Genasys Inc. (GNSS) Q3 2018 Earnings Report, Transcript and Summary

Good day ladies and gentlemen and welcome to today’s webcast. At this time, all lines have been placed on a listen-only mode and we will take questions following the presentation. [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 everyone and welcome to LRAD Corporation's fiscal third quarter 2018 financial results conference call. I am Brian Harvey, Director of Capital Markets and Investor Relations for LRAD and on the call with me this afternoon are Dennis 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 third quarter 2018 financial results. Mr. Danforth will then provide an update on our business and 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, see 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. We may also discuss non-GAAP operational metrics of bookings and backlogs, which we believe to provide helpful information to investors with respect to evaluating the company’s performance. We consider bookings and backlog leading indicators of future revenues and use these metrics to support production planning. Bookings is an internal operational metric that measures the total dollar value of customer purchase orders executed in a period regardless of the timing of the related revenue recognition. Backlog is a measure of purchase orders received that have not been shipped but are planned to ship within the next twelve months. I would now like to turn the call over to LRAD’s CFO, Dennis Klahn. Dennis?

Thank you, Brian, and good afternoon to everyone on the call. The fiscal third quarter of 2018 was another strong quarter for LRAD with $7.5 million of revenue. This is an increase of 82% or $3.4 million over the third quarter of 2017. The first full quarter of Genasys contributed $502,000 of revenue to this 2018 quarter. This was our fourth consecutive quarter of revenue greater than $7.5 million. Gross profit for the quarter was $3.7 million, an increase of a 116% or $2 million over the prior year fiscal quarter. Gross profit in this year’s quarter was 49.2% of revenues, compared to 41.4% for the third quarter of the prior fiscal year. Operating expenses in this quarter increased 43% or about half the rate of increase in revenue. Operating expenses were $3.9 million in the third fiscal quarter of 2018, compared to $2.7 million in the third fiscal quarter the prior year. Genasys related expenses were 40% or $469,000 of the increase including normal operating expenses, amortization of intangible assets resulting from the purchase and $119,000 of acquisition-related expense incurred in this quarter. Other increases over the prior year are for computer-related investments, higher compensation; we have hired four sales and three engineering personnel since last year and higher commission expense. The company reported a net loss of $80,000 or essentially breakeven in the third quarter of this fiscal year, compared to a net loss of $528,000 in the prior year third quarter. The balance sheet continues to be strong. Cash and cash equivalents at June 30, 2018 were $12 million, compared to $12.8 million at September 30, 2017. Notes payable assumed in the Genasys acquisition totaled $740,000 at June 30. We have $444,000 of cash as collateral against the notes payable thus the net debt is $296,000, a decrease of $786,000 since the acquisition. Working capital continues to be strong at $23.1 million. This is a $2.3 million decrease from September, primarily due to the purchase price paid and debt assumed in the acquisition of Genasys. During the third quarter, we repurchased 211,326 shares for approximately $500,000 at an average price of $2.37 per share. With that, I’d like to turn the call over to Richard.

Thank you, Dennis, and good afternoon to everybody. Fiscal year Q3 for 2018 was a fourth consecutive quarter of more than $7.5 million in revenue. Our fiscal nine months revenues in 2017 – in 2018, excuse me, were 10% higher than all of fiscal year 2017’s revenue and puts us on track to report the best fiscal year revenues in company history. With a $9.3 million backlog and a robust pipeline, I expect this trend to continue. Bookings for the fiscal 2018 nine month period were $19.5 million, a 23% increase as compared to the same period last year. The growth in bookings came mainly from domestic and international defense, law enforcement, public safety and homeland and border security orders. As compared to the first nine months of fiscal 2017, revenues have increased 80% to $23 million. Acoustic Hailing Device revenues were up 75% and Mass Notification revenues were up 64%. The addition of Genasys also contributed of a $900,000 to our fiscal nine month revenues. Revenues in the Americas and in the Asia-Pacific regions increased 193% and 428% respectively. Gross profit was up 99%. Income from operations increased 175%, operating cash more than doubled to $2.1 million and as I said a moment ago, backlog at the end of June was $9.3 million. When I joined LRAD two years ago, some of the questions frequently asked were about our plans for deploying company cash and growing revenues. Our backlog at that time was $3 million. Quarterly revenues were lumpy and I was determining our engineering production and sales capabilities. During the last two years, we deployed our cash by making significant investments in growing our Acoustic Hailing Device product line, substantially expanding our Mass Notification offerings and implementing cost reduction programs with added personnel and engineering business development operations and in finance. Last month, we added a Vice President of operations with over 30 years of experience to lead our manufacturing operation. We also added four more members to our outside sales team including two directors that will focus respectively on developing and selling into the fire rescue markets and introducing and selling the LRAD Genasys messaging software solution to government entities, schools and universities. And we have upgraded and strengthened our sales rep and reseller networks around the world. During the first nine months of FY 2018, we completed our first acquisition, Genasys Holdings, which increases our market reach in the large and growing Mass Notification market. We completed the installation and went live with a new ERP system designed to streamline our sales, manufacturing and business processes, and support our growth. We also secured a larger facility, that is better suited for our growing business. As we close out our fiscal year, we will continue to build a solid foundation to facilitate and accelerate company growth. Next month, we are scheduled to move into our new facility, a facility that provides more engineering and manufacturing space and will support our business growth well beyond fiscal 2018. Our recent hires, facilities and systems investments, coupled with this year’s acquisition and integration of Genasys position the company to pursue larger opportunities and significantly expand fiscal year-over-year revenues. Regarding the Army RFP, in FY 2016 and FY 2017, the Army leveraged an existing LRAD Navy contract to procure LRAD systems. As you know, that contract expired. So in FY 2018, the Army modified their approach to use an existing vehicle suitable for the Army and LRAD. Last year, we received an Army order at the end of our fiscal year. Another larger order is expected this fiscal year with additional orders anticipated in FY 2019 and beyond. With the $9.3 million backlog, up more than 300% from when I joined LRAD two years ago, four consecutive quarters of more than $7.5 million in revenue and a robust and growing pipeline, LRAD is on track to achieve record fiscal year revenues. To increase shareholder value, we will continue utilizing our strong balance sheet to pursue additional M&A opportunities, which enable us to expand our addressable markets and fuel revenue growth and we’ve also continued to be active in the share buyback program. With that, I will turn it over to Brian.

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

[Operator Instructions] Okay. Our first question comes from Aman Gulani with B. Riley Financial. Please state your questions.

Hey guys. Thanks for taking my question. So I guess, my first question is, now that we’ve got a defense budget in place. How do you think that impacts your evolve business?

Well, to be clear, there is not an FY 2018 defense – I am sorry, FY 2019 defense budget in place. The headlines you read probably today is not an appropriation document, it’s an authorization document. An appropriation document needs to be passed by both the House and the Senate caucused again and then sent over to the President for signature. That process for FY 2019 is at a phase where it has passed the house and be voted on, on the floor and approved. The Senate is expected to put it to the floor for a vote this month. The Senate and Congress will, in the house will get together caucus and it’s best I can tell, not much disagreement and then potentially send the DOD budget over to the President before the end of the fiscal year, which will be the first time that’s happened in more than a decade. So, we are hopeful that the FY 2019 moves very quickly it appears to be. It’s typically at least in the FY 2016 and FY 2017 as I recall those budgets weren’t passed until March of the following year. So, it’s on track, much better than it has been. But it hasn’t been passed yet.

Got it. Okay. And then, in terms of M&A that you are looking at, is there anything like specific capability you registered in acquiring?

Reviews in the M&A world, those that are complementary to LRAD as opposed to additive to what LRAD does. Genasys fit very well into that. There are several other market segments within – particularly within Mass Notification that also will offer a tangential market potential growth for LRAD if an acquisition could be put together.

Got it. Okay, it’s helpful. And, how do you see the split between domestic and international revenues evolving over time? And, where do you see the most strength in terms of the international markets?

50-50, Asia-Pacific.

Got it. Very helpful. And then, in terms of your biggest opportunities in terms of your end-markets for the Mass Notification business, where do you see that? And how is the pipeline looking for the Mass Notification business?

The pipeline, the second question first, the pipeline looks quite good. There are large opportunities in Mass Notifications. Some, as large as country-wide that we are pursuing. The largest opportunity is spinning back to the market segmentation are in fact outside the U.S. That’s what is currently on our plate.

Got it. Okay. It’s all for me. I’ll pass it on.

Okay.

Thank you, Aman. Nice talking to you.

Thank you.

Okay. Our next question comes from Ed Woo with Ascendiant Capital. Please state your questions.

Great. Congratulations on the quarter. I was just curious in terms of what do you think about any impact from tariff in terms of international sales. Thank you.

From a sale of LRAD’s products internationally, we don’t see anything right now from the tariffs that would affect us.

Have you seen any change in people being a little bit more concerned about defense spending or possibly economic issues either here or internationally?

Well, we can’t answer that in a broad brush for economic issues of various countries around the world, but if you look at our biggest markets, be it North America and Asia Pacific, they are quite well positioned right now. In terms of the proposed tariffs, as I said, they don’t impact us directly on sales. So, right now, if you look internationally, most of our markets are – not most – all of our markets are equal to better than they were last year.

Great. Well, thank you and I wish you good luck. Thank you.

Thank you, Ed.

Okay. Our next question comes from Lloyd Korten with Unique Investments. Please state your questions.

Yes, hi. Congratulations guys. Nice revenue and thank you for your hard work.

Thank you, Lloyd.

Thank you, Lloyd.

Could you clarify, at Fort Drum yesterday, day before they did a big signing of a military budget. How does that conflict or how does that help us with what’s coming. I am a little confused.

Yes, that’s not a budget, Lloyd. It’s a considered a strategy document. It doesn’t authorize – it doesn’t appropriate any money. So, it’s a document that’s signed by both the House and the Senate. It’s developed by them. It’s approved. It’s signed by the President which is probably what you saw yesterday. It is a strategy document for FY 2019 and beyond. They published a document like that every year. In FY 2019, particularly, as you probably know, FY 2018 and FY 2019 were not subject to the sequestration rules and the arbitrary cuts. FY 2019 is a good robust budget for DOD. I’d say that, FY 2020 and beyond, we have to see what’s going to happen. But 2018 and 2019 are good. 2018 has been past as you know, and FY 2019 I described a moment ago, it at least has a fair opportunity to pass into law before the end of this fiscal year.

Okay. Thank you. In addition, the numbers in this quarter, are we still rolling out our product in Japan? And is there any contribution from them for this past quarter?

We continue to have sales in Japan. I don’t – I looked at Dennis to help me. I don’t believe we had a great deal of revenue generated by our Japanese sales at this past quarter.

Weren’t they putting in our Mass Notification throughout the country, is I thought?

They are and they continue to do. In general, Lloyd, the produce about $1 million of revenue for the company each year as they continue to rollout that Tsunami warning system.

Gotcha. All right. That was about it. Other questions were answered. Thank you and I look forward to continued success, gentlemen. Thank you.

Thank you.

Appreciated. Thank you, Lloyd.

[Operator Instructions] Okay. Our next question comes from Sergio[Indiscernible]. Please state your questions.

Hi, good afternoon. I was wondering, what other adjacent sectors you see with Mass Notification?

There are several, Sergio. If you look at, first of all, what we do, we are the premier provider of the outdoor Mass Notifications. With the acquisition of Genasys, we have a distributor recipient software capability that will geolocate and allow for emergency messaging on a very quick basis. There are other companies that provide emergency Mass Notification that will go to your personal computer, that will go to your desktop at home and at work, that can…

And you are talking about other software or applications?

I am sorry, can you say that again?

So you are talking about other software or applications?

That’s right. That’s right. We do continue to develop hardware – new hardware solutions for Mass Notification to support the market as we see it moving and growing. But, we are very good at that. Software was – the acquisition of Genasys was a first phase. There were other software applications that would be of interest to us if the economics and everything works.

So, with – the software, now you guys can biz toward double-digits given the billion contracts instead of single-digits. Is that correct?

Yes, and more.

Okay, so with all this, could you heck of insiders are – all right.

Okay, insiders are playing so good.

Yes, that’s what it is.

I think, well, first it appear as an inside information regulations that insiders have to adhere to and I think the fact that the company reinstituted the buyback is a pretty good sign as to how we feel about the operations. But again, we are under a lot of restrictions as to when we can buy.

Okay, thank you. That’s all my questions.

You are welcome. Thank you, Sergio.

Okay. Our next question comes from Carter Christopher with CBDG. Please state your questions.

Yes, guys. Great quarter. Appreciate the update. A question, the revenue looks really solid, but, I never configure out your bottom-line. Can you give me the quarter and the year-to-date number for kind of cash from sales from core sales of your products, not from – not saving of cash flows where you are adjusting accounts receivable and all those working capital accounts, but just straight kind of cash generated from operations or sales to our products.

Speaking from operations eventually?

Yes, right. So, I’ll let Dennis address that.

Well, for the quarter, I mean, income from ops, we had a loss of $178,000 in this quarter, compared to a loss of essentially $1 million, $997,000 in the prior year.

Yes.

So, we had some one-time expenses or there is timing between product mixes and some sales are commissionable. We had higher commission expense in this past quarter. We also had some ongoing acquisition-related expenses associated with Genasys.

And year-to-date, what’s the situation year-to-date, it’s also a loss from operations?

No, no, year-to-date actually, income from operations is about $1.4 million which is better than the $1.9 million loss from operations last year.

Oh, got it.

It’s about a $3.3 million swing.

Swing.

That’s a positive in operating income on about a $10 million increase in revenues. So, I think, we did a very good job of driving about $3.3 million of that increased revenue to the operating income line. We do have a net loss because of the tax issue that we experienced in the first quarter. A $2.5 million charge for the deferred tax asset. But beyond that, it’s a non-cash charge. But beyond that, operations have been generating a lot of income this year.

Yes, yes. So, it’s kind of funny – I call it funny money, the tax adjustment, all that. I am more interested in what cash you generate from sales of core products. Yes, now I appreciate the clarity.

I think we can give you clarity on the cash. The cash, as Dennis pointed out, we are actually – for the quarter used, - no for the year, have used approximately just under $800,000, correct me if I am wrong.

No, for the year, we have generated $2.2 million.

Right. I am sorry. We generated $2.2 million after the acquisition and those other costs.

Okay. Great. On the big army RFP that could not happen or would not happen until 2019 at the earliest is what I hear you guys saying. You might have a trailing order for the fourth quarter that’s in your pipeline or in your backlog. But the big army RFP that you guys have been talking about that we see ever went from all we see snippets of 3000 to 5000 units, that kind of volume. Is that really kind of focused on 2019 now and we shouldn’t hope for as a fourth quarter gift this year? Is that a fair conclusion?

Yes, let me break that out. There is two different things you are mentioning. The requirement for AHD for the U.S. Army remains as it has been previously stated up to 3500 units. And that remains in place. The Army bought – there are some of those requirements in FY 2016 and FY 2017, it’s a Navy contract and they are going to buy their FY 2019 through another contract vehicle for FY 2019. And it’s expected that they will buy through that other contract vehicle beyond FY 2019.

Okay. Got it.

Just to headline at it, it’s a contract vehicle in place with LRAD to support the AHD requirements for the U.S. Army.

Got it. Last question is, do you guys feel like the revenue stream for this year is projectable into 2019? I guess, the question I’ve always had with your product is I see them on TV a lot. I am always wondering, how is anybody going to replace that revenue? If I buy your products and they last for twenty years, isn’t – it’s all my kind of underline my own ability to grow, because until those units fail, there is not going to be replacement orders to replace. You strictly – your business is to grow your business is really a focus on new accounts, new municipalities, new governments, all that stuff, right. There is no inherent replacement of sales unless you are talking about units are sold ten years ago that were –maybe data technology that you’ve updated. Is that your – can you give me a sense of that at all?

Sure, so, Mass Notification – I’ll start there that has the biggest growth. Our sales and our revenue last year grew by 30% and we expect, we are new in that marketplace. So we expect a robust growth curve in that area. And the same is set with the Genasys software in the Mass Notification. Those areas were new two and it hasn’t been in our prior – much in our prior year revenue streams.

Right.

Acoustic Hailing Device perspective, the biggest market is the U.S. Army and it’s just beginning. And so, that’s all ahead of us.

Okay.

We also recorded bookings and sales with the Canadian Army. There are many large armies around the world with the credentials of North America that will open up additional AHD sales for us.

Got it. Great. Thank you very much. Appreciate your time guys. Have a great fourth quarter. Hope it finishes the year strong.

Thank you.

Okay. Our next question comes from Lloyd Korten with Unique Investments. Please state your questions.

Yes, hi guys. A couple more questions. The Genasys for this quarter, has this – everything being generated by us or is this just a continuum of the business that they were doing before we acquired them?

The revenue is from them.

How far away do you think we are from integrating and generating revenue?

When we announced the acquisition, we also announced the development program for a module that would best suit the U.S. markets. The time we have forecasted that to be initially available at the end of the summer of this year and we still hold to that forecast.

Yes, the beta is already operable. And so, we are working on finalizing the plan for the rollout.

Okay. I look forward. So, this quarter we are in now, you think?

Yes, at the end of this quarter.

End of September.

Okay. But also, how are we doing with the coastguards domestically and international? I know we broke into one coastguard, I don’t remember where, who, what, but it seems to be a very viable business all over the world. How are we doing with coastguards?

I can’t specifically answer the coastguards around the world. The overall navy, maritime patrol, as you know, what I think we are on – correct me if I am wrong, it’s 24 various navies and coastguards around the world already, which is terrific business. I will point out however, there is a limited number of ships. So, although that’s very good and we continue to pursue that around the world, the pursuit in the national police forces and armies provides better – potentially better revenue streams for us and we are focusing on all of that, but in particular, the larger revenue stream potentials.

What about the helicopter business?

That’s been disappointing. We do expect an order this quarter , which will only I think be the second order for helicopters. But I think the potential remains there and we continue to have to interest in demonstrations and much like the U.S. Army order provides for credentials around the world, so will substantial fleet here in the United States for helicopters and that’s what we are pursuing.

We haven’t sell into the U.S. Coastguard helicopters?

I don’t know. Lloyd, we can find out specifically and Brian can get back to you on that.

Yes, I mean, when they are going out and seeing to make a rescue, I would imagine it would be important for them to be able to communicate that the people they are rescuing that are in the water or whatever.

Yes, not just in the water, but, yes, you are right.

Okay. Thank you guys.

Welcome.

Okay. Our next question comes from – let me see. [Operator Instructions] And our next question comes from Lloyd Korten from Unique Investments. Go ahead, Lloyd.

Answered already. They took my call just prior to this.

Are there any other – if there is no other questions, we’ll wrap up operator. Are we still live?

Yes, we are still live. Okay, it looks like, we are having some technical difficulties with the Q&A portion.

Okay. So if there weren’t any additional questions, we will wrap up. That’s fine.

Okay.

Well, thank you everyone for participating in LRAD Corporation’s fiscal third quarter 2018 financial results conference call. A replay will be available in approximately four hours through the same link issued in our July 31, press release. Thank you again for participating.

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