FLIR Systems, Inc.
Q4 2014 Earnings Call Transcript
Published:
- Operator:
- Greetings. And welcome to the FLIR Systems Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host for today, Mr. Todd DuChene, Senior Vice President, General Counsel and Secretary of FLIR Systems. Thank you, sir. You may begin.
- Todd DuChene:
- Good morning, everyone. Before we begin this conference call, I need to remind you that statements made on this call other than historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and are based on our current expectations. Words such as anticipates, estimates, expects, intend and believes, and similar words and expressions are intended to identify forward-looking statements. All of these statements are subject to risks and uncertainties that could cause actual results to differ materially. Please refer to the press release we issued earlier today for a description of factors that could cause actual results to differ materially from those forecast. The forward-looking statements we make today speak as of today, and we do not undertake any obligation to update any such statements to reflect events or circumstances occurring after today. Let me now turn the call over to Andy Teich, President and Chief Executive Officer of FLIR Systems. Andy?
- Andy Teich:
- Thanks, Todd. I’d like to everyone on the line to FLIR’s Fourth Quarter 2014 Earnings Call. With Todd and me today is our CFO, Tony Trunzo; COO, Tom Surran; Chief of Product Strategy, Jeff Frank; and Chief Marketing Officer, Travis Merrill. This morning we reported fourth quarter revenue of $434 million and earnings per share of $0.51. Revenue increased 9% versus the fourth quarter of 2013 with year-over-year growth in five of our six segments. Operating income grew 28% compared to Q4 of 2013, adjusting for restructuring charges in both periods and one-time items in Q4 of 2013. Earnings per share grew 49% over last year, when you exclude the restructuring and one-time charges. The growth and profitability was a result of the topline growth, 150 basis points improvement in gross margin and nearly flat operating expense base. For the year we returned to positive organic revenue growth for the first time since 2010, while increasing our earnings per share 14% over 2013. 2014 represented a significant year for FLIR in the thermal imaging industry. Early in the year we launched our revolutionary new low-cost thermal imaging camera cores Lepton and the world's first truly consumer-oriented thermal camera the FLIR ONE. Both products represent significant technological milestone that will enable broad market growth as thermal imaging technology becomes prevalent in everyday life. Our product innovation engine continued to produce good results in 2014, with the introduction of more than 20 new products, many of which established wholly new categories. This kind of pioneering has been our strategy for over a decade and while we have been very successful at driving the adoption and affordability of thermal technology, we believe there remains a tremendous amount of opportunity ahead of us. Already this year we've introduced new products that leverage our core technologies and bring differentiated capabilities to existing and new markets. At the 2015 Consumer Electronics Show for example, we introduced the next-generation of FLIR ONE, which offers four-time higher thermal resolution, smaller size and weight, and much broader compatibility across multiple Apple and Android mobile devices. We also launched the world’s first fully-integrated super-slim pocket-sized thermal imager the C2, which is targeted at building inspectors, contractors, realtors and other tradesmen. Our Maritime business continues its drive in the first water, recreational fishing market with the launch of a new series of lower cost dragonfly multifunction displays. These units feature our award-winning down vision sonar capability and offer a new retail opening price point to Raymarine. Our Surveillance segment recently began volume shipments of our new CDMQ 380-HDc and 280-HDc stabilized multi-sensor gimbal systems, which fully optimize size, weight, power and range performance by leveraging FLIR’s unique vertically-integrated technology. Our Detection segment will begin addressing much larger markets for their life saving technology by introducing new products that have unmatched value to price ratios. And our Security business will continue to fuel its high growth rate with the introduction of several new products in both the visible and thermal spectrum that will further differentiate FLIR’s offerings in the consumer, professional and infrastructure segments of this business. Today we announced our outlook for 2015. We expect revenues of between $1.55 billion and $1.6 billion for the full year and earnings per diluted share in the range of a $1.60 to a $1.70. This range incorporates our current views of currency rates for the year. I will now pass the call over to Tony to review the fourth quarter financial results. Tony?
- Tony Trunzo:
- Thanks, Andy. The following discussion of pretax operating results for the fourth quarter excludes restructuring and one-time costs totaling $31 million in 2013 and restructuring costs of $963,000 in 2014. The discussion of full year results excludes $31 million of restructuring and other one-time items in 2013 and $17 million of restructuring costs in 2014. All 2013 numbers reflect our new segments structure that was implemented in January of 2014. Fourth quarter consolidated revenue was $434.4 million, an increase of 9%, compared to the fourth quarter of 2013. The increasing strength of the U.S. dollar during the quarter impacted revenue growth in Q4 as revenues on the constant currency basis increased by approximately 11%. Sales to U.S. Government represented 19% of the total in Q4, compared to 18% of revenue in the fourth quarter of last year. Consolidated Q4 gross margin was 49.4%, a 1.5 percentage point increased compared to last year. Consolidated operating margin before restructuring was 20.3%, compared with 17.2% in the fourth quarter of last year. Segment level SG&A declined by 8% in Q4, due partly to the benefits of last year's business restructuring. Corporate administrative costs were higher due to expenses related legal matters, including legal costs related to a litigation matter where we received a favorable jury verdict during the quarter. Net earnings excluding restructuring costs were $73.5 million, an increase of 48% and earnings per fully diluted share were $0.52, an increase of 49%. For the full year 2014, consolidated revenue increased by 2% to $1.53 billion. Surveillance and Detection segment revenue was down 7% and 5%, respectively, compared to 2013, but our other four segments all reported revenue growth led by the security segment which saw our revenue grow by 27% to $179.1 million. Consolidated gross margin for the year was 49.1%, 30 basis points less than in 2013 due to the higher proportion of security revenue and somewhat lower margin. The segment level operating expenses declined by $9.6 million or 2%. Corporate expenses for the year were up 29% in the legal costs associated with several significant litigation matters which should not have material impact in future quarters. International revenue represented a record 50.1% of 2014 total while sales for the U.S. government represented 20.3% of the annual total, the lowest percentage since 2000. Our tax expense in Q4 was $10.3 million or 12% of pretax quarterly income as we benefited from the release of approximately $9.4 million of tax reserves associated with our Raymarine acquisition in 2010. For the full year, our tax rate came in at 20%. Inventory levels declined by $22.7 million or 7% during Q4 while accounts receivable increased by $60.8 million. As a result, cash provided by operations for the fourth quarter was $62.8 million or 86% of net income. For the full year, cash from operations of $226.2 million would equal to 113% of net income well below prior year. We made significant progress in reducing inventory in 2014 but accounts receivable growth due to substantial late quarter deliveries and collection delays in certain international locations were disappointing. These issues were largely combined to our Surveillance and Detection segments and we do not anticipate any issues with ultimate collectability. We should see a meaningful drop in accounts receivable during Q1. In Q4, we purchased 2 million shares of our stock at an average price of $31.64 per share. For all 2014, we repurchased 4.2 million shares of stock at an average price of $32.81. Today, we announced a new share repurchase program that authorizes the repurchase up to 15 million shares over the next two years. For 2015, we expect to continue our long-standing approach to buyback whereby repurchase activity is governed by our view of relative value and expected capital needs in M&A opportunities. As Andy stated earlier in the call, we currently expect revenue for 2015 to be in the range of $1.55 billion to $1.6 billion in earnings per fully diluted shares to be in the range of $1.60 to a $1.70 representing growth of approximately 11% at the midpoint. While we anticipate stabilization in our government markets, we expect the continued strength of the U.S. dollar to have a negative impact on revenue and profitability throughout 2014. At current exchange rates, the stronger dollar would reduce our 2015 revenue growth by approximately 3 to 4 percentage points. We also announced the 10% increase in our quarterly dividends to $0.11 per share, reflecting our continued commitment to appropriate capital deployment that includes the combination of direct and indirect return of capital by dividends and share repurchase along with continued capital investment and M&A. This concludes summary of our fourth quarter and annual financial results. I’ll now turn the call over to Tom Surran to cover our operational highlights for Q4.
- Tom Surran:
- Thank you, Tony. During the fourth quarter, we saw solid topline growth that was broadly driven across many of our businesses. This revenue growth combined with improved gross margin and lower operating expense resulted in a significant improvement in segment level profitability with consolidated segments, operating income reaching $115 million excluding restructuring charges, up 37% over Q4 2013. This represents a 26% operating margin which is 550 basis points improvement over Q4 2013. Total order backlog reached $547 million and is 12% higher than last year. During the fourth quarter, the Surveillance segment grew revenue of 8% year-over-year to $150.1 million as a result of the significant increase in our integrated systems product line. These product offering provides sophisticated multi-sensor capabilities with rapid deployment and ease-of-use previously unavailable to customers. This gain was partially offset by reduced activity in our web insights and manned portable products. Segment operating income of $43.8 million, excluding restructuring charges, increased 48% versus the prior year, which represented 790 basis increase in operating margins, driven by improved gross margins and 15% lower operating expense. Segment operating margin of 29% is the highest since late 2012. Surveillance order flow was also improved year-over-year growing $10 billion or 11% over Q4 2013. Surveillance 12 months backlog reached $295 million and is up 5% over the prior year. While we did see increased order flow in United States with a notable order for our TALON gimbals from the U.S. Army, order delays with some Middle East opportunities kept that region relative flat versus the far year. In the fourth quarter, we received a large amount of sub $10 million orders compared to last year, which is becoming a consistent trend in something that fits well with our commercial off-the-shelf operating model in the government markets. Instrument segment Q4 revenue grew 2% over the fourth quarter of 2013 to $103.5 million. While there is a significant growth in our test and measurement products as well as continued growth in our automation line of businesses, these gains were offset by declines in the building and predictive maintenance market. Operating income for instrument segment grew 7% over Q4 2013 with an operating margin of 34%, excluding the impact of restructuring charges. This improvement was the result of both higher revenue and reduced operating expenses. The growth in the test and measurement product line was driven by the successful launch of TG165, our Lepton-based thermal imaging spot temperature tool. This product was introduced in the third quarter of this year but significant shipments did not commence until the fourth quarter. At CES last month, we continued our trend of revolutionary product introductions when we launched our FLIR C2, the first fully integrated pocked size thermal camera focus on the building, HVAC and maintenance professional markets. This ruggedized and ultra slim thermal camera offers our patented MSX image enhancement and features our Lepton camera core inside. Units of the C2 will begin shipping to distribution this month. OEM in emerging segment revenue grew by 8% over the fourth quarter of last year to $58 million, despite a $4 million headwind from the divestment of our OCG business this summer. The year-over-year growth was driven by strong results from the uncooled cores product lines in addition of the mobile product category with our FLIR ONE product. Operating income improved dramatically in the quarter increasing 75% over the prior, excluding the impact of restructuring charges, reaching $18.9 million. Driving this improvement were 630 basis point increase in gross margin in part due to the elimination of the OCG product and that 13% deduction in operating expense. At the Consumer Electronic Show, our mobile products group introduced the second generation FLIR ONE smart thermal camera accessory to outstanding customer feedback and media coverage. The latest FLIR ONE is offered in versions for both the Apple and Android phone. While being substantially smaller than the first generation FLIR ONE offering, this version still features its own internal battery and incorporates a visible camera to enable the same MSX image enhancement features that consumers love about the original. This new version also incorporates automated temperature calibration which provides reliable and continuous temperature measurement without user intervention. We are planning to commence shipment of the second-generation FLIR ONE within the first half of this year. The Maritime segment was our only segment that reported either drop in revenue or operating revenue in Q4. Revenue was down 6% to $40.1 million and operating income fell 39% to $1.3 million, excluding restructuring charges. The revenue decrease was in part due to industry wide aggressive holiday pricing promotions in the U.S. market as well as the inability to meet the significant demand for the new high performance MU MV thermal imager. Operating margins were down as a result of the revenue weakness, as gross margins and operating expenses were comparable to the prior year. At CES in January, Raymarine significantly expanded its line of freshwater fishing electronics with the introduction of seven new models in its Dragonfly product lines. Two of these offerings will be priced below $200, including the Dragonfly 4 DV, the world’s first recreational sonar below $200 to use wide spectrum CHIRP DownVision sonar imaging technology. Also added to the Dragonfly lineup was the Wi-Fish and the Dragonfly 5 Pro models, which stream live sonar images via Wi-Fi to Android and Apple mobile devices using the new Raymarine Wi-Fish mobile app. The security segment had another quarter of significant growth with revenues increasing 35% to $56.4 million. Lorex-branded product revenue was up 24% versus the prior year due to an expanding retailer footprint and a strong holiday season for our direct-to-consumer ecommerce site. Our FLIR-branded thermal products grew 72%, as compared to the prior year and unit volumes were up 62%. The combination of our long-standing prowess and thermal security cameras combined with the full line of visible camera has proven quite successful, yet there remains tremendous room for growth in the $15 billion security equipment market. As a result of the increased revenue and increasing gross margins and controlled operating expenses, operating income increased 85% over the prior year to $10.3 million excluding restructuring charges. We look forward to introducing some very innovative new products during 2015 that will create further momentum for the security segment. Detection segment fourth quarter revenue of $26.2 million increased 19% versus the prior year, due primarily to the shipment of low-grade initial production units of the DR SKO Program. During the quarter, we received our first full rate production order for the DR SKO Program, totaling $27 million. Detection operating profit of $5.2 million was more than doubled that of Q4 2013, excluding restructuring charges. As a result of the cost savings, we’ve been able to realize in the reorganization of the segment’s operations during 2014. That concludes my summary of the segment fourth quarter. I will now pass the call back to Andy.
- Andy Teich:
- Thanks, Tom. We are pleased with results of this fourth quarter and year. Our 2014 results are indicative of our ability to execute against our key strategic initiatives. During the year, we further reduced the cost to produce thermal sensors, which allowed us to break new ground on price and generate accelerated demand. The introduction of the Lepton thermal camera core has changed the way the industry thinks about size, weight, power and the price of thermal technology. And it enables us to produce products that address new markets or create new categories in existing markets. In our government business, we continue to drive technological innovation under our CDMQ model to fuel growth in the U.S. and internationally, where we feel we have a significant competitive position. We remain committed to being the leader in CDMQ products for demanding high-value applications. Operationally, during the year, we completed a company-wide realignment and restructuring that not only has meaningfully reduced our cost structure but has also improved the way we develop and sell our products. We also invested in our marketing organization to strengthen our brand and increased overall awareness of the benefits of our technology in a wide range of applications. With these actions, we believe we've created an organizational structure and capabilities that position us very well to growth in each of our markets, identifying and attack new application and reach our vision of becoming the world’s sixth sense. That concludes our comments on the fourth quarter. And we will now open up the call for questions. Operator?
- Operator:
- Thank you. [Operator Instructions] Our first question comes from Jim Ricchiuti with Needham & Company. Please proceed with your question.
- Jim Ricchiuti:
- Hi. Good morning. A question on Raymarine. Andy, would you expect these products to be shipping for the seasonally strong period of the quarter, or is this the catalyst that we might see to get that part of the business moving?
- Andy Teich:
- Yes, Jim. They will be shipping. So they are filtering into distribution right now. It’s primarily a retail distribution channel for these new lower-end products but we are doing our retail fill right now.
- Jim Ricchiuti:
- Okay. And if I could just ask one other question. Just in the past you have seen a sequential decline in revenues in the 12% or so range if we go back historically. Is there anything about this quarter that would suggest something other than that?
- Tony Trunzo:
- Jim, it is Tony. I can’t give you an exact percentage reduction. But typically and I think in almost every case, Q1 revenue and earnings tend to be less than Q4. We get seasonal strength in our instruments business because of the Q4 sell-through and typically Surveillance is meaningfully stronger as well. Raymarine will offset that a little bit, as Raymarine has a much stronger Q1 than it does Q4. So, our maritime business tends to do better in Q1. But overall there is -- I think it’s reasonable to expect what we’ve seen historically, which is a tick down from Q4 to Q1.
- Jim Ricchiuti:
- Okay. Thanks a lot. I will jump back in the queue.
- Operator:
- Our next question comes from Peter Arment with Sterne, Agee. Please proceed with your question.
- Peter Arment:
- A question on the defense-related on the -- the delays that you saw in the Middle East with some of those orders, was it oil related or is it just timing on that? I wonder if you could clarify that first.
- Andy Teich:
- Yeah. I think it’s probably, mostly is driven by timing here. I think that there is going to be some effect from lower oil prices but generally, I think the demand there is driven by requirements either from platforms that have been acquired or from just the regional instability driving some of the border demand in the region.
- Peter Arment:
- Okay. And then if I could just ask a follow-up, Tony. On the EPS guidance, just to clarify, you were getting -- the last -- the second half of 2014 you were getting a pretty substantial restructuring savings. You didn't have as much in the first half. So, I mean is there a way to be thinking about that that is a tailwind that is going to continue in 2015 of course? But it seems like your guidance is only up low single-digit if you are looking at it on a pro forma basis. Am I looking at it the right way, if you could just clarify that? Thanks.
- Tony Trunzo:
- I’m not sure how you get low single-digits, Peter. In aggregate, yes, we will see more savings throughout 2015 than we saw in 2014 from the restructuring. The further we get away from the actions themselves, the harder it gets to tease out exactly what those savings. But I think it’s reasonable to expect that we will see more savings in 2015 than in 2014. I’m not sure how you go about pro forma-ing that. At the midpoint of -- what we don’t expect in 2015 are meaningful restructuring charges. We will have a little bit just because some of the stuff requires that it be posted in the period if the expense is actually incurred and you can’t accrue it upfront. But we don’t anticipate those costs to be meaningful at all in 2015. You saw them come down fairly dramatically in Q4 and I think that will be even lower in the quarters of 2015. But I think it should be a pretty clean look in 2015 and excluding the 2014 restructuring charges, but looking -- effectively looking at them is a bit of a headwind because with 2015 -- at the midpoint, we are looking for about 11% to 12% earnings growth and I think that’s actually a pretty good apples-to-apples analysis.
- Peter Arment:
- Okay. Thank you very much.
- Operator:
- Our next question comes from Pete Skibitski with Drexel Hamilton. Please proceed with your question.
- Pete Skibitski:
- Good morning, guys. Nice quarter.
- Andy Teich:
- Thanks, Pete.
- Tony Trunzo:
- Thank you.
- Pete Skibitski:
- I guess maybe for Tony. Tony, on the FX headwind for 2015, should we think about that primarily impacting instrumentation, or is it meaningful back to the other commercial businesses as well?
- Tony Trunzo:
- Actually, Pete, the biggest impact is on our maritime business. We have -- we tried to do some analysis around this. And I think we’ve gotten to a pretty good place from a segment standpoint. Couple of things, couple of dynamics in maritime, all of their non-U.S. sales, which is north of 60% of the total, are in currencies other than U.S. dollar. That’s not true in all of our other segments. For example, surveillance has a lot of non-U.S. sales, but virtually everything they sell is in USD. So they don’t have the headwind that a lot of our other segments don’t have the headwind that this maritime does on the revenue line. Additionally, our contract manufacturing arrangements in the maritime business are largely in USD. So we don’t have the natural hedge on the expense side that we do with a lot of our other segments. So maritime is going to be -- based on current rates maritime is going to see the strongest negative impact on a percentage basis, followed by instruments which will see a larger number of a headwind on a revenue side in terms of absolute dollar, but as a percentage it looks like it would probably be meaningfully less. And then the other segments really don’t have a lot of impact that all tends to be there is some at the revenue line, but when you flow all the way through the EBIT, the impact in the other segments isn’t that dramatic at all.
- Pete Skibitski:
- Okay. That makes sense. And just as a follow-up on security. I mean, it almost looks like you guys can’t keep product on the shelf and security. Is it -- so I am trying to remember what you guys said in prior quarters, is it mostly better distribution, is it new products or other stuff, and kind of how much tailwind you guys have in the segment going into 2015? I am wondering if we have a tough comp now or are you just really disrupting the space and then going to have a tailwind for long time in security?
- Andy Teich:
- Yes, Pete, this is Andy. The segment continues to do well and it’s really a combination of all of the things that you mentioned. We have expanded retail distribution under the Lorex brand. We’ve expanded our distribution into the professional enterprise and integrator space under the FLIR brand of visible spectrum. And then the real star of Q4 frankly was the growth in thermal and that’s driven by new product launches. So we’ve launched new products at somewhat lower price points and that’s driven significant increases in volume. And really for 2015, we expect that market to continue to grow quite nicely and there we’ve got significant product launches that we’ve planned for announcement as well. Tom, maybe you can talk little bit about some of the differentiation things too.
- Tom Surran:
- Well, before I go there, I would say we have geographic expansion that will be occurring, as we take our commercial class products into the international markets. So that’s something we are excited about. In terms of the products, we are going to be introducing a number of products, probably don’t want to premature enough them, but we have quite a bit that will be coming out with here in 2015 that we expect will be continuing to drive revenue growth.
- Pete Skibitski:
- All right. So you guys are thinking that maybe this might continue to be your fastest growing segment in 2015?
- Andy Teich:
- Yes. It will be.
- Pete Skibitski:
- Okay. Thanks, guys. I will get back in queue.
- Operator:
- Our next question comes from Tim Quillin with Stephens Incorporated. Please proceed with your question.
- Tim Quillin:
- Hey, good morning. Thank you for taking my question. First, I was just wondering if you could talk about gross margin and operating margin targets that you might have for 2015 and longer-term. And then if you could quantify the impact of unusual legal expenses or nonrecurring legal expenses in the quarter?
- Tony Trunzo:
- Sure. Tim, its Tony. I will take a shot at those. So the single biggest factor for us in gross margin is mix, because we do have some parts of the business that are lower gross margin. The Extech branded test and measurement piece of instruments is lower margin. Maritime is a bit lower margin. And the low end, do it yourself security business, the Lorex business is lower margin. On bias the margins in the short term are going to look like they are stable just because of that mix. It really doesn’t have anything to do with product level margin shift. It’s really going to be -- it’s really mix related. We are going to always work to improve our product level margins and I think there is some work underway there now. I wouldn’t expect in 2015 that you would see a dramatic change in margins upward as a result of that just because you are going to have a headwind with respect to mix. Operating margins over time should tick up. And into the question Peter asked earlier, we won’t have a little bit more restructuring savings this year than we have last year and that should provide a little bit of a lift at the operating margin line. And as you guys know, we obviously are consistently working to try to grow our OpEx at a slower rate than revenue. A little bit of a challenge this year because of a revenue headwinds associated with the strong U.S. dollar, but a return to organic revenue growth like we saw last year and likely anticipate this year should help us in that respect. As regard to the legal expenses, we commented this morning that the unusual piece of those was approximately equivalent to what we saw in terms of a pickup from nonrecurring, from discrete tax items. So you are looking at high single-digit millions in total related to those matters, Tim.
- Tim Quillin:
- Okay. And just one follow-up if I may, maybe for Andy, but could you talk about the pace of Lepton product introduction, so you had a handful of nice products that came out in 2014. Should we expect it to be a bigger number across all of your segments in 2015? Thank you.
- Andy Teich:
- Yes, Tim. One of the strategies that we mentioned is that we feel that there is a home for Lepton in each of our segments within the business or certainly within five of the six of the segments from the business would certainly be logical candidates for the utilization of the technology. So we have R&D efforts going on in each of the segments relatively to Lepton product developments. And I do expect that you will see more launches in 2015 than we had in 2014. I am happy with the start that we had in 2014, though the products that we did develop and have launched in 2014 and we’ve already launched one here in 2015 the C2 -- and well actually two of the C2 and the second generation FLIR ONE. The initial response to those two products has been quite good.
- Tim Quillin:
- Thank you.
- Operator:
- Our next question comes from Michael Ciarmoli with KeyBanc. Please proceed with your question.
- Michael Ciarmoli:
- Hey, good morning, guys. Nice quarter. Tony, maybe just some housekeeping on 2015. In the earnings guidance, what sort of the buyback that’s implied and what’s the tax rate?
- Tony Trunzo:
- Tax rate is going to be around 24% plus or minus.
- Michael Ciarmoli:
- Okay.
- Tony Trunzo:
- There is minimal impact of buyback during the year. We do anticipate being in the market depending on what the -- what valuation looks like, but the impact of share repurchase is going to be -- unless there is some fairly dramatic change in valuation metrics, the impact to share repurchase during the quarter is going to be minimal with respect to earnings.
- Michael Ciarmoli:
- Okay. So even though you guys want to complete this, I guess, to two-year buyback, we shouldn't expect sort of half and half, should just kind of assume it…
- Tony Trunzo:
- Yeah. And as regard the size of the buyback maybe I’ll take the opportunity to comment on that. Our last buyback was authorization was 25 million shares over two years. And we actually only utilize about 41% of that, we bought back a little more than 10 million shares over that two-year period. And those 10 million shares, there was a meaningful chunk of them that represented some pretty specific discrete opportunity to get stock at where we deem to be pretty attractive valuation. If we see the stock become inexpensive again, we would certainly be much more aggressive in the market. But I wouldn’t want to leave the investment community to think that we sort of under any circumstance are going to complete 15 million shares over the next couple years. Its design to give us flexibility in the events that we see a significant change in valuation, but it’s not designed, is what I would consider to be a goal for the next two years.
- Michael Ciarmoli:
- Got it. That’s helpful. And then just on the end markets, I know you don't really guide on segments? But Surveillance, do you think you could actually be up year-over-year and then Europe was down, I guess, close to 20% sort of, if you can kind of give us some expectations there?
- Andy Teich:
- So relative to Surveillance, I don’t think that we can necessarily call a bottom in the business yet. It -- we were pleased with what we saw for bookings in Q4, but we still see it as a somewhat of a volatile segment relative to demand. So I think we’ll have a better feel for that perhaps when we get through -- half way through the year. In terms of Europe, Europe was soft for us in Q4. And at this point, we don’t see much of an indication of that improving in the near-term, so we certainly tempered our expectations relative to European revenues in our 2015 budget.
- Michael Ciarmoli:
- Got it. Thanks, guys. I will jump back in queue.
- Operator:
- Our next question comes from Jonathan Ho with William Blair. Please proceed with your question.
- Jonathan Ho:
- Hey, guys. I just wanted to start out with sort of the new form factor for the FLIR ONE second-generation. Can you maybe give us a sense of how you think this could impact the trajectory of the FLIR ONE? Is this going to be meaningful in terms of revenue for the product? Are we seeing sort of, with that strong reception, maybe more buying activity? Just want to get a sense from you how you think this will impact the trajectory.
- Andy Teich:
- Yeah. There is a lot of discussion about the form factor, which one is better, is the case better, is the dongle better, which is what we call that form factor. We chose to go with the dongle because we could do the review size. It’s not saying that we won’t ever come back with a case offering, but we’re excited more about the features that we’re bringing to this new generation of product and we think that’s what will actually be driving the sales. We think that there our people who clearly like the dongle form factor, its portability, the ease of attachment. So, clearly, it is something we’re positive about, we like. And we think though that it’s really the form -- the performance of this unit that’s really going to drive the adoption.
- Jonathan Ho:
- Got it. And then as we look at sort of the new consumer product categories that you guys are targeting, I mean can you give us maybe a quick preview on which ones excite you the most? Or maybe not specific products, but in terms of the opportunity set or the challenges that you would be tackling where you see the most opportunity there?
- Andy Teich:
- Sure. Jonathan, it’s Andy again. Certainly, the thing that we like about FLIR ONE on the consumer space is that we expect to see new applications come from the deployment of that product and we’ve already seen that with the first generation of FLIR ONE and the second generation opening up a significantly broader base of platforms so the product can operate with we think will also bring in new application. So, I have to say from an excitement standpoint, that’s one that probably excites me the most just because it opens up a broad based of the potential for new applications to be discovered as we get user feedback on the product and as developers develop new applications for product. The other products in the consumer space, the other two that we launch for example at CES, the Dragonfly series in the Raymarine space. That’s an existing application of freshwater fishing market that we think we bring a new level of functionality to that market, which is going to drive growth. The imaging performance of our down vision -- chirp down vision sonar is really pretty amazing. We hear a lot of people say it is like having a camera under the boat. So it’s turning sonar data into visible imaging basically. The other one is a C2 and while I wouldn’t necessarily say this is a pure consumer product. It does have some transition in the consumer market. It’s a product that has a consumer form factor, a consumer price point and we’re targeting at -- primarily at the home inspection market and we think that could span everything from contactors to tradesman to real estate professionals, to low-level home inspectors. And I’m pretty excited about the new form factor there as well. No one has built a thermal imager in the super slim format and it plays to the strength of Lepton. And it plays to the strength of our MSX algorithm, which really produce a very consumer-friendly image on that product.
- Jonathan Ho:
- Got it. And just the last one on the thermography side. As we think about sort of the spot pyrometer replacement that you guys came up with, can you talk a little bit about how that’s impacting the market? Is there any potential for cannibalization of your low end products? I mean, it seems like it is a different form factor in use case. But I just want to get a sense for how you see those unit volumes ramping over time, are you seeing sort of broader distribution? Just maybe a little bit more detail on the growth opportunity.
- Andy Teich:
- Sure. Jonathan, I’m glad you ask about what the product that you are referring to is called the TG165. And I probably would have put that as one of the product that I was most excited about. And if you look at how it’s been received by the marketplace and you can look on sites like Amazon.com about how people and customers are receiving that product, it’s very positive. In terms of -- one of the things you mentioned there is this is a product for those that don’t know is a $500 price point. And it’s not a pure thermographic imaging camera. It’s basically a thermal image with the spot temperature measurement in the center. And so it’s a different value proposition but it clearly, we think reaches a new customer base as our price point and we hadn’t seen the cannibalization. So, we actually saw and what was our low-end Exx product line, which is probably where we would see that cannibalization, we actually saw increased volumes. And one of the things this is going to create additional awareness that’s kind of a starter product for looking into thermal imaging but clearly there is capabilities as you step up through our product line that is still there. So we haven’t see it. It’s been extremely well received and it’s one of the one that I probably would have picked for most exciting.
- Jonathan Ho:
- Great. Thank you.
- Operator:
- Our next question comes from Saliq Khan with Imperial Capital. Please proceed with your question.
- Saliq Khan:
- Great. Thank you. Good morning guys.
- Andy Teich:
- Good morning.
- Saliq Khan:
- I'll be speaking on behalf of Jeff Kessler as well. Just a couple of real questions that we had for you. First one being is, the percentage of the government revenue that we are seeing from you guys, that certainly increased year-over-year. How are you dealing with or how are you changing the business planning processes to account for the changing government budgets?
- Tony Trunzo:
- Go ahead, Andy.
- Andy Teich:
- Yeah. Saliq, I think our government percentage declined year-over-year slightly and was actually at a lowest point since -- that we’ve seen since 2000. However, we’ve got a presidential budget proposal that’s in -- that shows an increase and certainly we like the sign of that. We’ll see what gets proved and where the specific spending gets approved. But at this point, we are being pretty conservative in terms of our assumptions and the change of the mix of our DoD revenue base.
- Saliq Khan:
- Great. And the other thing would be is, you're seeing a lot of investments that you have made, certainly the Lepton over the past year. In speaking with your current clients, are you getting a sense that there are a lot more budget contest going forward or are they open to making larger purchases as well?
- Andy Teich:
- Well. So Lepton, really is a completely different value proposition in terms of price and performance relative to our existing cores and components business. So I think we are really talking to a whole new class of customers there. Some of the large automation companies, for example, have expressed a strong interest in integrating Lepton and to process control application. We’ve also seen Lepton be very successful in the UAS/UAV market. So I think there we’ll see nice growth in Lepton revenues in 2015. As we’ve mentioned before on this call, it’s a fairly long sale cycle because you’re dealing with an OEM component that has to get designed into a product and qualified and tested and then brought to market. But I’m confident that we’ll see a nice increase in revenues coming from the Lepton in ‘15.
- Saliq Khan:
- Great. Thank you.
- Operator:
- Our last question comes from Pete Skibitski with Drexel Hamilton. Please proceed with your question.
- Pete Skibitski:
- I wanted to follow up with one of Jonathan's earlier questions on FLIR ONE, guys. I know your expectations for the first generation of FLIR ONE were pretty low. It sounds like for this new one that will start delivering this year that maybe you have higher expectations with a lower price point and wider distribution. Is that fair? Are the expectations higher this year? And do you have any kind of meaningful amount of revenue for the new FLIR ONE in your 2015 guidance?
- Andy Teich:
- Sure Pete. I’ll handle first part of this and then I’m going to flip over to Jeff to talk a little bit about, what’s different about FLIR ONE and what we’re doing there. Certainly, the revenue expectations for FLIR ONE second generation product are meaningfully higher than we had with the first generation FLIR ONE. I still don’t think it’s going to be a huge needle mover for FLIR from a revenue standpoint. The reality here is that the FLIR ONE is a product that we have launched to drive awareness in the market and to seek out new application for the product as well. It’s performed very well in that regard in terms of the awareness building that has taken place. And maybe after Jeff comments, I can have Travis comment on that as well. But I think we’ve got Jeff. Why don’t you talk a little bit about some of the things that we are doing with the second generation FLIR ONE.
- Jeff Frank:
- Hi, Pete. This is Jeff. The sell-through to the existing FLIR ONE continues to remain relatively strong, but the introduction of the second generation FLIR ONE with the much, much broader market ability to achieve the full iOS platform and the Android platform really creates a whole new universe of users for them. And I think where we are seeing probably the biggest impact in that at least the near term is the developer momentum that’s starting to build around that. We’ve started to sponsor some programs around developer events. We have done two recently, one up in the Bay Area and one with the [UC] [ph] system. These things are like hundreds of innovators that focus on our technology over a week and we’ve seen a lot of really great ideas start to emerge out of these events and we’re also starting to see now few apps that are in the Apple approval process. So we expect that with this much broader -- if you could imagine if you are a third party developer having universal customers that is the entire iOS and Android community that the opportunity for creating a market for your apps is much, much stronger. So we are expecting to see quite a bit of uplift in that.
- Pete Skibitski:
- Okay. Yes, we just need a killer app, right?
- Jeff Frank:
- We hope so. We keep looking for it.
- Andy Teich:
- Pete, I’m also going to have Travis’ comment a little bit on awareness building because I mentioned that’s really what this product was all about.
- Pete Skibitski:
- Thanks, Andy.
- Tony Trunzo:
- Hi, Peter. I think as I talked about a little bit on previous calls and we’ve reiterated throughout the life of this product that really is one of the strategic objectives of FLIR ONE and we felt very good about the exposure that we’ve gained to a whole new class of customers. We have seen over a hundreds of millions of impressions, media impressions over the course of 2014 as the results of FLIR ONE. And by and large, those are the people who had never been exposed to the FLIR brand or to thermal imaging technology. So we feel like that’s opening up an entire new market and obviously broader brand awareness. But we are very excited about the next generation of this and given the broader platform compatibility of the device. The opportunity for that heightened awareness is even greater than it has been in the past. So we’re very enthused and still committed from a marketing perspective of using this as an awareness building to not only for this category but for all FLIR branded products.
- Pete Skibitski:
- Okay. Got it. Very good. I appreciate that, guys. And just the last one maybe for Andy. Andy, how are you guys seeing the M&A environment currently?
- Andy Teich:
- Well, so it’s something we’re going to looking much more closely at in 2015. We just finished the rather extensive strategic portfolio review at the business and have identified the areas that we feel offer the strongest growth for the business. And I think that the M&A will become an important part of our strategy to augment those growth areas in the next year or two.
- Pete Skibitski:
- Thanks, guys.
- Operator:
- At this time, I would like to turn the call back over to management for closing comments.
- Andy Teich:
- Great. Thank you. So in closing, I would like to thank the nearly 3000 FLIR employees around the world for their thoughtful dedication and development during the year. We continue to have a significant opportunity ahead of us and I look forward to what 2015 will bring to the company. Thank you all for joining the call. We’ll see you next quarter.
- Operator:
- Thank you. This does conclude today's teleconference. You may disconnect your lines at this time, and have a great day.
Other FLIR Systems, Inc. earnings call transcripts:
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- Q1 (2020) FLIR earnings call transcript
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