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Insignia Systems, Inc. (NASDAQ:ISIG)

Q2 2013 Earnings Call

July 31, 2013 05:00 pm ET

Executives

Glen Dall – President & Chief Executive Officer

John Gonsior – Vice President of Finance & Chief Financial Officer

Analysts

David Polonitza – AB Value Management

Daniel Rubin

Bob Frendell – Private Investor

Steven Moore – Woodstone Securities

Mark Kowalski

Operator

Good day, everyone, and welcome to the Insignia Systems’ Q2 Earnings Conference Call. As a reminder, today’s conference is being recorded.

Except for the historical information mentioned, the matters discussed in this conference call are forward-looking statements. The company’s actual results could differ materially from the forward-looking statements as a result of a number of factors including risks and uncertainties as described in the company’s Form 10(k) for the year ended December 31, 2012, and other recent filings with the Securities and Exchange Commission.

The company wishes to caution listeners not to place undue reliance upon any such forward-looking statements which are made only as of the date made. At this time I would like to turn the conference over to Mr. Glen Dall, President and Chief Executive Officer. Please go ahead, Mr. Dall.

Glen Dall

Thank you, Janet. Thank you all for participating in this conference call in which we’ll discuss our Q2 and 2013 year-to-date results, then answer any questions you may have. With me is John Gonsior, our CFO. We’ll have John review the numbers and then I’ll have some comments before opening up the call for questions. John?

John Gonsior

Good afternoon, everyone. As you can see in the earnings release from earlier today we just completed another profitable quarter which is our fourth consecutive profitable quarter. I will first go over those quarterly and year-to-date results and then provide some other financial highlights and commentary on our Q2.

Our quarterly results were as follows: net sales were $6.1 million, of which $5.7 million was from POPS revenue. This compares to net sales of $4.7 million for Q2 2012, of which $4.3 million was POPS revenue. This represents a 33% increase in year-over-year POPS revenue and a 29% increase in year-over-year total revenue. Net income for Q2 was $164,000 or $0.01 per share. This compares to a net loss of $496,000 or $0.04 per share in Q2 2012.

Our year-to-date results were as follows: net sales through six months were $13.5 million, of which $12.7 million was POPS revenue. This compares to net sales of $8.7 million for the first six months of 2012, of which $7.8 million was for POPS revenue. These year-to-date results represent over a 64% increase in year-over-year POPS revenue and a 54% increase in year-over-year total revenue. Net income through the first six months of 2013 was $584,000 or $0.04 per share. This compares to a net loss of $2.1 million or $0.15 a share for the first six months of 2012.

Now I’d like to comment on a few other financial highlights. As I just mentioned we have seen upwards of a 54% increase in total revenue through six months year-over-year and this gives us a great start to what should be a successful year. Our gross margin percentage has remained above 40% in recent quarters. While this is in part due to a higher revenue base it is also due to our continued focus on the operational aspects of our business and making sure that we are gaining incremental revenue in an efficient manner. We will continue to invest in our business to help ensure future growth.

Our cash and equivalents balance as of June 30 was $22.9 million versus $20.2 million as of December 31, 2012, which represents a $2.7 million increase in cash. Additionally, we have nearly $23.0 million in working capital as of June 30th which is an increase of more than $1.2 million over the working capital we had at the end of 2012. And finally, as we mentioned in our press release we have approximately $6.6 million in POPS programs set to run in Q3 with approximately three weeks of time left to sell. And with that I’ll turn it back over to Glen.

Glen Dall

Thanks, John. We’re proud of the team here at Insignia for our ability to turn around what was initially a soft-looking quarter into a profitable one and the momentum we’ve built for Q3 as well. As John mentioned this is the fourth profitable quarter in a row and we believe indicates continued stability and profitability. That being said we’ll continue to invest to provide the infrastructure for growth.

We continue to see stronger CPG spend versus the previous few years and we’re continuing to invest in resources to capitalize on that trend. We added an additional salesperson and have several more in the recruiting pipeline. This is allowing us to increase our penetration into existing CPG customers and also broaden our reach into additional customers.

As a matter of fact, to date in 2013 we’ve contracted programs with 25 new CPG customers accounting for nearly $2 million in revenue; and 14 of those new customers have come from the efforts of our inside sales team who have been very successful in reaching small- and mid-tier CPG customers. So having a broader base of customers allows us to better withstand fluctuations in spending patterns.

Our Retail Team has had quality meetings with several large retailer chains that would be new to our network but we have no new relationships to announce at this time. On the digital front we’re still seeing limited consumer engagement with the programs we’ve run. We continue to test and learn with our CPG and retail partners on digital programs and we have added an additional program and we’re testing another in a few months.

Until we determine the program variant that we believe will lead to large-scale consumer adoption and increase product sales for our CPG and retail partners we really can’t forecast and meaningful revenue from these digital products. However, we are looking to increase usage of digital in our sales and marketing initiatives with investments into a next-generation CRM and enterprise platform. This is going to allow us to test generating customer leads online. This does integrate into the next phase of our website redesign strategy which you’ll see in the next coming months.

Our relationships with Valassis and News America Marketing continue to be positive and productive. And lastly, I assume everyone on the call has seen the recent news of a tender offer, management changes, and Board changes. We believe the tender offer allows our shareholders who desire liquidity the ability to access the value they have in the company with the benefit to the company of reducing the number of outstanding shares. At the same time, we’re maintaining a healthy cash balance at the conclusion of the tender offer.

I’m very pleased that the Board had the confidence to name me in a CEO role with the culmination of Scott Drill’s succession plan, and I’m appreciative that Scott will remain with us in a senior advisory role. Scott’s knowledge and experience continue to be invaluable to us.

As for the Board changes, Gordon Stofer and Scott have done a tremendous job on leadership, perseverance and stewardship over the years. The new face of the Board under the completion of the tender offer and under the Chairmanship of David Boehnen will certainly provide the necessary guidance to see us through the next generation of Insignia under Insignia 2.0. I’ve had the opportunity to get to know Gary Vars over the years and I’m excited to have him on the Board, and I’m also honored to be included in the Board of Directors.

So in conclusion while we still have challenges in front of us our team has proven their ability to execute. We need to continue to focus and move forward on a long-term strategy that can take us to the next level. So with that I’d like to open it up to questions.

Question-and-Answer Session

Operator

(Operator instructions.) And your first question comes from the line of David.

David Polonitza – AB Value Management

Hi, it’s David Polonitza. I was just curious if you had some comments on your increases in G&A expenditures really this quarter and the prior quarter, and where is that money going to?

John Gonsior

David, this is John Gonsior, I’ll comment on that. As we alluded to in our opening comments we continue to make some investments in the infrastructure in our business, and that can be through people and also through technology. So that’s the main increases that you’re seeing. And we’ll continue to invest, and as you’re aware those investments are made to fund future growth.

David Polonitza – AB Value Management

Sure, yeah. I was just trying to get an idea of what types of growth expenditures were going on in the G&A area. I know you might not want to break it out at this point.

John Gonsior

Yeah, I’d summarize it as sales and marketing hires mainly and then technology investments.

David Polonitza – AB Value Management

Okay, thank you.

Glen Dall

Thanks, David.

Operator

And your next question comes from Daniel Rubin.

Daniel Rubin

Hi, good afternoon gentlemen. The question I have is the share buyback would be up to $12 million and on the balance sheet you currently have $23 million. I was wondering what do you expect your cash needs to be going forward and why have you guys limited the share buyback to $12 million?

John Gonsior

Obviously we carefully considered the amount of cash that we wanted to leave in the company and we felt like a $12 million repurchase or tender offer would accomplish providing liquidity to shareholders while still leaving the company with adequate cash for the future.

Daniel Rubin

And do you think that going forward you may put together another share buyback plan if you feel that you get to the stretch on the balance sheet? My concern is it doesn’t seem that this business requires a lot of cash and I was wondering what was the strategy or mindset behind still keeping something like $10 million on the balance sheet.

John Gonsior

At this time I can’t say that our strategy is going to be to continue to do tender offers – I don’t think it will be. But the strategy is to provide liquidity to shareholders right now that want it given the low trading volume. As we move forward and we see what our cash balances are and what our future cash needs might be we’ll constantly evaluate that with the Board and go from there.

But as you mentioned, no – it’s a business that can be profitable and should be profitable and has been profitable, and as we go we’ll assess what to do with our cash going forward. But at this time we’ve decided on $12 million to leave ourselves and adequate amount of cash going forward and hopefully that should provide the shareholders with the liquidity that they want.

Daniel Rubin

Okay, thank you very much.

Operator

And your next question comes from Bob Frendell.

Bob Frendell – Private Investor

Hey guys, nice to see profits again and the cash flow was good. One quick question as far as sales were concerned: I noticed that obviously with the revenue increase you’ve got sales as a percentage of revenue somewhere around 19%, down from 23%, 24%. Does that have anything to do with a new policy as it relates to how you’re paying your salespeople? Has there been any different, more a commission-type structure put in place or are we still operating under the same way as we have in the past?

Glen Dall

This is Glen, how are you doing?

Bob Frendell – Independent Investor

I’m doing great, Glen.

Glen Dall

Good. So to answer the question, Bob, we have instituted many changes. One of them was in sales compensation. I won’t be able to comment specifically on what that might be but it’s just one of many changes we’ve instituted over the past 12 to 14 months that we really believe are leading to the increase in sales and revenue. And part of that is just really putting significant resources behind our sales, marketing, and customer service organizations.

Bob Frendell – Independent Investor

Okay, good, but the changes are in place and continue to be.

Glen Dall

Correct.

Bob Frendell – Independent Investor

That’s great, alright. Thanks a lot and again, nice job.

Glen Dall

Thank you, Bob.

Operator

(Operator instructions.) And your next question comes from Steven Moore.

Steven Moore – Woodstone Securities

Hi, congratulations. We seem to be moving in the right direction.

John Gonsior

Thank you, Steven.

Steven Moore – Woodstone Securities

I just had a question about, we added nine new CPGs I believe in Q1. Has that been material going forward? Do you feel, I mean has that added quite a bit? What do you see there?

John Gonsior

Certainly, Steven. In the opening comments I had made we’ve actually improved on that. We’ve added now 25 new CPG clients year-to-date and that’s accounted for nearly $2 million in contracted revenue in this year. So that’s a significant factor.

Steven Moore – Woodstone Securities

Okay. Alright, sorry – I missed that. But okay, well thank you. And going forward, here we all sit, everybody listening and we’re all wondering “Do we tender? Do we not tender? Can we buy back for $2.00 if we tender for $2.35?” Everybody’s thinking the same thing. But it sounds like we’re really going forward, and things really look really good. And I just want to thank you guys for turning this company and doing what you’re doing.

Glen Dall

Well thanks for your support, Steve.

Steven Moore – Woodstone Securities

Thank you.

Operator

Your next call comes from David Polonitza.

David Polonitza – AB Value Management

It’s David Polonitza. With the company’s revenue growth, how much capacity today in terms of printing and kind of some of the core functions you guys do can you add to your current business without a significant increase in cost improvements?

John Gonsior

That’s a great question, David, and actually I think it ties back to your first question on our G&A expense. From a production capabilities standpoint we still do have plenty of room there for production – producing signs and the infrastructure there. On the support side that’s where we are making more new technology enhancements, and so a new enterprise platform with the goal of being able to increase the amount of transactions – so revenue, more customers, more programs – without significantly adding headcount in that area; and really being able to allocate more of the resources into salespeople and marketing resources.

David Polonitza – AB Value Management

Great. I really appreciate that. Thanks for a good quarter.

John Gonsior

Okay, thanks David. Nice talking to you.

Operator

And your next question comes from Mark Kowalski

Mark Kowalski

Hey guys, great quarter. A quick question for you, though: as you guys tender these shares through this modified option is the plan to retire these shares permanently or are you planning on using it for compensation down the road? Maybe you can shed a little light on that.

John Gonsior

Sure. The shares will not be retired or terminated. There’s no plans for future use of those but they would go back into the bucket of available and unissued.

Mark Kowalski

Okay. And did I read it right – is the tender through mid-August?

John Gonsior

August 15th, yes, twenty business days.

Mark Kowalski

And do you guys have any plans, or can you guys forecast what you’re looking forward to as far as how many shares you are going to purchase? Because it doesn’t look like you’re going to get to the full amount that you guys are thinking just based on the volume that I’ve seen anyway.

John Gonsior

We can’t really forecast it at this point but we’ll see what happens when we don’t have (inaudible) share to forecast at this point.

Mark Kowalski

Okay. I guess I was just kind of playing on the assumption there that people that want to tender or [sign] some liquidity would have done it in the first week and then they’d probably taper down, but I guess it’s kind of a wait and see.

John Gonsior

Right.

Mark Kowalski

Alright, guys. That’s it, I appreciate it. Thank you.

John Gonsior

Alright, thanks Mark.

Operator

And there are no further questions.

Glen Dall

Okay. Well with that we’ll conclude the call. Thank you very much, everyone, for your time and thank you for your continued support.

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