Autoscope Technologies Corporation
Q3 2013 Earnings Call Transcript

Published: 6 Nov 2013

[Operator:]

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Image Sensing Systems Third Quarter 2013 Earnings Conference Call. [Operator Instructions] This conference is being recorded today, November 6, 2013. I would now like to turn the conference over to Mr. Al Galgano of Investor Relations for Image Sensing Systems. Please go ahead, sir.

[Al Galgano:]

Thank you, Camille. Joining me on today's call is Kris Tufto, Image Sensing Systems' President and CEO; and Dale Parker, Chief Financial Officer. Kris and Dale 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 Kris, I'd like to preface all remarks with the 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, which was filed in March of 2013. With that, I'd like to turn the call over to Kris.

[Kris B. Tufto:]

Thank you, Al. Thanks, everybody, for joining us today. First, I'm pleased to report that revenue increased 8% over last year's third quarter to $7.7 million. We're excited about the growing traction we're seeing for Image Sensing's products and solutions. During the quarter, product sales rose 27.6% year-over-year to $4.3 million, reflecting the progress we've made in introducing and launching products that meet our customer needs. While we're encouraged by the activity that we've seen, our business, like others, continues to be subject to macroeconomic and seasonal factors. We are approaching our seasonally slow winter months but remain positive that revenues will continue to improve as our product development and marketing efforts gain further traction. The planned investments we've made are paying off, and we're pleased with the growth of our sales pipeline. We remain encouraged by opportunities we've seen in global markets and expect momentum to build throughout 2014. We have a best-in-class product offering that's recognized throughout the industry and have been actively expanding our product portfolio. During the quarter, we announced the support of and compliance with the ONVIF protocol within License Plate Recognition software. ONVIF is an open industry forum promoting and developing global standards for interfaces of IP-based physical security products. By complying with ONVIF requirements, we are able to leverage the power of Image Sensing's advanced License Plate Recognition software and analytics to deliver a stronger value proposition to our clients. Another exciting development during the quarter was the launch of our new research initiative, ISS labs, which reflects our focus on innovative research and development. ISS labs will explore and develop new and early stage technology for commercialization in the intelligent transportation, safety and security market sectors. Also in October, we introduced 2 new Autoscope products, Autoscope Sn-500 and Sn-510. These robust video detection solutions help transportation officials improve traffic flow and promote safety worldwide. Both products offer fast and easy setup installation, minimal maintenance and high performance. We're also excited about the new data analytics software we announced, CitySync Safety, at the International Association of Police Chiefs Conference in October. The new breakthrough back-office solution uses data collected from License Plate Recognition technology to provide police and investigators with critical evidence in a quicker time frame, allowing them to apprehend criminals faster. As I've said before, our software is what has turned Image Sensing into an important player in the global traffic and safety management markets, and we've capitalized on market opportunities. However, there's still work to be done, and we continue to develop our business and product lines. We're committed to maintaining Image Sensing's market-leading position, and we are doing this through a keen focus on product development, more effective marketing programs and an enhanced sales strategy. We're proud of the platform we are building, and we'll continue to take advantage of future growth opportunities as they come, including timely product launches, continued R&D investments and maximum selling capabilities. We believe that as revenue growth accelerates, Image Sensing will return to historical margin and profitability levels, creating a financial platform to maximize shareholder value. With that, I'm going to turn the call over to Dale to cover financials.

[Dale E. Parker:]

Thank you, Kris, and good afternoon, everyone. For the third quarter ended September 30, 2013, Image Sensing Systems' revenue totaled $7.7 million, up from $7.2 million in the third quarter of 2012. Revenue from royalties was $3.4 million in the quarter compared to $3.8 million in the 2012 third quarter. Product sales were $4.3 million compared to $3.4 million for the prior-year period. Autoscope Radar product sales and royalties were $2.5 million and $309,000, respectively, in the third quarter. Autoscope Video product sales and royalties were $495,000 and $3.1 million, respectively. Sales of LPR worldwide for the third quarter were $1.1 million -- $1.4 million. In the quarter, Image Sensing reported a net loss of $1.9 million or $0.39 per share compared to net income of $1.0 million or $0.20 per diluted share in the prior-year period. The third quarter 2013 net loss includes operating expenses of $6.7 million, a $2.2 million increase over 2012. The third quarter 2013 operating expenses include research and development costs of $1.7 million, a $700,000 year-over-year increase, reflecting higher investment levels of new products. Included in the third quarter 2013 are expenses totaling $476,000 related to previously disclosed investigation. On a non-GAAP basis, excluding intangible asset amortization, impairment and the cost of the investigation, net of tax, net loss for the third quarter was $1 million or $0.21 per share compared to net income of $831,000 or $0.17 per diluted share in the same period a year ago. Product sales gross margin for the third quarter of 2013 was 32%, which includes charges related to a write-off of an obsolete finished product. Also negatively impacting third quarter product sales gross margin were additional expenses related to the transition of the company's warranty repair service for Autoscope Radar products to its contract manufacturer. These matters reduce margins by approximately 9 percentage points. Management believes margins will tend -- will tend toward historical levels over time. Looking at the 9-month period, revenues increased 9% over 2012 to $19.8 million, while revenue from royalties was flat year-over-year at $9.2 million. Product sales for the 9 months were $10.7 million, including $5.1 million of worldwide ALPR products and Autoscope Radar product sales and royalties of $3.4 million and $981,000, respectively. Autoscope Video product sales and royalties were $2.1 million and 8.2, respectively. The year-to-date net loss totals $5.1 million or $1.04 per share compared to a net loss of $3.3 million or $0.68 per share in 2012. On a non-GAAP basis, excluding intangible asset amortization, investigation costs, restructuring charges and goodwill impairment, net of tax, net loss for the first 9 months was $2 million or $0.40 per share compared to net income of $735,000 or $0.15 per share in the first 9 months of 2012. The previously disclosed investigation is ongoing, and we continue to cooperate with authorities. We are presently unable to determine the likely outcome or range of any loss, if any. With that, I'd like to turn the call back over to Kris for some final thoughts. Kris?

[Kris B. Tufto:]

Thanks, Dale. Before I open up the call to questions, I want to reiterate how energized I am about the positive changes we're seeing in the business, the opportunities for growth in the markets that we serve and the traction we're seeing for Image Sensing's products and solutions. We are seeing movement, both domestically and internationally, and we're encouraged by our growing sales pipeline. As I've said before, we're very pleased with the traction we are getting from our planned investments in sales, marketing and product development, and we expect to see ongoing positive impacts from these investments heading into 2014. With the right team in place, we believe we're well positioned to take advantage of future growth opportunities, and we're dedicated to maximizing long-term shareholder value and returning the company to historical profitability levels and excited about our future potential. Thank you, again, for joining us today. I look forward to updating you on our full year and early 2014. And at this time, I'd like to open the call for your questions.

[Operator:]

[Operator Instructions] Our first question is from the line of Brian Yurinich with Craig-Hallum Capital Group.

[Brian Yurinich:]

When we talk about getting back to historical margins, is that a 2014 event? Or when are we thinking about the timeline for that?

[Dale E. Parker:]

Yes, Brian, I would say it's in 2014, 2015. It's going to be sometime during '14, probably latter in the year rather than earlier. We're still fairly aggressive on prices, and our margins are still being affected by some warranty costs and as you heard also, our inventory obsolescence issues. So it'll be sometime in '14, latter part I would think.

[Brian Yurinich:]

Is the warranty costs and the obsolescence costs, is that something that will carry over into Q4 as well?

[Dale E. Parker:]

Yes, I think so. I don't know the magnitude of it. I don't think it's going to be particularly significant. But as we go through the audit and we review the outstanding warranty costs, it will carry into '14 for sure -- or the fourth quarter, rather.

[Brian Yurinich:]

Okay. When we look at '14, what of your initiatives are you guys most excited about? What has the most -- what's been gaining the most traction lately?

[Kris B. Tufto:]

Well, I think it's really across the board, I guess, as far as our releases in the traffic management area, our new sensors that we just released. And then also, I would say we're excited about the CitySync Safety back-office, both cloud and on premise, solution that we've launched at the International Association of Police Chiefs show last month. So I think we're excited about both areas. And I think we -- I guess, like I said in our talk is that I think we're -- we've done a better job on the marketing side with regard to getting our message out.

[Brian Yurinich:]

And then I guess the last question I have, when we think about the seasonally soft kind of winter months, the License Plate Recognition shouldn't really be as impacted as the other business by that. Is that true?

[Kris B. Tufto:]

No, it's -- well, when you get into the northern parts of the country, or Europe for that matter, people tend to not want to install things, especially hardware devices, right? So cameras, whether you're standing selling cameras on the -- in the traffic side or on the License Plate Recognition side, it's -- people just don't like to install them when it's cold out, I guess. So it's a -- there are some seasonal factors there.

[Operator:]

[Operator Instructions] Our next question is from the line of Joe Furst with Furst Associates.

[Joe Furst:]

Could you extrapolate a little bit on the market potential for some of these products to see what kind of market there is and how much growth there possibly could be in these products?

[Kris B. Tufto:]

Sure. I'll use crime law enforcement as an example. The crime law enforcement License Plate Recognition market is about $130 million market globally, and it's growing in double-digit rates basically across the world right now, and that's data from IMS Research. So we think that's very attractive and there's opportunity basically across the globe for that technology. I would say that Europe is quite aways ahead of us in this area from a deployment standpoint. So both Asia and North and South America are trailing those 2 territories.

[Joe Furst:]

Okay. How about the software you talked about you introduced at the Police Conference?

[Kris B. Tufto:]

Yes, that software, that back-office platform fits in nicely to that crime law enforcement market. So it's specifically targeted for police organization -- police agencies, and specifically targeted to basically do all kinds of crime -- very sophisticated analytics around crime analysis.

[Joe Furst:]

Okay. And your capital vision, I know as you've been burning cash here, how do you look toward your capitalization about having enough money to finance this stuff?

[Dale E. Parker:]

Yes, we're pretty comfortable with that. As you can see from the balance sheet, we have about $7.5 million of cash. Our burn rate from operations, if we extract some of the investments, is less than $1 million. So as we look forward, we're pretty comfortable with the balances that we have today and in the future, they'll start to climb. But we still have some investments to make in 2014, and we can -- we expect to make them in order to drive the revenue numbers that you're seeing. So we're comfortable with it. Yes, we've spent about $1 million this quarter. There was -- half of it was the Polish investigation, and the other half was some working capital issues. So we're pretty comfortable with it. And at this point in time, we have no reason to want to recapitalize the company. So the short answer is we're very comfortable and feel secure with where we are.

[Joe Furst:]

Do you have any idea when this investigation might conclude?

[Dale E. Parker:]

Yes, that's a good question. And with all due respect, the investigation, to a great extent, is dormant now and it just lies in the hands of the SEC and what they would like to do or not do regarding any type of penalties. There's no way I have any idea of their time frame. My understanding is there's about 100 cases in the SEC. We're probably number 100, the smallest when it comes to the size of the situation. So I don't think that we're necessarily on the top of the list. So this could go on for quite some time, and it could be another year easily. So we're just dormant and not spending pretty much in way of legal cost.

[Operator:]

There are no further questions at this time. And now I'd like to close the conference call. Thank you for joining us today. If you like to listen to a replay of today's conference, please dial 1 [phone] or [phone], with the access code of 4646858. We'd like to thank you for your participation. You may now disconnect.