Autoscope Technologies Corporation
Q4 2012 Earnings Call Transcript

Published: 27 Mar 2013

[Operator:]

Good day, ladies and gentlemen, and welcome to the Image Sensing Systems 2012 Fourth Quarter and Fiscal Year Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today, March 26, 2013. I would now like to turn the conference over to Al Galgano, Investor Relations for Image Sensing Systems. Please go ahead, sir.

[Al Galgano:]

Thank you, Chris, and welcome, everyone. Joining me on today's call is Kris Tufto, Image Sensing Systems President and CEO; and Greg Smith, Chief Financial Officer. Kris and Greg will provide results for Image Sensing Systems performance for the quarter and fiscal year, as well as a product and operational update. We will then open up the call for Q&A. Joining us for the Q&A portion is Jim Bracke, Image Sensing Systems Board Chairman. But before I turn the call over to Kris, I'd like to preface the 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. With that, I'd like to turn the call over to Kris. Kris?

[Kris B. Tufto:]

Thanks, Al, and thank you, everyone, for joining us today. On today's call, I'll summarize our performance in 2012 before asking Greg to give more detail regarding our financials. After Greg speaks, I'll return to recap our go-forward initiatives and what gives us confidence in the future. Fourth quarter was approximately $6.8 million and was below our expectations. The North American markets are beginning to improve and will likely see a pickup in traffic management spending as a result of the passage of the MAP-21 legislation in 2013. We continue to fight headwinds in the international austerity measures we have seen since 2009. In spite of this, there were several bright spots and we see momentum building as we wait for the international markets to recover. As I mentioned last quarter, I'm very energized to be leading ISS. I know that our talent, combined with Image Sensing Systems' state-of-the-art technology, positions our company to be market leaders and gain significant market share as we look to 2013 and beyond. While we want -- underwent leadership transitions and faced economic uncertainties in 2012, I'm very encouraged about the recent steps we've taken to position Image Sensing Systems for future growth. Our pipelines are increasing across all product areas, we are speaking with some premier brand names, and we are seeing signs that MAP-21 funding is starting to materialize, specifically for Econolite. In February, we announced the introduction of our Rapid Plate Recognition technology, the fastest and most accurate ALPR engine in the world, that's automatic license plate recognition, as prospects are now seeing this best-in-class technology can be the difference in making an arrest, earning ticket revenue or accessing and securing a facility for all law-enforcement parking and security organizations. Further, and in the traffic management segment, we are confident that our Autoscope Duo product existing partnerships and a stronger marketing push during 2013 will lead to improved market share. Last quarter, I made the pronouncement that loop technology is dead. I stand by that statement and believe that this is a key driver and a title shift we will see in this industry. As a result, I'm guiding Image Sensing toward a future of our products and services that can better respond to marketplace needs. Autoscope Duo meets the needs -- meets the demands of forward-thinking governments and entities that seek effective data-rich traffic management solutions. This change presents significant opportunity to Image Sensing as our best-in-breed product offering will support the transition. By moving forward with this new technology, we are shifting the dynamic that drives this business. But our technology also has applications in other areas, including law-enforcement. Let me give you a brief example of some transformational results we're seeing from our industry-leading products and the difference we are making in everyday lives of citizens around the globe. Let's key in on our license plate reading business, where great things are happening with our technology. An ISS contract with Kent, England, has led to the installation of automatic license plate reading systems at gas stations on city streets. Kent has recently experienced issues with people stealing gas, syphoning gas and drilling into gas tanks after hours. Our technology has provided law-enforcement agencies with images of the suspects, and those images are being used to accelerate and close these ongoing investigations. The ALPR technology has also come into play in other law-enforcement situations in Kent. Home owners were being targeted by door-to-door salesmen and tradesmen who offer their services for home improvements. The tradesmen were producing very low-quality work, but demanding high payments. Because of our superior technology in ALPR software, Kent law officials were able to use the images to capture by our solution and track down the perpetrators and make a case against them. Both of these cases exemplify how Image Sensing Systems solutions are delivering high-quality, useful tools for law enforcement, city and private agencies. Our technologies are having a positive effect and also give us leverage into other municipalities with similar needs. We expect this trend to continue and produce results for us in the future. We are making enhancements across our product solutions, services and operations that we believe will open up significant growth opportunities in the second half of 2013. With a keen sense of maximizing long-term shareholder value, we have taken significant steps to align our cost structure with worldwide demand levels, and position Image Sensing Systems to return to historical revenue on profitability levels and beyond. I'm proud of our organization's focus on innovation and excited to be leading ISS as we continue to offer industry-leading product solutions and service offerings through our current and future customers. Our mission going forward is a simple one, to clearly position ISS as the market leader supported by our dedication to innovation and adherence to core values

[Gregory R. L. Smith:]

Thanks, Chris, and good afternoon, everyone. I'll start with our fourth quarter results for 2012 and then come around to the full year. For the fourth quarter ended December 31, 2012, Image Sensing Systems reported net -- a net loss of $15,000 or $0.00 per share, compared to a net loss of $890,000 or $0.14 per share in the prior year period. Revenue was $6.8 million compared to $8.9 million for the 2011 fourth quarter. Royalties totaled $3.2 million compared to $4 million in the same period of 2011. Product sales were $3.6 million versus $4.9 million for the period a year ago. RTMS product sales and royalties were $1.3 million and $395,000, respectively, in the fourth quarter. Sales of CitySync worldwide for the fourth quarter were $1.1 million. On a non-GAAP basis, excluding goodwill impairment, restructuring and intangible asset, amortization, all net of tax, net income for the fourth quarter was $155,000 or $0.03 per diluted share. For the full fiscal year, we reported a net loss of $3.4 million or $0.69 per share versus a net loss of $10 million or $2.07 per share in 2011. Revenue for the year was $25 million, compared to $30.5 million in the same period of 2011. Royalties for 2012 were $12.4 million, compared to $13 million a year ago. We posted product sales of $12.6 million versus $17.5 million in 2011. Again, as a reminder, our business model change for domestic RTMS impacted these results beginning in Q1 of 2012. On a non-GAAP basis, the 2012 net income was $890,000 or $0.18 per share. In his earlier comments, Kris mentioned measures we are taking to align our cost structure to worldwide demand. A tangible example of this is the drop in our direct operating expenses, which declined to $16.6 million in 2012 from $21.3 million in 2011. Excluding savings from the RTMS business model change, this represents an approximate 15% decrease in operating expense, the direct result of our cost containment initiatives. On the balance sheet, we improved our cash position over 2011's closing balance. Rounding out 2012, we increased cash investments to $13.2 million, up from $10.6 million at the end of September and from $7.3 million at the start of the year. We also implemented cost controls throughout the year, which benefited margins on the operating side. At this point, I'll turn it back to Kris.

[Kris B. Tufto:]

Thanks, Greg, and I want to reiterate that Image Sensing Systems is built on a legacy of ethics, integrity and innovation. I will continue this legacy in plan to return ISS to historic revenue and profitability levels. We will also continue to manage our cost structure to maximize long-term shareholder value. Within the current environment, we anticipate great opportunities. Funding is starting to materialize from MAP-21, we're seeing pipeline improvements in domestic and international markets, and we expect more success stories like those from Kent, as our products' relevance and applicability within license plate reading and traffic management markets. Due to seasonal factors, we expect our first quarter to be challenging from a revenue generation standpoint, given slower spending and installation levels in the winter months. Yet, as spending continues to recover, we anticipate solid growth and opportunity in the second half of 2013. And at this point, we anticipate revenue growth in 2013. Thank you again for joining us today. We look forward to updating you on our progress throughout the year. And at this time, I'd like to open up the call for questions.

[Operator:]

[Operator Instructions] And our first question comes from the line of George Marima [ph].

[Unknown Analyst:]

I've got a few questions here. Can you give any more color on your pipeline momentum into where it's coming from, both geographically and product-wise, and what kind of magnitude, if you could kind of categorize the magnitude of this?

[Kris B. Tufto:]

We can't characterize the magnitude, but we are seeing it both in our domestic and international markets.

[Unknown Analyst:]

Okay. And do you have any operating expense guidance for 2013 as a whole?

[Gregory R. L. Smith:]

We will be guiding in the 10-K, which will get filed momentarily on that. So I'll defer that until that's out. We had indicated in the third quarter call that we expected we would be increasing some costs in the selling and marketing and engineering areas, but we didn't give any exact detail on that. So I'll defer that -- our 10-K should be filed shortly, and that should give you a little bit better view of those operating expense increases.

[Unknown Analyst:]

And a few months ago, you talked about, I think it was in the last Q3, talked about the Autoscope Duo new generation coming out. It's a little bit behind schedule at that time. It looked like it was slated for this summer. Is that approximately one that's coming out?

[Kris B. Tufto:]

Yes, I think we'll start to see Duo revenue here in the last 3 quarters of the year.

[Unknown Analyst:]

And you had said that the detection levels were on par with in-ground systems from the test set were done. How significant is that to your customers?

[Kris B. Tufto:]

Well, we think it's significant, but these shifts usually take many, many years from -- so I would say that it's -- it will take many years. But we start -- we're starting to see a shift from a mentalities perspective.

[Unknown Analyst:]

Say if you look out at 2013, 2014, what are your strategic priorities and plans?

[Kris B. Tufto:]

We believe that there's lots of opportunity in all of our markets so that would be, at present, both intersection, highways and ALPR. So we're really executing on a solution perspective in all of those key markets.

[Operator:]

And our next question comes from the line of Brian Yurinich with Craig-Hallum Capital Group.

[Brian Yurinich:]

There's only a couple of days left in the quarter, can we get a little bit more color around what challenging revenue in Q1 means?

[Gregory R. L. Smith:]

Well, Brian, I think it's the same as every year. Q1 is weak because it's winter in the Northern Hemisphere, which is the most of our markets. And as we don't give revenue guidance, I can't get into the specifics of that. But we, of course, don't want investors to do a sequential analysis of revenue. You have to go to a year-over-year look at Q1. And as in other Q1s, this Q1 is challenging.

[Brian Yurinich:]

If we look back the last year, challenging meant 40% quarter-over-quarter declines. Are we in the same ballpark?

[Gregory R. L. Smith:]

Again, sorry, we're not going to give revenue guidance to that specific nature.

[Brian Yurinich:]

Okay. What -- can you explain -- I mean, I understand that times are tough, but times don't seem a whole lot tougher than 2011, and you should theoretically have more royalty business now with the change. What kind of caused the weakness in Autoscope royalty that we saw this quarter?

[Kris B. Tufto:]

Well, specific to Q4, last year, we had had -- last year, meaning 2011, there was a large overseas sale that Econolite had made that had generated significant amounts of royalty. And I think we disclosed that at the time. So it was a difficult comparison on a year-over-year basis. That said, we did see volume drop a little bit, but most of the drop is related to that difficult comparison of that one large sale.

[Brian Yurinich:]

Okay. When you guys bring up things like the stuff you're doing in Kent, England, what's the market opportunity there? And...

[Kris B. Tufto:]

Well, I think, the market opportunity is global in the license plate reading market. So there's opportunities basically everywhere these days with license plate reading. And license plate reading was really founded in the U.K. and some -- their market is a little bit more advanced than other markets worldwide.

[Brian Yurinich:]

Can you quantify what the revenue opportunity is from a city like Kent in size?

[Kris B. Tufto:]

Each opportunity is different, and the opportunities range in the -- they would range from, I'd say, in the $50,000 to $100,000 upwards to millions of dollars based on the size of the -- based on the city and what they're trying to do.

[Brian Yurinich:]

Should we think of Kent as a lower end or higher end of that range?

[Kris B. Tufto:]

Kent would be at the lower end of that range.

[Gregory R. L. Smith:]

Now one of the things we're trying to do, Brian, is, as Kris has said, is bring a solution set. And some of the investments that we're making currently will allow us to expand our solutions. So we will sell license plate reading technology, but we'll also wrap that with some information management and data management, and we're working out some other things that we're not ready to talk about. And that will increase the parts that we can chase.

[Operator:]

[Operator Instructions] And our next question comes from the line of Sam Bergman with Bayberry Assets.

[Unknown Analyst:]

A couple of questions. In terms of the revenue breakout, can you give us the percentages of international versus U.S. for the quarter?

[Gregory R. L. Smith:]

We don't disclose those breakouts anymore. We used to, but we don't. Our 10-K will have some disclosure over that, and that will be published here in the next few days as I've said.

[Unknown Analyst:]

Okay. And in terms of R&D for this coming year, where do you expect that to be over the year? Is there going to be a 10% growth in that -- in the R&D line, or is it going to be less than that?

[Gregory R. L. Smith:]

Again, we don't give exact guidance on that. But it will be higher. It was our guidance from Q3. And again, I'll encourage you to read our MD&A and the 10-K and draw a conclusion. But the plan was that we do need to shore up a few areas and that we'll spend more.

[Unknown Analyst:]

So are you able to take other costs out of the company to make up for the increase in the spend in the R&D?

[Gregory R. L. Smith:]

A little bit. But the attention is that revenue growth will be key to keeping our operating line positive.

[Unknown Analyst:]

And you expect that to be in the latter half of the year?

[Gregory R. L. Smith:]

Yes.

[Kris B. Tufto:]

Yes.

[Unknown Analyst:]

And the only other question I wanted to ask you is in terms of IR. What are your plans for IR in 2013?

[Gregory R. L. Smith:]

Well, I think our plans are as they've always been. We're a small company. We don't do a significant amount of IR work. But we're available, we travel, and we speak to our large holders all the time. And so it's a steady as you go as IR plan.

[Operator:]

And there are no further questions at this time. Ladies and gentlemen, this concludes the conference call for today. If you would like to listen to a replay of today's conference, please dial 1 [phone] or toll-free at 1 [phone] and use access code 4600240. We thank you for your participation, and you may now disconnect.

[Kris B. Tufto:]

Thank you.