Genasys Inc. (GNSS) Q4 2018 Earnings Report, Transcript and Summary

Good day ladies and gentlemen and welcome to the LRAD Fourth Quarter and FY18 Financial Results Conference Call. All lines have been placed on 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, Dagma. Good afternoon everyone and welcome to LRAD Corporation's fiscal year 2018 financial results conference call. I am Brian Harvey, Director of Capital Markets and Investor Relations for LRAD. 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 year 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. We also may 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 12 months. I would now like to turn the call over to LRAD’s CFO, Dennis Klahn. Dennis?

Thank you, Brian. LRAD Corporation revenue for fiscal year 2018 was $26.3 million, a 29% increase over the $20.3 million in the prior year. Fiscal fourth quarter 2018 revenue was $3.3 million compared to $7.5 million in the prior year’s fourth quarter. Revenue in the 2018 fourth quarter was lower due to September scheduled shipments totaling $4.7 million that did not ship due to government funding issues. Gross profit for fiscal year 2018 was $12.7 million or 48.4% of revenue an increase of $2.4 million over the prior fiscal year. In the fiscal fourth quarter of 2018, gross profit was $1 million or 31.8% of net revenues, compared to $4.4 million or 58.8% of net revenues for the fiscal fourth quarter of 2017. Gross profit percentage was impacted by the lower fourth quarter revenue and higher operating costs, including occupancy costs from the overlap of facility leases in the fourth quarter. Operating expenses for fiscal year 2018 increased 28% to $14.2 million from $11.1 million in 2017. Operating expenses in the fiscal fourth quarter of 2018 were $3.9 million, an 18.4% increased over the same period in 2017. These increases were primarily due to the addition this year of Genasys operating expenses, increased investments in product development and computer systems and higher expenses from the overlap of facility leases in the fourth quarter. For fiscal year 2018, the Company reported a net loss of $3.7 million or $0.12 per share, compared to a net loss of $877,000 or $0.03 per share in the prior fiscal year. Fiscal 2018 had income tax expense of $2.4 million due to a change in the deferred tax asset, resulting from the reduction to U.S. corporation income tax rates compared to income tax expense of $198,000 in the prior year. 2018 fourth quarter results were a net loss of $2.4 million or $0.07 per share compared to net income of $166,000 or just under a penny per share in the prior year’s quarter. Our balance sheet remains strong. Cash and cash equivalents at September 30, 2018 were $11.1 million compared to $12.8 million at the end of the prior fiscal year. $1.7 million decrease in cash and cash equivalents is primarily due to the cash paid to acquire Genasys and payment of its notes payable offset by $1.3 million of cash provided by operating activities this year. Working capital decreased by $4.3 million from $25.4 million at September 30, 2017 to $21.1 million at September 30, 2018. This is primarily the result of the use of cash to acquire Genasys and pay down the notes payable. In fiscal 2018, we used $725,000 to repurchase 286,746 shares of our stock. The current program expires on December 31, 2018. Recently, the Board authorized a new $5 million repurchase program that is in place through December 31, 2020. With that, I'd like to turn the call over to Richard.

Thank you, Dennis and good afternoon to everybody on the call. Fiscal 2018 was a year of growth and investment for LRAD. Revenues increased 29%, bookings reached $36.5 million, a record for LRAD, and backlog ended fiscal year ‘18 at $23.6 million, also a record for LRAD. We made our first acquisition by purchasing Genasys, a leading distributed recipient software solution provider. We relocated to a facility with more engineering and manufacturing space to support current and expected business growth, and we implemented a new ERP system to streamline our business processes. Revenue in fiscal year 2018 increased 29% from fiscal 2017 to $26.3 million. Revenue came in under our expectations when $4.7 million in scheduled September shipments were delayed due to unexpected government funding issues, primarily from one Asia-Pacific country. The revenue shortfall created a $2.2 million reduction in anticipated operating income and turned our fiscal year operating income from positive to negative. We expect the government funding issue will be resolved and the orders to ship in LRAD’s fiscal Q2 and Q3. Despite these issues, the Company maintained a positive cash flow from operations. Acoustic hailing device revenues were up 24% and mass notification revenues which now include Genasys were up 45%. Led by strong domestic defense orders, revenues from our Americas region increased 90% over the last fiscal year to $16.5 million; and revenues from Europe, Africa, and the Middle East were up 125%. Revenues in our Asia-Pacific region were down 54% to $6.6 million, due to the previous mentioned government funding issue. Looking statistical 2008 (sic) [2018] were record $36.5 million, up 29% compared to our last fiscal year. Our America region accounted for $21.9 million or 67% of total fiscal ‘18 bookings. Bookings growth came primarily from domestic and international defense, law enforcement, public safety, and mass notification orders. Over the last two fiscal years, bookings have more than doubled from $14.2 million to $36.5 million. Backlog at September 30, 2018 was a record $23.6 million, nearly double of the September 30, 2017 backlog and a 661% increase from the September 30, 2016. Of note, our fiscal 2018 backlog exceeds the total revenue in all, but two of the Company’s previous fiscal years. The Company also announced wildfire emergency notification initiatives this year. The initiatives provide increased exposure and interest for LRAD’s mass notification system and mass messaging solutions. As a result of this initiative and this year’s severe fire season, Company representatives are conducting several mass notification demonstrations at the request of the city and county officials in Northern and Southern California. The devastating November wildfires in California highlighted the importance of adding highly intelligible voice broadcast systems to local and regional emergency warning networks. We have added to our business development staff and resellers with extensive experience selling into the fire rescue markets in anticipation of federal funding to upgrade wildfire emergency alert systems. As of last month, LRAD’s systems have been deployed by the U.S. Customs and Border Patrol special response team at the San Ysidro California Port of Entry. The systems are used to broadcast warnings and notifications to the caravans that have [indiscernible] entry into the United States. We’ve received feedback from special response team offices praising LRAD’s effectiveness and communicating to large crowds from great distances. We believe the successful deployment is an important milestone in our yearlong effort to secure significant domestic border security orders. With the acquisition of Genasys, we’re rapidly expanding our capabilities and presence in global mass notification market. Our engineering staff recently completed the Genasys Command and Control software, which integrates our industry leading mass notification systems with our advanced mobile mass messaging solutions. We are also obtaining qualification certifications through launched new indoor mass notification products. With the many domestic and international business opportunities we’re working, including country-wide systems that include both hardware and software solutions, LRAD’s well positioned for increased mass notification bookings in our fiscal 2019. Additionally, we added two more systems for our product line is fiscal ‘18, a rapidly deployable self contained mass notification system, which has been delivered to the National Guard units in all 50 states; and an acoustic hailing device system, which the National Guard will also deploy under the $3.2 million order we announced last month. After working with the National Guard for several years, we’ve received more than $6.6 million in systems and LRAD helicopter-mounted systems in orders in the last 14 months with more orders expected in our fiscal 2019. Building on our $11 million dollar U.S. Army order announced last August and record fiscal 2018 domestic defense bookings, we anticipate increased sales in both the U.S. and international militaries organizations in fiscal 2019. We expect larger orders from the U.S. Army this fiscal year and in subsequent fiscal years to support the AHD program of record. Beyond the 286,00-plus shares we repurchased in fiscal 2018, we are continuing to utilize our strong balance sheet to purchase shares under the current share buyback program. The Board of Directors recently announced a new $5 million share repurchase program that will run through December of 2020 and take effect when the current program expires at the end of this month. Based on our $23.6 million backlog, the strength of our current booking forecast and our substantial business pipeline, we expect positive cash flow, profitability and record fiscal year revenues in 2019. With that, I'll turn it back over to Brian for Q&A.

Thank you, Richard. We will now 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?

Thank you. [Operator instructions] Our first question comes from Ed Woo with Ascendiant Capital. Please state your question.

Thank you for taking my question. My question is more on the political result. After this current election, does it change your outlook on your business at all?

You're talking in the U.S.?

Yes, in the U.S.

Well, no it doesn't. You're aware that the FY19 DOD budget actually passed on time at a record level. The FY20 will have to go through a process that now has the Democrats in-charge of the House, which will be a difference. Last year for the first time in more than a decade, our government passed the defense bill on time with by bipartisan support. The bipartisan support, if it sustains, which I think it will, gives us a good chance that the FY20 budget comes out on time at the expected values that we anticipate.

Great. And then, my next question is just on the overall M&A landscape. I know you guys mentioned before that you guys would always take a look at opportunistic -- opportunity. Has that environment changed at all with a little bit of the volatility in the stock market?

No. We continue to be active and in pursuit and review of capable M&A opportunities. And I think that will be part of our process for a long time.

Great. Well, thank you for answering my questions, and good luck.

Thank you.

Our next question comes from Aman Gulani with B. Riley FBR. Please state your question.

Hey, guys. Thanks for taking my question. So, I just want to get a bit more color on the delay in government funding. I think you said it was about a $4.7 million delay. So, is that something you expect to get pushed out in the first quarter or is that going be pushed maybe to the second and third quarter?

It will be pushed out to the second and third quarters. So, you’re correct, it is $4.7 million, it is an Asia Pacific country. The product was built and ready to ship, the government customer, final government customer placed their order through a reseller. The reseller was not funded by the government for reasons we don’t have to get into here. We have met and been constantly in contact with the reseller, we have met with the user. And the user is quite positive that the products will be -- the money will be put in place in order for us to ship in our Q2 and Q3, and also very positive outlook for their orders back to us in FY19. So, although disappointing certainly in our FY18, the outlook is positive from that country and we do expect the 4.7 to turn to revenue in our Q2 and Q3.

And just turning to Genasys. Are you talking to see some cross-selling opportunities starting to materialize, is Genasys sales performing in line with your initial expectations?

They are; there’s quite a bit of crosspollination between San Diego and Madrid. We are collectively prosecuting some large mass notification systems across the globe, some even here in the United States. As I mentioned in my remarks, the new software program and release took place on time, and there’ll be more releases following that. But, so far, Aman, Genasys has met all of our expectations.

And I know that a lot of sales was coming from international, but now, are you sort of targeting domestic sales for Genasys?

Yes. Yes, we are, just from a simple distributor recipient software offering, as well as the integrated system with our mass notification hardware.

Got it. Okay.

In fact we announced an order a couple of months ago for Caribbean nation. That’s the first use of the Genasys Command and Control software with the LRAD hardware. That order was for a program that will be addressed through many phases. Phase 1 is currently under contract. We expect that the balance of that Caribbean nation mass notification system will be put under contract over time, and it will all be netted together by the software created by Genasys and LRAD.

And just looking at backlog, I mean, correct me if I’m wrong. The backlog at the end of the third quarter was $9.3 million; now, it’s up to close it $26 million. I’m just [multiple speakers]. Yes. So, what was driving the big increase in the backlog?

We had a great bookings fourth quarter, number one, and which also included an $11 million order from the U.S. Army, which is the largest order, largest domestic order LRAD’s ever received and the largest U.S. Army order that LRAD has ever received.

And then, just in terms of the U.S. Army, do you have any visibility in terms of how much in orders you can get in fiscal ‘19?

We have directional numbers. In other words, we know what has been passed and came through Congress and Senate and signed into law by the President. It's a little confusing on our products because it's our products and systems are part of a shared line item. So, it's not a precise how much of that money will come to LRAD. But, in my remarks I told you, I expect that to be significantly higher than what we received in FY18.

Got it, okay. And then, last question for me and I'll jump back in the queue. How are the orders for the helicopter-mounted systems tracking? Do you see that as a significant opportunity?

It is. And we booked our first Air National Guard order in three states in the United States, California, Arkansas and New York with three systems for each state. That's our first major booking into -- we had some bookings, small bookings for State Department years ago, but this booking was the first time we've made inroad into the Air National Guard in three states. And it's encouraging that there should be more to follow.

Our next question comes from Jarrod Cohen with JM Cohen & Company. Please state your question. Jarrod, are you there? You may be muted.

Yes. Can you hear me now?

Yes.

Hello. Can you hear me?

Yes, we can.

Why don't we take the next one, Dagma? And if he comes back, we'll move him to the front of the queue.

Our next question comes from Paul O'Keefe with Edge Trading. [Ph] Please state your question.

Hey, guys. Can you hear me okay?

Yes.

Great. I appreciate the buyback. I think our stock has pretty thinly traded as is. Any way you guys are considering dividends as a reward for holding LRAD through this period, or -- I mean, I'm just curious to see, took a big beating over the last quarter and the numbers are good. I just want to defend the stock a little bit more.

Yes. Right now, Paul, as we said in our remarks, the buyback program, we've been very active in, in our fiscal ‘18 and so far in our fiscal ‘19 and put in -- put together another program that the Board approved for up to $5 million, starting next year. So, dividends, no, not at this time; buyback, we’ll continue to be active in.

Okay, I appreciate it. I've got great faith in the product and you guys. I like the momentum. I just would like to see it back above 3.50.

All of us as well. Thank you, Paul.

Okay. Our next question comes from Jarrod Cohen JM Cohen & Company. Please state your question.

Yes. Can you hear me now?

We hear you gentleman.

All right. Yes, just a few questions. One, could you give us a little of a plan maybe for the next three years for the Company in terms of incremental margins? Because just looking back through the history of the Company, back in 2011, the Company at the same revenue run-rate was making around $4 million and here you are -- I know you lost some orders as you said, this quarter. I’m talking about on the annual numbers, I forget that you lost $2 million. And over the years, the Company bought back a whole bunch of shares, and still actually got more shares outstanding than you did even back in 2011 by about 300,000 shares. So, I’m just trying to get a sense of where you see yourself going forward over the next three to five years. I know in terms of incremental margins and so forth.

I expect the gross margins to, at least in the short-term, be at historical levels. I see further out than that that the revenue growth will support a higher return on sales from a profit perspective. You mentioned we -- on similar sales, we made money a few years ago. That’s true. This year especially has been a year of significant investment for the Company to establish itself to succeed in its future years with both new products, new building, new ERP system and an acquisition. Those actions have set as up for what I believe is a very bright and growth future.

I understand that. I’m just trying to get a sense of how much ultimately would fall to the operating income line. Because even -- because I think, if you take the next $20 million of revenue that the Company can do and even if with that say 50% gross margin line, how much of that would fall to the operating income line, give or take?

We don’t give guidance, you know that. But what we do provide, Jarrod, is our bookings and our backlog. And with that information, you can put together a model that will be reasonably close with what we provide for publicly available data.

Okay. All right. Second question, I have is, I know Oshkosh got a big order about a month ago. How can that relate to LRAD in the future in terms of the benefit to LRAD?

From our record we enjoy with the U.S. Army is a requirements contract. Those requirements were put together by various functions within and across the U.S. Army, which includes the wheeled vehicles. So, by that nature, the demand for the acoustic hailing devices for those new vehicles is in the forecast.

Okay. Because I think their contract was for total of investing 6,000 vehicles and so…

…don’t do that, Jarrod. The requirement for wheeled vehicles in the -- for U.S. Army wheeled vehicles, the acoustic hailing device requirement for the wheeled vehicles in the U.S. Army are for the first vehicle and the last vehicle of a convoy. It’s not for every vehicle.

Okay. So…

But the requirement still remains the same at approximately 3,500.

And as we stated before, when we fulfill the $11 million order that we received in August, we will have fulfilled only about 20% of the program requirement. So, between our first three years of the program, add up to about $18 million in revenue, it represents about 700 units, which is only 20% of the requirement. So, there's still a lot of that requirement, and that includes going on the order, some of the vehicles that -- in the Oshkosh order.

We’re also working to generate new requirements and we are working international armies, such that they can -- we can develop requirement for acoustic hailing devices much like we did in the U.S.

Okay, all right.

Okay. Our next question comes from David Luebke with Summit Brokerage. [Ph] Please state your question.

Yes. Thank you. And for the record, I'm not an analyst. I'm a registered representative. I represent shareholders. In the past conference calls, you were able to give us an update on bonus accruals. Can you provide that for the fourth quarter and the year?

I'm not sure I understood the question.

Yes. The 10-K is not out yet.

If your question is, did we pay out bonuses. We did.

Well, in previous quarter conference calls, you actually gave specific numbers for the quarter. Is that...

Right. And we said what we would accrue for the quarter in anticipation of the year.

That was only because it was comparing one year to another, and there's a large variance. There's not a significant variance year-over-year from 2018 versus ‘17.

Okay.

Thank you. Dagma, we’ll take the next question.

Our next question comes from Steve Alan. Please state your question.

Yes. Hi, guys. Question on the share buyback. It says you bought 286,000, which I guess would have been in the fourth quarter. Have you been -- can you say how many you've bought this quarter?

No. So, I’m going just first answer the 288. It was mostly bought in Q4 but not entirely. And as I mentioned, we are active and remain active, and we'll announce what were bought when we announce our Q1 results in early February.

But, I think the important part, Steve, is that the Board has recognized that the share price -- there’s significant value in the share price, which is why they've increased the buyback to $5 million. So, we think there is good shareholder value down here.

Okay. Also on the $23.6 million backlog, will the majority of that share first quarter, second quarter, or is that pretty much skewed to the year.

It was all counted in revenue in the year.

Okay. And I see -- when you say your largest order was the $11 million from the Army, and you think it will be -- I think you said significantly more. Is there a way to quantify that as percentage 20%, 30%, 40%?

No, I'm not going to do that. I think the -- as I said, it's a shared line item which makes it a little bit difficult to precisely tell you what it is. But, there is good news in this, Steve. And one is, the program office in the Army has been funded. This is again, I mentioned earlier, funded on time from our Congress for the first time in decades. The acoustic hailing device program is well entrenched. We expect the orders in ‘19 to exceed the orders in the prior fiscal year. And we expect that trend to continue in the out years.

And two more quick ones. One, would you mention countrywide system possibilities? What can -- can we look at for scope of what that can be? I mean, is that $10 million for a country, is it significantly more, what size countries are those?

For the most part, they’re small countries. But, to answer your question directly, if you look at the mass notification pursuits and take out the very small ones and the very large ones, try to narrow down what -- the answer to your question, what are the size of those opportunities, and on the small end, it’s a $1million; on the upper end, it’s $25 million. There are others that are in the extremes, but that’s where most of the opportunities are.

And I know you mentioned the border. It seems like that has to be a huge opportunity. I mean, you’re obviously working it. What’s your optimism that you’ll be able to secure some of the border funding?

Guarded at best, as you’re probably aware that the FY18 Department of Homeland Security federal budget has not been passed. What you hear on television, radio regarding the government setting down, isn’t the entire government. DoD has been funded, most of the government been funded; the biggest single piece of the government that has not been funded is Department of Homeland Security. And as you might expect, that is a political bombshell between the two parties and the wall and DACA and philosophical differences. So, I’m not optimistic that they’ll get a Department of Homeland Security budget passed for FY18. I hope I’m wrong. And then, we’ll see what happens in FY19. But, that’s embroiled and still in a political nightmare.

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

I just have one quick question. Could you give me a little more information about the Caribbean countries, in particular probably the first country that’s going to be adapting the Genasys and the LRAD systems? How big an order is it, first of all?

Yes. The first -- as I mentioned, this is a multi-phase program. The first phase was for $1 million. If they exercise all of the phases of the country for the island, we would expect it to approach $10 million.

If they’re starting it, potentially they’re going to continue it. Are there other -- I mean that would be great business and the great win for us. Are there other countries like this that we’re close to getting orders from?

I’ll answer that, yes, and then with an explanation there. The countrywide systems are complex. There’s a political nature and a funding nature to all of them that are frequently put delays in the awards. With that said, I’m looking at a page now that has six opportunities that we’re active pursuing, some in the United States and some outside the United States. And I’m hopeful certainly but at least one of those will close, maybe two of those will close this fiscal year.

Okay. Another question. The helicopter business, we've gotten three states so far. What can you anticipate for this year or the next couple of years in that kind of business?

I remain guarded in that respect, Lloyd, as much as these are the first three states we’ll put them in. We will put them in and begin to exploit them with the National Guard to both at a national level and at a local state level around the country. And again, that’s not meant to avoid your question. The whole process to fund the purchase of these things is a long cycle. So, it starts with developing a requirement. And we're able to do that in those three states. We will continue to pursue the balance of the states here in the U.S.

I realize we're not candy bar business; everything is complicated. Do we have any competition on that business, the helicopter business?

Yes with an explanation. There are hailers on most police helicopters. They are completely ineffective. In fact, Brian can send you a video to illustrate that of Pennsylvania state police helicopter and a helicopter equipped with LRAD to give you quite a vivid demonstration of the contrast.

I’d love to see it. Okay. Thank you, guys.

You’re welcome.

[Operator instructions]. Okay. We have a question that came in from Dennis Wells [ph]. Please state your question.

Hi. I have been listening now to your quarterly reports for some time, and I have never heard you talk about IP rights. And any requirements for your protection of those rights for companies that may be in the same field trying to compete against LRAD? Can you kind of address that sort of issue?

So, I’ll address it in a couple of broad strokes. Our IR -- all of our software was developed by us and is owned by us. It's not patented, which is not at all unusual for a software company. But, it remains the rights of LRAD. Our hardware is protected by some patents as well as just our own intellectual property. If you separate out the markets we operate in as acoustic hailing devices, that has protection from in terms of some patents as well as what we're -- our own IP. And as you know, we enjoy our market position in that space. Our acoustic -- our mass notification leverages the patents and IP from LRAD. So, I think we're as safe as we can be with that regard. And as I mentioned, the software has all been developed by Genasys and LRAD and it’s our own intellectual property.

All right. I have one additional question and that is, I have called in the past to talk about stock repurchasing, and I'm glad to hear from -- about the new stock repurchase agreement going forward. I've talked about and wanted to talk about the both the management and the Board of Directors as to why their bonuses, if they receive bonuses, why aren’t those paid in stock -- stock incentives rather than in cash?

Well, most of the outside Directors’ compensation is in fact stock.

All right.

They receive restricted stock units each year.

And what about management?

My compensation is highly incentivized on Company performance with Company stock.

Good to know. I like to have you align yourself with shareholder interest?

And indeed, I am.

All right. Let’s get that stock back up to $3.50.

Absolutely. We’ll do all we can.

It looks like that was our final question. I’ll turn the call back over to Brian for closing remarks.

Thank you all for participating in LRAD Corporation’s fiscal year 2018 financial results conference call. A replay will be available in about four hours through the same link issued in our December 4th press release. Thank you. Have a good afternoon.

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