Genasys Inc. (GNSS) Q2 2018 Earnings Report, Transcript and Summary

Good day ladies and gentlemen and welcome to today’s webcast. LRAD Corporation’s Fiscal Second Quarter Financial Results Conference Call. All lines have been placed in a listen-only mode and the floor will be open for 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 very much, Kath. Good afternoon everyone and welcome to LRAD Corporation's fiscal second quarter 2018 financial results conference call. I am Brian Harvey, Director of Investor Relations and Capital Markets for LRAD. On the call with me this afternoon are Dennis D. Klahn, LRAD's Chief Financial Officer and LRAD's Chief Executive Officer, Richard Danforth. In just a moment, Ms. Klahn will open today's call with a recap of our fiscal second quarter 2018 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 Dennis, 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 forecasts 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, 2017. 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’s Chief Financial Officer, Dennis Klahn. Dennis?

Thank you, Brian, and good afternoon to everyone on the call. The second fiscal quarter of 2018 was another strong quarter for LRAD with $7.9 million of revenue, an increase of 37% over the $5.7 million in the second quarter of 2017. The acquisition of Genasys in mid-January contributed $415,000 of revenues to the 2018 quarter. Gross profit for the quarter was $4 million or 51.3% of revenues compared to $2.9 million or 51.1% of revenues for the second quarter of the prior fiscal year. Operating expenses in the quarter increased 37% from $2.5 million in the second fiscal quarter of 2017 to $3.4 million in the second fiscal quarter of 2018. This increase reflects $461,000 of Genasys-related expenses. Including normal operating expenses, amortization of intangible assets related to the purchase and also $151,000 of acquisition-related expenses incurred in the quarter. Other increases over the prior year were for computer-related investments, trailer costs, higher compensation and related costs, and product development expenses. The company generated net income of $461,000 or a penny per share on a basic and diluted basis in the first quarter of this fiscal year compared to a net income of $298,000 or a penny per share on a basic and diluted basis in the prior year second quarter. The balance sheet continues to be strong. Cash and cash equivalents at March 31, 2018 were $12.7 million compared to $12.8 million at September 30, 2017. Debt at March 31, 2018 totaled $1.2 million from the Genasys acquisition. There is also $428,000 in the current and non-current restricted cash categories to offset this debt. The net debt therefore is $737,000. Working capital decreased $2.4 million from $25.4 million at September 30, 2017, to $23 million at March 31, 2018. This is primarily due to the purchase price paid and the debt assumed in the acquisition of Genasys. One final note, due to the increased financial disclosure requirements resulting from our acquisition of Genasys, our 10-Q filing with the SEC will be delayed up to five days. With that, I would like to turn the call over to Richard.

Thank you, Dennis, and good afternoon to everyone on the call. We finished the first half of fiscal 2018 [ph] with another strong quarter highlighted by the acquisition of advanced location-based mobile alert software provider, Genasys Holdings. Bookings for the first half of 2018 reached nearly $12 million, an increase of 24% over the first half of fiscal year 2017, and included $2.2 million from that notification. The growth in bookings came mainly from domestic and international defense, law enforcement, public safety, and Homeland and Border Security. For the second quarter, we achieved $5.1 million in bookings, 13% higher than the same period last year. As compared to the first half of fiscal 2017, revenues increased 79% to $15.5 million, due primarily to strong order intake from the U.S. government and military. Mass Notification and AHD revenues increased 10% and 104% respectively. Regionally, revenues increased 50% in Europe, the Middle East, and Africa; and 198% in the Americas. Gross profit was up 92%, operating income increased 279%. Excluding the non-cash adjustments to the company’s federal net deferred tax asset, net income would have been $0.04 per share. Operating cash was nearly three times higher at $2.8 million, and backlog at March 31, 2018, was $9.3 million. In the fiscal second quarter, we issued press releases announcing $3.9 million in new and follow-on defense, public safety, and offshore security orders for Southeast Asia and the Asia-Pacific region, and accessories and spare part orders from domestic and International governments and defense departments. The integration of Genasys and its experienced management and software development team is going well. Of note, net cash provided from the LRAD’s fiscal first half operating activities exceeded the cash needed to fund the purchase of Genasys. LRAD and Genasys engineers are working to combine the Genasys location-based mass messaging software and LRAD’s mass notification software. Integrating Genasys’ ability to geolocate and send alerts to all mobile phones in an emergency notification area with LRAD’s versatile and advanced voice broadcast systems will provide comprehensive and customizable mass notification solutions that are targeted and scalable. With the completion scheduled in this fiscal year, the combined software and hardware solutions will significantly enhance the company’s ability to compete the larger mass notification programs in the U.S. and throughout the world. Also this month, we hired our first Software Sales Director, who until recently had worked for a mass notification software competitor. We will provide more details of the new product offering and roll out plans in upcoming press release and conference calls. With the expected increase in government, public safety funding for local, regional, and national emergencies, and the number of people in the world using cellphones projected to surpass 5 billion in 2019, we see substantial opportunities for fully integrated turnkey solutions that combine LRAD’s advanced mass notification voice broadcast systems and Genasys’ location-based mass messaging software. Earlier this month, we met with officials from the U.S. Army and received an update of the status of the AHD program. Our key takeaways for the meeting are that the Army is committed to meeting the requirements of the AHD program, and we anticipate a competitive solicitation in fiscal 2018. Strong fiscal first half revenues, $9.3 million in backlog, and a pipeline that has grown 35% year-to-date has the company on track for significant fiscal year-over-year revenue growth and well-positioned for fiscal 2019. With that, I will turn it back over to Brian.

Thank you, Richard. We would 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. Kath, would you please instruct the callers how to queue up with their questions?

[Operator Instructions] And our first question comes from Ed Woo from Ascendiant Capital. Go ahead, Ed.

Yes, thank you for taking my questions. The backlog went down a couple of million this quarter, was it due to any seasonality or any external factors?

No, revenue exceeded our bookings which is reflective of the very strong backlog coming into the quarter. But as I said in the remarks, Ed, even bookings for Q2 were 13% higher than they were last year and through the half, 24% higher, and I’ll remind you last year was a record booking year for LRAD. So we are at 24% pace better than that at this point.

Great. And then going on to the acquisition of Genasys, have you guys – has there been revenue synergies so far? Have you got deals that you wouldn’t have got otherwise already in the bookings?

No, we have opportunities that we are bidding collectively, and we have opportunities that Genasys has identified for LRAD and vice versa, but nothing has closed yet.

Okay. And where do you think -- the implementation of the acquisition, do you feel that you guys are fully integrated now or do you think there is still some more integration to do?

Genasys is in Madrid, so there is not a physical integration. They are on their own systems and they will likely stay that way for a while. The integration has occurred in the development and the sales and marketing activities. The engineering activities, I outlined in the remarks is going very well. The sales activities are going well. We just hired a first specific – as I said, the first specific software sales person here in the United States. So, it’s progressing quite well.

Okay. Well, thank you and good luck.

Thank you.

Thank you, Ed.

And our next question comes from Lloyd Korten from Unique Investments. Go ahead, Lloyd.

Hey, guys, hello.

Hi there.

Glad to hear the increases. Thank you for your efforts. The backlog, do you know what it was a year ago at this time?

I did not look that up on preparation for this meeting, but we will take a note and we will send an answer back to you after this meeting. It was substantially less than what we’ve reported now, but the specific number, we’ll look up and get back to you.

Just curious about that. Thank you.

But bookings is, for example, I mean, you could do the math yourselves, bookings for the first half of last year were $9.5 million. The backlog coming into the year was $2.9 million, and the revenue was 7. … in the low numbers, low-single millions I think.

And our next question comes from Carter Christopher from CBDG. Go ahead, Carter. Mr. Carter, are you on mute?

No, I am not on mute.

Hi, Carter, do you have any questions?

I think he is having a line trouble. And our next question comes from Dennis Walsh. Go ahead, Dennis.

Yes, hi.

Hi.

I am a long time stock investor and let’s say, long, long time stock investor, and I see no mention about the stock buyback program. With your company having such good prospects as you have just mentioned, then I was wondering why the implementation of that buyback program would not be a good investment to the company.

The buyback program is still in place. It’s not currently active. As we have mentioned on prior calls, the deployment of the capital to grow the business, we’ve just recognized that with the acquisition of Genasys and that’s where we are at right now. So, we will continue to look and keep active the buyback program. But right now, that’s not what we are doing.

Yes, I think as Richard noted, Dennis, we are trying to keep that capital available for opportunistic M&A that might come our way. And so, we’d rather then have to go to the market because we bought back stock, we think it’s a better use of capital at this point to have it available for acquisitions.

Well, I just want to point out to you that, if we do not see the company nor its officers and directors buying that stock in the open market, then it would seem to me that it may give a reflection of the fact that maybe investors should not buy as well. So, that’s all I have. Thank you.

Very good afternoon.

And our next question comes from Jonathan Manela from Edge Strategy Group. Go ahead Jonathan.

Thanks. Hey guys.

Good afternoon, Jonathan.

So, just in terms of the integration of Genasys and some of the legacy LRAD business from a strategy standpoint, do you guys feel today that the strategy is sort of fully thought out or it’s sort of in development? And in terms of market opportunities you are going after, do you have an ability to assess the existing business around that strategy in the marketplace or is it going to be more of developing new opportunities or trying to create new opportunities that don’t exactly fit what you guys are trying to do? Can you give a little color around that?

Sure, starting with Genasys although stick to mass notification for the time being. So, mass notification has a huge market potential. That had a growth rate in the double-digit CAGRs. The software element of that happens to be the highest double-digit CAGR growth rate. That was one of the reasons that from a strategic perspective focused us on Genasys to add their software capability to the LRAD hardware capability. And that’s put us in a ten – but different market space. So it opened up that space that was not previously available to the LRAD company. So now LRAD, combined with Genasys has a much bigger piece of that market than it did individually. There are still market segments to the left and right of what we are currently in that would provide other lanes for additional market potential and opportunities for this company and we will continue to look to find an potential candidate and acquisition potential that would further grow our opportunity in the market space.

All right. Let me re-ask the question. I screwed that up. So, the combination of the hardware/software business post-Genasys acquisition, do you guys have a handle on the specific markets that you are going after, how big that is?

Yes, how big it is, it’s essentially you want to ask, as many market research studies that have been done, that show it in the billions of dollars. We had one done specifically and it’s consistent with everyone we have read independently. So it’s a quite a large and growing at a double-digit CAGR.

So then, help us understand a little bit, I know in the last call, you mentioned that there is really nobody out there that has the cruiser carrying device and the software. So, as you guys are competing in the marketplace, are you thinking you are competing separately software, you are competing separately hardware, but maybe if hardware is not the right term.

When we go into the marketplace today with the acquisition of LRAD, we go as one company providing a software/hardware solution that’s been integrated. Not one that needs to be integrated at a particular customer’s site, but two different vendors.

Right, so, talk about that, other businesses – I am assuming the other businesses are selling hardware and software as well, maybe just – try to give us a little color on what is that, $100 million, $500 million opportunity, so that we have some gauge of understanding, how quickly you are ramping up into that space and how large the opportunity is and how well the product is being received?

That’s a lot of questions. So, how well the product is being received, we’re just starting. So…

I am saying that, how do we gauge it? How do we gauge it?

How do we gauge the size or the success or what?

Correct. We are base lining here today at May 15, you read zero. So we have a baseline. The market opportunity in 2018, 2019 is a particular number. I am not sure what that number is. But let’s assume it’s a $500 million number. As you grow your business into that space, you are going to accumulate a piece of that market. So, I am trying to just understand how to gauge over time. How well your future sales are right, yes, I understand we are not there with baseline, we are at zero. So we only have upsize.

That’s right. So, our modeling during the process to acquire Genasys kept Genasys as a neutral to LRAD’s financials in the first year and then, accretive thereafter. And in prior conference calls, perhaps one announcing the Genasys thing, I put out there that I believe that the sales of Genasys as a company in the foreseeable future could double with the combination with LRAD.

And doubling would take you to what, $5 million?

No, it’s – well, under $5 million potential exchange rate on dollars, but yes.

Okay.

Which tells you this, at least in my mind is great upside opportunity with that.

Okay, okay. Understood. Thank you.

Thank you, Jonathan.

And our next question comes from Lloyd Korten from Unique Investments. Go ahead, Lloyd.

Yes, hi guys. I got cut-off before. I don’t know if you knew that.

Yes, we didn’t say good bye. So we assumed so.

Yes, anyway. Actually on the news about this China, which is launching an aircraft carrier. Are we on there?

The aircraft in China, if it’s a U.S. carrier, we are on, yes. No, in China, no, we are not in a Chinese carrier.

Okay, all right. How large is the sales team these days as we acquired and had we expanded it?

Yes, we added someone last month to the software sales, two or three, we’ve probably put on four new sales people in the last two quarters.

Okay, good.

Somewhere in the neighborhood.

Yes, also, I know the move is going to impact of course, expenses a little bit, how is the move going?

Well, we haven’t moved. The current outlook would be to move late summer. And it’s going through this - as one would expect the planning and execution phase. So, right now, we are in the planning phase.

Okay, one more question in reference to Genasys, have you had any major interest from either a country or schools or et cetera on new products?

Yes.

That you could share with us.

Sharing it would not necessarily help us in the competitive marketplace. So, I am not going to answer that question. But I will tell you that we have had interest from customers including large municipalities and higher education opportunities.

Okay, great. Thank you, guys.

Thank you.

Thank you, Lloyd.

And the next question comes from Carter Christopher. Go ahead, Carter.

Can you guys hear me?

We can now.

Good, good. Hey, just a quick question. If you pull the Genasys deal out of your first half of the year numbers, how much cash did you guys generate from operations from this organic sales of your hardware?

In the first six months of this year, cash flow from operations was, I believe $2.8 million.

So that whole thing about the net income being negative in the first quarter related to that tax – deferred tax situation, you guys really generated cash, just on a net income basis, you are negative because of that?

That’s correct.

I am not familiar with that tax treatment, but, yes, okay. And then, can you guys talk about the Army deal at all? Is it still as big as it was in the last call? And you’d really feel like it’s ever going to come to fruition. It’s been hanging around for a few years.

Yes, we agree it’s hanging along a long time. So, there has been no substantive change in the Army’s appetite to buy AHD equipment to fill all other requirements around this. So, I actually met with the leadership two weeks ago and they had not received – said that time, had not received their FY 2018 sponsor [Ph]. So, [Indiscernible] they have the funding, they are back in house, yes. So, that will resolve itself shortly.

Okay, great. And any news on the border? Any of the border prototypes incorporating LRAD? Can you hear that or?

Yes, I think I said it a couple calls ago, but I think there were five wall prototypes, LRAD is on three of them. Obviously, decision on the wall has not been built, but, if one – if a wall is actually funded and built, there is a high probability we’ll be part of it.

Got it. Thank you very much. Appreciate your time.

You are welcome. Thank you, Carter.

And our next question comes from Gregory Luster from, he is a private investor. Go ahead, Gregory.

Thank you for taking my call. I have been a long-term shareholder as well. I think I’ve got one or two of my questions answered. Onward with the border security, do you group that sales in that category, specifically? And can you give us any kind of an idea of what that added up to?

I don’t believe we break it out specifically for border applications in our filings.

We haven’t.

So, the answer to that question, Gregory, is, no, we don’t.

Okay. The prototypes that you mentioned LRAD is on three of those. Would it be in your plans to update or upgrade those prototype concepts with – since the Genasys acquisition?

Not relative to the wall. However, with the software capabilities, there are applications for Genasys in other CBT potentials which we are exploring.

Okay, okay. One other question. I didn’t quite get it. The comment was that net income would have been $0.04 per share, it’s not for – I have thought is that something to do with the tax law, is that correct?

It is. Dennis, do you want to take?

In the first quarter, we had an adjustment to our deferred tax asset that’s on the books that resulted – we’ve reduced that asset value by $2.4 million and that was strictly as a result of the change that the new lower effective corporate tax rate. So, that asset went down, income tax expense was increased by $2.4 million. No cash was involved, but that is what caused the loss on a year-to-date basis.

So, is that, is that type of event, are we done with that type of event? Or was that – will that continue in the quarters ahead?

No, that should be – there could be a refinement of the calculation, but there is nothing significant similar to that anywhere in the future.

Yes, Greg, and let they change the tax laws again, all that we have is some refinement. So, let – I am happy with the way the tax rates went, but, again, it wasn’t helpful to our net – our tax deferral asset.

Understand, understand. Okay, thank you guys very much.

Great. Thank you.

[Operator Instructions] And I would now like to turn it back over to Brian Harvey.

Okay, thank you everyone for participating in LRAD Corporation’s fiscal second quarter 2018 financial results conference call. A replay will be available in approximately four hours through the same link issued on our May 3rd press release. Thank you. Have a good night.

Thank you. This does conclude today's webinar.