Autoscope Technologies Corporation
Q4 2014 Earnings Call Transcript

Published: 19 Mar 2015

[Operator:]

Good day, and welcome to the Image Sensing Systems Fourth Quarter 2014 Earnings Conference Call. Please note that today's conference is being recorded. At this time, I’d like to turn today’s conference over to Mr. [indiscernible], Investor Relations for Image Sensing Systems. Please go ahead, sir.

[Unidentified Company Representative:]

Thank you, John. Joining me on today's call is Dale Parker, Image Sensing Systems CEO and CFO; and Rich Ehrich, VP of Finance and 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 Securities and Exchange Commission reports, including the latest Annual Report on Form 10-K filed in March of 2014. With that, I'd like to turn the call over to Dale.

[Dale E. Parker:]

Thanks, Dave, and thank you everyone for joining us this afternoon. On today's call, I'll summarize our 2014 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. Looking at the fourth quarter, revenue totaled $5.6 million, and as anticipated was down 13% from the same period in the prior year. Keep in mind that prior year results still include revenue from our discontinued Poland operations. Excluding 2013 fourth quarter Poland operations revenue of $923,000, 2014 fourth quarter revenue increased $110,000 or 2% from the prior-year period. This performance was in line with our expectations and consistent with the seasonality we see during the winter months. We continued to see improvements in operating expenses as a result of our cost reduction initiatives we implemented in 2014. As a result, operating expenses even including non-recurring charges were down approximately $1 million on a year-over-year basis. We believe we will continue to see improvement as we progress through 2015. And from a product perspective, we continued to enhance our competitive position as we focus on product development of our best-in-class customer offerings. For those of you who are new to following our company, let me briefly summarize how we view the marketplace, so you have some contacts from my comments. We separate our business into three segments

[Richard Ehrich:]

Thank you, Dale. Good afternoon everyone. For the fourth quarter ended December 31, 2014, Image Sensing Systems revenue totaled $5.6 million. This is up appropriately 2% from last year after adjusting for our prior year revenue of $923,000 from the Polish operations, which were discontinued earlier this year. Revenue from royalties was $1.9 million in the fourth quarter compared to $2.4 million in the fourth quarter of 2013. Product sales were $3.7 million, an increase of $631,000 or 20% after adjusting for the $923,000 of prior year product sales derived from Polish operations. Autoscope Radar product sales were $1.6 million in the fourth quarter, down approximately 9% from 2013. As previously disclosed, we completed the transfer of our domestic marketing and manufacturing of the Autoscope Radar product line from Econolite during the third quarter. Autoscope Video product sales and royalties were $446,000 and $1.9 million, respectively in the period. Worldwide sales of Autoscope License Plate Recognition or LPR products were $1.7 million, an increase of $400,000 over the same period in the prior year. We saw product sales gross margins of approximately 30% in the fourth quarter of 2014, an increase of 140 basis points from the 16% margin experienced in the same period in the prior year. During the quarter, we had a higher than normal volume of inventory obsolescence and demo inventory charges. These charges combined with our seasonally low volumes negatively impacted our margins. As Dale previously discussed in the fourth quarter, we made the decision to close our offices in Asia in order to further reduce our expense base. As a result, we incurred a $310,000 restructuring charge in the period. During the fourth quarter, we also recognized $867,000 of impairment charges related to our cloud-based LPR back office. For the quarter, Image Sensing Systems reported a net loss of $3.9 million compared to a net loss of $10.8 million in the prior year period. The fourth quarter net loss includes operating expenses of approximately $6.9 million, down from $8 million in the fourth quarter of 2013. We are pleased, but not yet satisfied as we continue to see the benefits of the cost reduction initiatives that we’ve taken over the course of 2014. On a non-GAAP basis, excluding intangible asset amortization, impairment charges, and restructuring expenses, the net operating loss for the fourth quarter was $2.4 million compared to a net operating loss of $3.9 million in the same period in the prior year. Looking at our full-year performance, revenues decreased 12% from 2013 to $23.1 million. Excluding Poland operations revenue of $2.3 million in 2013, revenue for the year decreased $960,000 or 4% from the prior year. Revenue from royalties was down year-over-year as expected to $10.2 million. Product sales for the full-year decreased 13% to $12.8 million. Revenues were comprised of $4.9 million of worldwide LPR products sales, and Radar product sales of $6.1 million and $709,000, respectively. Autoscope Video product sales and royalties were $1.8 million and $9.5 million, respectively. The full-year net loss totaled $9.7 million or $1.95 per share compared to a net loss of $15.9 million or $3.21 per share in 2013. The full-year 2014 net loss included $152,000 of investigation expenses, and impairment charge of $1,770,000 of restructuring charges related to the office closures in Poland and Asia. On a non-GAAP basis, excluding intangible asset amortization costs, investigation costs, restructuring charges, and impairments, non-GAAP net operating loss for 2014 was $6.7 million compared to a non-GAAP net operating loss of $6.7 million in 2013. On the balance sheet, cash and investments at December 31 totaled approximately $2.7 million, up from $1.2 million at the end of the third quarter. The increase in cash is primarily attributable to the timing of our sales and collections during the quarter. We believe that going forward we have sufficient capital to support our operations. Our balance sheet, which contains no debt, allows flexibility as circumstances dictate. With that, I would like to turn the call back over to Dale for some final thoughts. Dale.

[Dale E. Parker:]

Thanks, Rich. Before we open up the call to your questions, let me reiterate how encouraged we are with the growth opportunities we see before us. From a product and solution portfolio perspective, we're focused on user and customer needs and believe that our offering is a strategic value add to our customers operations in the traffic and safety management 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 operates and financially positioned for long-term profitable growth. We believe we can take advantage of the market opportunities that we return the company to historical profitable levels and grow shareholder value. Again, thank you for joining us today. I look forward to updating you on our next call. And at this time, I would like to open it up for questions.

[Operator:]

Thank you very much. [Operator Instructions] And our first question comes from Mr. Patrick Donohue.

[Unidentified Analyst:]

Good afternoon gentlemen former securities analyst and a private shareholder. Just curious can you guys unpack your statements around opportunities for growth and specifically when you say getting back to historical profitability, what exactly, can you actually frame that up in terms of percentages whether it’s operating profit or some type of cash flow profitability, and what does the growth look like?

[Dale E. Parker:]

Okay, this is Dale. Thank you for the question. Let me first talk about historical profitability levels and certainly invite Rich to participate wherever he wants. When we look at our profit and loss statement, historical profitability metrics is around our gross margins of our non-Econolite or non-royalty products. And those products have historically been in the 60% gross margin level, and we have been working hard the last two years to bring those percentages of gross margin back up to what we call historically strong levels. And again, it should be around the 60%. The reasons that it had not been, there’s been some inventory obsolescence, there’s been some new product development in there, and there is also some warranty issues that we’ve had with a couple of our product lines. We now believe that we have those corrected and we feel positive about the margins going forward. When we look at the company on an overall basis historically, we’ve been at – we’ve had a breakeven point of somewhere close to 27, 28. We worked hard the last year or so to drive that number down closer to the -- probably in a range of $23 million to $25 million. So, when we talk about historical profit levels, that’s what we’re talking about. Does that help?

[Unidentified Analyst:]

That does help, thank you.

[Dale E. Parker:]

You’re welcome.

[Unidentified Analyst:]

And it’s been a while since I’ve been deep into the story, so can you help me better understand the growth opportunity in terms of being - is it replacing a) hardware out in the field or is it new orders, can you help update me on what the market dynamics look like in the coming years?

[Dale E. Parker:]

Yes, that’s a good question and let me first go back and say that when you look at our numbers or you pulled the filings, you will see that, and as I spoke earlier, we have really three basic product lines we have the video which is our product for the intersection which is marketed, and the sales function is controlled by Econolite, our distributor. We have the Radar business, which is Highway and we have LPR the License Plate Reading unit, which is primarily located in the UK, and all three have a little different metrics. The one thing that I think this company have got away from in the previous years is that the research and development hasn’t been strong enough and that’s something that we’ve been working hard on the last couple of years to bring on some new products. We are spending a considerable sum of money this year to do that especially in the intersection market. The Radar business we now have – we took that back in July, Econolite was our distributor on that we both agreed that we felt that Image Sensing could do a good job and sell it to directly to our distributors and customers. So we’ve taken that product, we’ve improved it, I talked about the Sx-300, it’s a good reliable product for the highway industry. In LPR, it’s a License Plate reading, we are spending - we have an R&D function in the UK along with our sales office there, and we are spending considerable funds on improving our License Plate reading, accuracies, things of that nature. So it’s a little bit different in each one of the businesses that we are spending as a company in terms of dollars, about $7 million a year between engineering and R&D to improve that. So that’s what we are doing there, plus the fact on top of all of that that we are very dedicated to customer service. I think that’s an area that this company previously was a little bit lacks in. We are working hard to improve that and seeing signs of that and simple things has returned customer calls promptly, handling any kind of warranty issues promptly, and obviously requesting the customer request for potential purchase. So we are doing all those things simultaneously. Thank you for that question.

[Unidentified Analyst:]

Thank you.

[Operator:]

[Operator Instructions] We have Patrick Donohue once again.

[Unidentified Analyst:]

All right. Its looks like I’m the only one, so my big question for you guys is, I just don’t want to hold more stock, but I got to understand the cash conversion cycle. The balance sheet is getting thin, can you help me understand and remind me what the cash conversion cycle looks like in terms of - what are you paying for inventory, how long is it sitting on a boat or what are you getting paid for this stuff. Help me understand when you are spending dollars and when we are going to return all those dollars back into our checking [ph] account.

[Dale E. Parker:]

Okay, Patrick that’s a good question. And again I’m going to have to deal with it a little bit on three different bases. If you look at our video, our intersection business, which I indicated early and I think you are aware is distributed by Econolite in Alabama and California. And our relationship there is that we design and they sell the product to manufacture. So, effectively from the date that they get an order, they manuf6acture the order, they build the inventory, and they have ship to the customer, we get our 50% of the royalty payment at that time. In that timeframe from the date they take the order to the day we get paid, it’s somewhere between 60 and 90 days. So from our standpoint, we don’t have any cash outlay in that transaction other than our engineering sustaining in R&D work. The Radar business in Toronto.

[Unidentified Analyst:]

Sorry to interrupt. Just real quick, remind me what percentage of revenues in a given year that is then?

[Dale E. Parker:]

It’s about 50%, it’s about a $10 million royalty.

[Unidentified Analyst:]

Okay, thank you.

[Dale E. Parker:]

You are welcome. The Radar business is a business that we go direct to our distributors and end customers primarily through distributors. We ship the product on average, we get paid in about 60 days. We do have to have the contract - the product manufactured, we have a subcontractor that we’ve had a relationship for a number of years, they are doing an excellent job. In many cases, they build some inventory, hold it and ship it on our request. So the cash conversion rate there is a little quicker, it’s closer to 60 days rather than 60 to 90. In the UK, it’s very similar in that that we go directly to our distributors in the UK, primarily for the EMEA marketplace, and we have the product produced in the UK and other - that we have two producers in the UK that subcontractors that produce our product. There is a little difference in the UK from the standpoint that often times we will have orders in the Far East, the Mid East in those cases these are letter of credit transactions which often times have 100% payment before we shift, on some cases it will be more or like a 75% before we shift in 25 later. So our European business cash flow is quite good when we have large orders. Smaller orders will have a tendency to be in the 60-day range also. Does that help?

[Unidentified Analyst:]

That is tremendous, thank you so much.

[Dale E. Parker:]

You are welcome.

[Unidentified Analyst:]

And thank you - I was calculating cash burn of $800,000 a month, but I know that there is a lot of one-time, it feels like a lot of one-time item in 2014. Can you get me off the dime believing that balance sheet is getting super skinny here coming into the first quarter? Can you give me some insights on what cash burn should be looking like here in these months getting into 2015?

[Dale E. Parker:]

Now lets – let me Patrick, thank you. Let me say this, our cash burn is becoming very negligible now from the standpoint that we talked about a breakeven position in this company close to $23 million, $24 million in that range maybe even $25 million, but it’s in that range of $23 million to $25 million. So our cash burn is very, very small right now, we have - if you look at the numbers closely you’ll see that we’ve made substantial reductions to our selling expense, our general and administration expense and all those type things, so we are way down. We do have a positive working capital you can see on the balance sheet, we have no debt and we are working very carefully to rationalize whatever inventory we have, most of that inventory sits in the UK, you’ll see from the balance sheet that we reduced it in 2014, we anticipate to reduce it further in 2015. So we are being very careful in investments and capital, we spend very little way of capital equipment. So our burn rate is much, much less than $800,000 in fact I could make to case to it is pretty close to zero on a quarterly basis now. Time will tell you will see that after the first quarter. Again the first quarter tends to be our skinniest month as far as revenue is concerned historically it’s been in the $4 million to $5 million range where our highest quarters will be close to $7 million. So and why is the first quarter the skinniest when it comes to revenue primarily because of weather they can’t put the equipment upon of polls in middle of the winter like in Boston. I am sure our revenue was affected by that weather patterning up there. The good news is the more customers we can get into the Southwest, Southeast part of the country where the weather is little more mild, it will take away some of that seasonality. So I don’t obviously agree with your 800,000 I think you are way high on that, it’s much, much less, but you can take a look at our cost reductions, look at 2013 versus 2014 you’ll see that we’ve substantially reduced our op expenses.

[Unidentified Analyst:]

Okay, I feel much better. And then finally, do you have a banking relationship is there a line of credit or anything like that if there is something that needs to be adopt into?

[Dale E. Parker:]

Yes, we have a line of credit with the Alliance Bank here in St. Paul, Minnesota and it’s a borrowing base, so yes we do.

[Unidentified Analyst:]

Okay fabulous and finally thanks guys so much, I have been doing this for a lot of years; the products would be doing these calls when it’s just great that you are going on, so I appreciate you being open in doing conference calls like this.

[Dale E. Parker:]

We appreciate it and we encourage your questions. So hopefully we’ve answered them all.

[Operator:]

Our next question comes from Mr. [Peter Houser].

[Unidentified Analyst:]

Yes, two things. Number one, what's the security market like and let’s say the camera systems that you have in the License Plate Recognition technology.

[Dale E. Parker:]

Yes good to hear from you Peter. The first question is how does the LPR markets looks for us, in EMEA we see it to be a strong marketplace, we’re very bullish on it. As you know or you may not know we had a very large order in the Middle East last quarter, got a [million four] so we are pretty comfortable with our security business there, its basically a License Plate reading order and we also in that part of the world we’re in the parking business and we feel strong about that. So in EMEA we’ve been pretty successful, we’re starting to see that business take off, we’re working on our margins of technology so we’re bullish. North America has been a little slower as you know we just entered that market about two years ago, our results have not been spectacular, we have been concentrating more recently into the parking area rather than security, it doesn’t means that we’re not interested in security, it’s a longer lead time process, it takes a while for governments and even universities to make decision, so right now we’re concentrating on that business. We have a gentlemen that’s been working with us to look at our opportunities, look at our partners and decide what makes sense. So in summary EMEA has been positive, we’ve had some good results in Far East or Middle East and North America has been a little sluggish and not the growth we would like to see, so we’re constantly in North America looking at our products, our relationships and distributors. Did that answer your question Peter?

[Unidentified Analyst:]

Yes, thank you. The other question I had since your president left what kind of severance costs and so forth were associated with that that may not have appeared last in the fourth quarter?

[Dale E. Parker:]

Our Ex-CEO had a contract that allowed him to be paid 12-months of salary, obviously assuming confidentiality and non-compete.

[Richard Ehrich:]

Those costs were recorded in the fourth quarter Peter.

[Unidentified Analyst:]

Okay that’s what minds my question, okay. Thank you. That’s all I have.

[Dale E. Parker:]

Okay. Thank you. End of Q&A

[Operator:]

[Operator Instructions] Gentlemen at this time we have no additional questions.

[Dale E. Parker:]

All right. Thank you very much and with that we will conclude the call.

[Operator:]

Ladies and gentlemen that does conclude today's call. We do appreciate your participation and on behalf of the CRT. Have a great day.