 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, would you please instruct the callers on how to queue up with their questions?

Thank you. The floor is now open for questions. [Operator Instructions]. Okay, our first question comes from Lloyd Courtin [ph]. Please state your question.

Can you clarify something for me? The order of 1.6 was, that was for mobile units. Is that the trailer item that we are talking about?

It is. It was actually a follow-on order to an order we announced in the first quarter of this fiscal year. The initial quantity order on Q1 was for 10 of those mass mobile communication devices that drove us, and the order we announced last week was for 12 additional ones.

I'm glad to see it's getting adapted. I think it's a fantastic product. It's going to go on for a long time. It's got great use out there. Did we do any stock buybacks this quarter?

We did not.

The stock got pretty low. There was any particular reason why we didn’t?

Well, the price set out there, we have a 10b5 set up and right now it's set fairly, and the board's direction to try and retain some of our cash to be able to use that for other business opportunities. With Richard being fairly new to the company, we wanted to get give opportunity to use it for other revenue generating opportunities as opposed to just strictly the buyback. So at this point they weren’t any in the quarter.

Okay. I know that there's been some changes to our sales path since you came in there Richard. Can you give us a little bit of update as to how we are situated now? Are you satisfied? Do we have more coming on and what's going on? Because it's ultimately where our business comes from?

It's an ongoing process, Lloyd. This past quarter we put on five new resellers here in the United States, and one in the Middle-East. We're in the final stages of extending an offer to a direct sales person for Europe and I think you will continue to see those kinds of activities throughout the -- certainly throughout the balance of this year.

Does any of this new business have to do with any of the new people that have been hired?

I'm going to say no to that. I will also point out that the gestation period from a new sales person or a new reseller, it doesn’t turn to sales immediately. There is a period of developing the customer base and marketing of their products and systems. It does pay-off over a longer-term.

Okay. Now that you've been there, about almost a year, or 10-months or whatever it is; our strengths and weaknesses, could you elaborate on that a little bit from what you found, and what changes you've made?

Yes, from a strike perspective, the product itself from the systems themselves, I think are heads and shoulders above what the competition has and markets out in the worldwide marketplace. So we are the leaders that people are chasing. Certainly, that's evident in the directional marketplace, and as we get further and further into the mass notification market, the quality of our output in my opinion surpasses the competition, that is both here in the United States and outside the United States. So that’s a significant strength of this company that we need to continue to exploit, especially in the further end of the development of the system offerings in mass notification. [Multiple Speakers]

Currently how many Navies are we -- or is our product being used by a navy or coast guards in the different countries out there?

Navies and coast guards, I'm going to give you a number and somebody will check it for me before the end of the call, but I believe its 26 to 30, and the gentleman that needs to check it is doing it right now.

Is that a number that’s been growing?

Yes, in fact I think this quarter we sold the -- correct me if I'm wrong, Kathy, the Mexican Navy.

Mexico, Italy.

That’s right. Italy was new this quarter as well. We will get you the number. It's on its way in. 24, thank you. Navies and coast guards yes.

Well that’s great. I think that’s an area we're going to keep growing worldwide. Anyway, that’s it for the moment. Thank you again for all the efforts that you are putting out there on our behalf. Great quarter.

Okay. Our next question comes from John Rail [ph]. Please ask your question.

So I have couple of questions. First off, all congratulations ladies and gentleman for this quarter. Hopefully its building quarter for us and we won't lose that momentum like we have in the past. I'm a multi decade owner of the stock. So my first question is sort of related to what was mentioned a little bit in the first question. Right now the European military budgets for many countries is growing. How aggressively are you doing after those opportunities?

How aggressively? Well as you are well aware, wanted to [indiscernible] along, we have recently within the last two years hired a direct sales person in Europe. We have gone through and added several new resellers in -- new, we exchange some out and put new ones in. Sales -- let me go back to bookings for a moment. Our bookings for this year, this half, approximately three times what we booked all of last year in Europe. So although the number was small to begin with John, the direction and the slope of the curve is good and I will also mention that the pipeline has grown even in this last quarter, not only in Europe but across all of our sales regions.

Richard, their response is that there are -- we're looking to bring on another full time, consultant in Europe to help.

We are on the final stages of the offer. So that will done.

Great. how is the penetration in Europe by now? You mentioned Italy but what other countries are currently being either an existing customer or ones that you see good potential for this year's sale.

The Nordic region, we have had some sales and we anticipate more sales to UK and certainly up there with potential sales. In fact, we participated in the show over there before the end of last year, which was quite successful. France, we just booked on order from the French navy and that was a competitive order that we won. Activity in Spain, activity -- so I'm going to say throughout Europe. Germany, there are mass notification potentials in Eastern Europe and central Europe that we we're pursuing as we speak. So there is quite a bit of activity in the Europe right now both -- throughout Europe, all the way up to the Russian countries.

So my other question is not related specifically to that but it was sort of mentioned by Kathy as far as we're not doing stock buybacks aggressively because you want to preserve capital for possible new opportunities. I was wondering if you had even looked at -- there are so many playing fields and arenas that could use our sound system as a PA system. I was wondering if we could develop a product that's not as powerful, but has a much lower cost base. Because there's tens of thousands, hundreds of thousands of these locations. That would certainly smooth out revenues stream if we could have that as a potential product.

I can't specifically say regarding playing fields. I will say that in terms of mapping product development on our roadmap is a lower price entry level product that may have applications that are playing fields you mentioned.

Because I mean -- people will spend anywhere from $3,000 to $40,000 on sound systems on these fields than I would think that if we have the smaller product, that we are able to sell tens of thousands into, it would be -- and I think like an idea of products for that because you wouldn’t have to disrupt the entire neighborhood. You just are angling the LRAD's [indiscernible]. So it just seems like a perfect fit for that.

Our product, it’s meant to optimize frequencies at a lower rate. So it may not be best for a like stereo speaker, that kind of sound?

Exactly. I would think -- exactly. I didn’t they would be used for music, but there's a lot of systems out there that are just PA systems.

Sure. For communicating over a lot of background noises, at race tracks, things like that for sure.

Exactly. Seems like it would be a very competitive product for us. Anyhow that was just a thought.

Our next question is coming from Robert Smith. Please state your question.

Could you give me an idea of what you feel is the market opportunity for the border -- the Mexican-U.S. border of more than 2,000 miles. I was wondering what's your continued opinion? I know that it's uncertain as to what form this might take, but what are your thoughts about that?

The U.S. has a program for -- it's called IFT Integrated Fixed Towers. It's an electronics surveillance intended to go across in the entire southern border. That was in place many years ago and is an ongoing program. It does not currently include LRAD. A great deal of our activities that I mentioned in my prepared remarks relative to CBP, are introducing the capabilities and the utility of LRAD in a border situation, not only at the border crossing, but in the vast areas that are not highly populated. In the last quarter we have been invited to do two separate demonstrations to CBP, one at mark port of entry, which we will likely conduct this month and one on a Marathon application for the customs and border patrol. So I can’t give you, Robert a specific number, but I believe the opportunity is large and we're pursuing it as such.

Its seems that what was in place before or now is in effect. So it really calls for some additional ways in looking at this and I assume that yours would be the one that would be considered.

The system that’s in place today, the electronic security system that I mentioned, is not complete by any stretch. It started in San Diego and is moving west, but it's going to long way to go. And just…

Sorry I interrupted.

No I corrected myself. Its moving east not west. But go ahead.

And just another minor point, but I'm aware of an offshore wind project off the coast of Maine, which is going to put to six megawatt turbines on the ocean, and the local population is concerned about bird migrations. So perhaps one of your sales reps could get in touch with the consortium that’s enrolled with that. It's called Maine Aqua Ventus and there might been an opportunity to place one or two units on those turbines.

We will take that opportunity. You may not be aware but we have sold now, what's the number Kathy 200?

227.

227 units with an order received this current quarter, well last quarter excuse me. Additional order for 220 units to protect the wildlife of the birds up in Canada from the…

That’s a good sales point to address from marketing partners, and I wish you the best.

There are no further questions. One just came in. This question is from Dennis Welsh [ph]. Please state your question.

I have a question with respect to what is your equity position in this company?

My equity position is actually listed in the 10-K, 10-Q excuse me. So that …

Well the reason I asked that is because in the proxy statement -- the materials that came out just recently, it showed that you had actually zero stock in the Company.

When he came onboard, he was given our performance stock options. So he has some time based some performance based. So those have not vested yet. So that's why you don’t see them on there yet. You don’t see any expense for them yet. They are longer term. So the intent is to motivate him to perform over the coming years, one of them two up 2019 or in 2020 based on financial results. So he's got kind of long-term type performance options.

Well I would I think that since the stock price has been in the toilet now for several months, that I would think that the management of the company, as well as the Board of Directors would be out there showing some confidence in the Company by buying stock, not through necessarily your stock options program, but on an individual basis. That would a go long ways to show confidence in the Company's future perspective. And that would be my comment. Could you address that?

Comments noted.

[Operator Instructions] Our next question comes from the line of Rich Yate [ph]. Please state your question.

Richard, I just want to ask you on the mass notification, on that one order, where do you see the growth coming for the rest of the -- for the next 12-months out on that, because I was -- obviously it was a large order do you see the backlog building up in that side?

I see our sales and our bookings as we continue and complete this current fiscal year to be represented by at least a third from mass notification. I'd say 2016 -- I'm going from memory here, it was probably in the order of 10%.

Got it.

Well, I think I know -- the absolute numbers, as you've heard, already surpassed what we did last year and as a percentage we will see this technology going from 10% to 30%.

The pipeline has grown quite a bit. They've got lot more opportunities now that we're carrying a little bit, while the product offering opportunities are bigger and there is a lot more opportunities in the pipeline going outward. Some of those are longer term deals. They might not be for 2018, 2019 kind of thing, but they are certainly working in current ones as well because campuses and for various other.

And do you feel on the technology side that the progress has been made. I know when you came on nine months ago, that there was a lot of work that had to go into. So it seems like everything is starting. I'm sure there is a lot of -- still there are lot of issues, but it seems like everything is clicking in the right direction from that in that regard?

There has been a lot of development done in six months. There was a lot of development done prior to the six months. In the last six months there has been completion of hardware development and a great deal of progress in the system software development.

Great.

And more to go.

Okay, once again congratulations on Europe. It sounds like things are great compared to -- you've done a great job building that up from where we were over for the years.

Well, thank you. Remember, it started up very small, but as a percentage it's very good.

We have to take baby steps. We're going in the right direction.

Okay, our next question comes from Steven Wagner [ph]. Please state your question.

Really great. That exceeded my expectations for the quarter. So while that puts a big smile on my face and I echo one of the things that Rich just mentioned as well. I got on the call really late, only about I think seven or eight ago, so I apologize of any of this is redundancy. But one of the things that we talked about in weeks and months past, sort of is that you were kind of realigning, redefining the sales organization there. How is that coming along in terms of getting really good and streamlining things in that regard.

Well what you didn’t perhaps hear Steve, is that our bookings for the first half of this year is contained that first half of 2016, a rough 27%. So the results are an indication of the change. Then it's been very good. More to come but the changes have been put in place earlier this year and for a lot of reasons, management included, the products are very good.

And again I was late, so I apologize if you guys addressed this next thought. With the price having been as low as its been over the last month or so, obviously we're all happy to just move back up to pretty close to where it was at the beginning of the year. What in terms of the stock buyback? Has there been any of that activity going on or can you comment about that?

No, there has been no stock buyback this past quarter. Steve.

And there are no further questions.

Okay well thank you, Dagma and thank you everyone for participating in LRAD Corporation's fiscal second quarter 2017 conference call. A replay of this call will be available in approximately four hours through the same link issued in our April 19 press release. Thank you for participating.

Thank you. This concludes today's webcast. We thank you for your participation. You may disconnect your lines at this time.