Autoscope Technologies Corporation
Q2 2015 Earnings Call Transcript

Published: 31 Jul 2015

[Operator:]

Good day everyone and welcome to the Image Sensing Systems Second Quarter 2015 Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Al Galgano, Investor Relations for Image Sensing Systems, please go ahead sir.

[Al Galgano:]

Thank you, Christie. Joining me on today's call is Dale Parker, Image Sensing Systems’ Interim CEO and CFO, and Rich Ehrich, Corporate Controller. Dale and Rich will discuss Image Sensing Systems' performance for the quarter as well as provide a product and operational update. We will then open up the call for your questions. Before I turn the call over to Dale, I'd like to preface all remarks with customary Safe Harbor statement. Today's conference call contains certain forward-looking statements. These statements by their nature involve substantial risks and uncertainties. Actual results may differ materially depending on a variety of factors. Additional information with respect to the risks and uncertainties faced by Image Sensing Systems may be found in the Company's Security and Exchange Commission reports, including the latest Annual Report on Form 10-K filed in March of 2015. With that, I'd like to turn the call over to Dale.

[Dale Parker:]

Thanks Al and thank you everyone for joining us this afternoon. On today’s call, I will summarize our second quarter 2015 operational performance before turning the call over to Rich to provide more detail regarding our financial performance. After Rich discusses the financial results, I'll return to recap our ongoing initiatives for future growth and then we'll open it up to your questions. For those of you, who are new to following our Company, let me briefly summarize how we view the marketplace, so you have some context for my comments. We separate our business into three segments; the Intersection, Highway and License Plate Recognition or LPR. Autoscope Video is our machine vision product line, is normally sold in the Intersection segment. The Autoscope Radar is our radar product line and is sold in the Highway segment. And lastly, Autoscope License Plate Recognition is our LPR product line. Subsequent to our quarter end, we announced the sale of our LPR business unit. We’ll discuss this transaction in more detail in a moment. We continue to integrate hardware and software technology across these segments in order to provide more comprehensive solution to our customers. I hope that this gives you a better picture of how we view our business and have organized Image Sensing Systems around our market opportunities. With that as a backdrop, let me give you a little more detail on our second quarter operations. Looking at the second quarter, revenue totaled $5.2 million, down from $5.9 million from the same period in the prior year, primarily due to higher royalty income in the year-ago period. This performance was in line with our expectations and reflects the way we have structured our business and seasonality trends. Second quarter product gross margin was 62%, up 25 percentage points from the gross margin of 37% in the same period in the prior year. This is also a sequential increase of approximately 6 percentage points from the gross margin of 56% in the prior quarter. Additionally, we saw continued reductions in our operating expense base and as a result, operating expenses excluding non-recurring charges related to the sale of our LPR of $751,000 were down approximately $1.6 million or 28% on a year-over-year basis. As a result of improved margins and reductions in operating expenses and excluding non-recurring charges related to the sale of LPR business, net income for the second quarter would have been $9,000 compared to net loss of $1.5 million in the same period in the prior year. We believe operating income will continue to improve as we progress through 2015. On July 8, 2015, Image Sensing Systems announced the sale of our LPR business to Tagmaster A.B. for the purchase price of $4.2 million in cash. Tagmaster designs and markets advanced long range radio frequency identification or FID systems, and information services associated with automatic vehicle identification in rail bound transportation. Further to our mission to position Image Sensing Systems of the future, the decision to sell our LPR business allows us to focus on our core ITS market in growing our radar and video product lines. The sale further reduces our operating expense base, while enhancing our balance sheet position to allow for strategic investment in the future. This transaction accelerates a return to profitability and sustained growth creating long-term shareholder value. We believe that our product offerings and market strategic positions Image Sensing Systems to generate profitable growth in our core markets. While the operating improvements made in the first half, a best-in-class product and service offerings, and our focus on sales execution, we believe we are well positioned for the future. Now I’d like to hand the call over to Rich to cover financials. Rich?

[Rich Ehrich:]

Thank you, Dale. Good afternoon everyone. For the second quarter ended June 30, 2015, Image Sensing Systems revenue totaled $5.2 million, down from $5.9 million from the same period in the prior year. Revenue from royalties was $2.6 million in the second quarter compared to $3.3 million in the second quarter of 2014. The difference is primarily related to the North American radar royalties of $329,000 we received from Econolite in the second quarter of 2014. As a remainder, during the second quarter of 2014, Econolite was still responsible for the sales channel for our radar products. Beginning July 14, 2014, we assumed responsibility for direct product sales to customers for that product. The reduction in product sales in the second quarter is primarily related to lower LPR sales, slightly offset by the increase in sales of our radar product. Product sales were $2.6 million compared to $2.7 million in the same period in the prior year. Autoscope Radar product sales were $1.2 million in the second quarter compared to $765,000 in the same period in the prior year. As previously disclosed, we completed the transfer of domestic sales and marketing of the Autoscope Radar product line from Econolite to Image Sensing Systems during the third quarter of 2014. Autoscope Video product sales and royalties were $580,000 and $2.6 million, respectively in the second quarter. Worldwide sales of LPR products were $774,000, down approximately 37% compared to the prior-year period. As Dale outlined, we saw product sales gross margins of approximately 62% in the second quarter of 2015, an increase of approximately 25 percentage points from 37% of margin experienced in the same period in the prior year. This increase was primarily due to the combination of greater percentage of higher margin sales and continued improvement in our warranty claim rates and inventory obsolescence. We are pleased with our progress in addressing product quality issues and expect warranty claim rates to continue to decline. Operating expenses excluding non-recurring charges related to the sale of LPR business of $751,000 were $4.2 million or 28% decrease compared to the prior-year period. For the quarter, we reported a net loss of $742,000. If we were to exclude non-recurring charges related to the sale of our LPR business, Image Sensing would have reported a net income of $9,000 compared to a net loss of $1.5 million in the same period in the prior year. On a year-to-date basis, revenue totaled $9.5 million, down approximately 7% from $10.3 million in the prior-year period. Included in the prior-year period was $639,000 of revenue derived from Asian operations. Revenue from royalties was $4.6 million in the first half compared to $5.7 million in the first half of 2014. The difference is primarily related to the North American radar royalties of $707,000 we received in the first half of 2014 [indiscernible] all North American radar sales during that period. Product sales were $4.9 million compared to $4.5 million in the same period in the prior year. Autoscope Radar product sales were $2.3 million in the first half of the year, up approximately 56% from 2014. As previously disclosed, we completed the transfer of domestic sales and marketing of the Autoscope Radar product line from Econolite during the third quarter of 2014. Autoscope Video product sales and royalties were $730,000 and $4.6 [ph] million respectively in the first six months of 2015. Worldwide sales of LPR were $1.9 million, down approximately 17% compared to the first six months of 2014. Product sales gross margins for the first six months were approximately 59%, an increase of approximately 22 percentage points from the 37% margin experienced in the same period in the prior year. This increase was primarily due to the combination of a greater percentage of higher margin sales and continued improved in our warranty claim rates. Operating expenses were $9.4 million in the first half of the year. If we were to exclude non-recurring charges related to the sale of our LPR business of $857,000, operating expenses would have been $8.6 million or 32% decrease compared to the prior-year period. Year-to-date, excluding non-recurring charges related to the sale of our LPR business, Image Sensing Systems would have reported a net loss of $1.1 million, 80% decrease compared to a net loss of $5.3 million in the same period in the prior year. Overall, we’re pleased to see improvement in the second quarter and year-to-date net operating loss. Now that we’ve sold LPR, we expect to return the Company to historical profitability levels. On a non-GAAP basis, excluding intangible asset amortization, depreciation, costs related to the sale of LPR business segment, cost of the investigation and restructuring expenses, the second quarter net operating income was $554,000 compared to an operating loss of $984,000 in the same period in the prior year. For the first six months, the non-GAAP net operating loss was $2,000 compared to a net operating loss of $3.6 million in the first half of 2014. On the balance sheet, cash and investments at June 30, 2015 totaled approximately $575,000, down from $2.7 million at the end of the fourth quarter of 2014. This excludes the gross proceeds of $4.2 million for the sale of the LPR business, which was executed on July 8, 2015, subsequent to quarter-end. A strong balance sheet, which contains no debt allows flexibility if circumstances dictate. With that, I’d like to turn the call back over to Dale for some final thoughts. Dale?

[Dale Parker:]

Thanks, Rich. Before we open up the call to your questions, let me reiterate how encouraged we are with the progress made in the first half and the growth opportunities we see before us. From a product and solution portfolio perspective, we are focused on user and customer needs and believe that our offering is a strategic value add to our customers operation in the ITS markets. We see significant growth opportunities in both our domestic and international markets and believe that we are well positioned for the future. With the leading product and service offering in the industry, our renewed focus on execution and the Company now operationally and financially positioned for long-term profitable growth, we believe we can take advantage of the market opportunities that will return the Company to profitability and grow shareholder value. Again, thank you for joining us and I look forward to updating you on our next call. And at this time, I’d like to open up the call for your questions.

[Operator:]

[Operator Instructions] And we’ll take our first question from Ben Fishman. Your line is open.

[Unidentified Analyst:]

Hi. Whoever I’m directing this call to, here is my question. Do you currently have on the books about $4.75 million in cash? Is that correct -- of the sale of LPR?

[Dale Parker:]

That would be true. We have -- obviously, we’re maintaining operations, but there was also some costs of transacting the transaction. I think you see that was about $800,000.

[Unidentified Analyst:]

Right, okay. So was somewhere close to the ballpark now, you get a comment on the accumulation of stock by some individuals?

[Dale Parker:]

I honestly -- I couldn’t comment on it. We had noticed clearly that there has been some activity in that area but I had nothing that I could pass on or nothing that I would be knowledgeable about the past.

[Unidentified Analyst:]

Do you have any idea why -- so you would have no idea basically why these particular group out in New Jersey would be looking, acquiring 12, 15 and moving upwards and onwards?

[Dale Parker:]

My policy is not to comment because frankly, I don’t know.

[Unidentified Analyst:]

Okay, that’s fair.

[Dale Parker:]

Thank you.

[Unidentified Analyst:]

Okay, thank you.

[Dale Parker:]

You’re welcome.

[Operator:]

And next we’ll take Charlie Pine from Van Clemens & Co.

[Charlie Pine:]

Good afternoon, Dale.

[Dale Parker:]

Hi, Charlie.

[Charlie Pine:]

Now that it looks like from these numbers that you’ve provided that you’ve sort of repositioned and stabilized the business again. Can you talk to us about some of those so-called growth opportunities that you see out there in the marketplace?

[Dale Parker:]

Charlie, just a little background and you know quite a bit about the Company but what I’ve been doing for the last -- really for the last year is to ration out the cost base of this Company. Make sure that we have the right people, the right resources in the right place. We’ve also looked at our business units and as everybody knows from this call and before that, that we have sold the LPR business. It’s a good business but it was one that we decided was not core and not one that we wanted to continue to invest in and grow that business. We would prefer to stay into the video and radar marketplaces both in North America and EMEA and that’s what we’re doing. We’re working closely with Econolite to improve our products and become the best-in-class in all the areas so that there is no question when they go to the marketplace with their [ph] we’re also working with them to help them in every way we can with our customer base. There is a lot of opportunities out there, especially in radar that we have a direct involvement in general Econolite is the sales distributor in North America for us. So, they have a long list of opportunities and we’ve been pleased with the results. When we look at EMEA, we have radar and video over there. We have a long list of opportunities. We have a good backlog of potential orders and I know that because my folks were in the office here last week and I’ll be with them next week actually building customers. So, we’re quite pleased with what we see there. Radar tends to be in EMEA, they’re little bit lumpy from the standpoint that I think the orders tend to be in the quarter million dollar range. So, we get little lumpiness there, but we’re quite enthused with what we’re seeing and we’re also very pleased to be able to continue to invest in both video and radar as we go forward here to improve those products and eliminate any issue that we might have on the warranty side, which we think we’ve taken care of though we’re going to continue to focus on that. Does that help at all?

[Charlie Pine:]

Yeah, little bit. Has there been much in how you would characterize the change in the ITS marketplace over the last 12 months, especially since you’ve taken over now as the CEO and where you sort of see that the scope of this market over the next 12 to 24 months and do you think that it’s -- that you’re positioned to take advantage of a growing and robust market or is that -- or is the pie -- how would you characterize the pie out there, the total pie?

[Dale Parker:]

When you look at the marketplace, both in radar and video, the growth rates that are projected are somewhere close to 7% to 8% on an annual basis. I’m sure most of you follow the news and see that the transportation still got hung up in congress and it looks like they’ve renewed it for another three to five months. That obviously has not been a positive we would like to see and industry would like to see a long-term transportation bill so that the states can go forward. I think it’s also fair to say that it doesn’t necessarily stop progress because from everything I can see and the folks that are out in the field that report back to me is that city budgets on average are better than they were two or three years ago or city, county, state, wherever you’re looking seem to be stronger, the revenue base has been up. So, it’s not quite the crisis maybe it was in 2008, but we’re encouraged. We work closely with Econolite and we get involved with a lot of their transactions and help them in any way we can with the technology. We’re pleased with what we’re seeing and that is that I think the Company for a few years [indiscernible] four years, five years ago had skimped on the research and development side and the product development, we kept that back up this year last year. We’re developing products that we think is going to put us best-in-class and I think Econolite would confirm with that. So, we’re doing everything we can to grow it. The transportation bill is out of our control but my guys in the field tell me that things are positive, there is always pockets of cities or states that have some issues, but in general, we’re pretty pleased with what we see and we’re bullish about the future, Charlie.

[Charlie Pine:]

Okay. All right, great, thanks and great job so far in rightsizing the business.

[Dale Parker:]

All right. I appreciate it, Charlie, thank you.

[Charlie Pine:]

Bye-bye.

[Dale Parker:]

Right.

[Operator:]

[Operator Instructions] We have no further questions in the queue. I’ll turn it back to you for any closing remarks.

[Dale Parker:]

Thank you, Christie. I’d like to thank everybody for joining us on today’s call. We look forward to updating you later in the year when we release our third quarter 2015 earnings. Thank you and good bye.

[Operator:]

That concludes our call for today. Thank you for your participation.