Image Sensing Systems Management Discusses Q2 2013 Results - Earnings Call Transcript

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 |  About: Image Sensing Systems, Inc. (ISNS)
by: SA Transcripts

Image Sensing Systems (NASDAQ:ISNS)

Q2 2013 Earnings Call

August 07, 2013 4:45 pm ET

Executives

Al Galgano

Kris B. Tufto - Chief Executive Officer, President and Director

Dale E. Parker - Chief Financial Officer, Chief Operating Officer, Treasurer and Director

Analysts

Brian Yurinich - Craig-Hallum Capital Group LLC, Research Division

Sheldon Grodsky

Joe Furst

Eileen Segall

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Image Sensing Systems Second Quarter 2013 Earnings Conference Call. [Operator Instructions] This conference is being recorded today, Wednesday, August 7, 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, Damien. 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 provide results for Image Sensing Systems' performance for the quarter, as well as a product and operational update. We will then open up the call to your questions.

But before I turn the call over to Kris and Dale, I'd like to preface their 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.

So 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 second quarter performance before asking Dale to give a more detailed analysis regarding our financials. After Dale speaks, I will return with some closing comments before taking your questions.

First, I'm excited to report that second quarter revenue increased 30% over last year's quarter to $7.5 million. This is our highest revenue level in 6 quarters and we are pleased by the progress we've made in recent months across all product categories. We believe that this provides a solid platform as we enter the second half of the year and we continue to benefit from the planned investments we've made in our business over the past several months. These investments, specifically in the sales and marketing and product development areas, have been a key priority for our company as we restore the legacy of innovation and product quality. We're very excited about where we see Image Sensing going. We feel we've turned a significant corner and anticipate steady growth and a return to historic gross margins.

Though second quarter on international sales were up from the prior quarter, we do anticipate accelerated growth in the second half of the year as we continue to fulfill product orders. We're excited about the opportunities we're seeing in the global markets and we expect continued momentum.

Next, we continue to gain traction with our distribution partner, Econolite, in growing Autoscope radar sales and much of our second quarter growth is attributed to the expansion of this key partnership.

We are also encouraged by the momentum in developing additional strategic relationships to augment our already industry-leading technology and product offerings. I believe that the interest we are seeing in this area is further validation of the platform that we are building. We are particularly excited about potential partnerships in the areas of law enforcement and security detection, and we look forward to updating you on our progress as we move into the second half of the year.

In late May, we attended the International Parking Institute Annual Conference and it was a tremendous success. We continued -- we conducted many demonstrations of our License Plate Recognition technology for the parking market more than 50 times during the conference and relaunched our Autoscope Ex-110 high definition intelligent camera for fixed solutions.

To further demonstrate the effectiveness of our law enforcement technology, we used hands-on product demonstrations.

Later this month, the Midwest security and police -- at the Midwest Security & Police Expo, we will showcase a police vehicle that has been equipped with our technology to highlight our industry-leading offerings. Our software has made us a key player in the global traffic market and law enforcement markets, and we are capitalizing on market opportunities.

We are committed to maintaining Image Sensing market-leading position and we're doing this through a combination of product enhancements, more effective marketing programs and an enhanced sales strategy. In short, there's many reasons to be excited about the -- by the platform we are building to take advantage of future growth opportunities.

With that, I'm going to turn it over to Dale to cover the financials.

Dale E. Parker

Thank you, Kris, and good afternoon, everyone. For the second quarter ended June 30, 2013, Image Sensing Systems reported a net loss of $1.7 million or $0.35 per share, compared to a net loss of $3.6 million or $0.75 per share in the prior year period. Revenue for the period totaled $7.5 million, compared to $5.7 million for the second quarter of 2012. Royalties totaled $3.2 million compared to $3 million in the same period of 2012. While we saw improvement here, we believe we can do better and look forward to increase activity in the second half of the year.

Product sales were $4.3 million, up dramatically from $2.7 million from the prior year period. RTMS product sales and royalties were $377,000 and $465,000, respectively, in the second quarter. Sales of LPR worldwide for the second quarter were $2.9 million.

On a non-GAAP basis, excluding goodwill impairment, restructuring and intangible asset amortization, all net of tax, the net loss for the second quarter was $244,000 or $0.05 per share, as compared to non-GAAP net income of $231,000 or $0.05 per diluted share in the second quarter of 2012.

On the balance sheet, cash and investments at June 30, 2013, totaled $9.1 million, down from $12 million at March 31, 2013.

Second quarter gross margins contracted on a year-over-year basis due in part to pricing pressures we are seeing on all markets. We believe that this is a temporary situation. We expect that Image Sensing will return to historic margin levels over the next few quarters.

On a final note when adjusted for extraordinary items and amortization, we saw a $1.5 million increase in year-over-year second quarter adjusted operating expenses to $5.7 million. This increase was due primarily to the planned investments we made in sales and marketing and product development as Kris discussed earlier. We believe that these are a critical part of our strategy to restore Image Sensing Systems' legacy of innovation, product quality and key to maintaining our product-leading position.

We are seeing dividends from these investments as evidenced by our revenue level in the second quarter and expected continued momentum into the second half of the year.

With that, I'd like to turn the call back over to Kris for some final comments. Kris?

Kris B. Tufto

Thanks, Dale. Before I open up the call to questions, I just want to iterate how excited I am about the positive changes we're seeing in our business and the markets that we serve. We continue to see increasing stability both domestically and internationally and we're excited about our sales pipeline both in terms of size and quality and we're looking forward to continuous growth in the second half of the year. We're also very pleased with the traction we are getting from our planned investments in sales and marketing and product development. And we expect to see continued impact from these investments throughout the remainder of 2013.

While no one can predict to a certainty the full recovery of the global markets, we're encouraged by the progress that we're seeing in some of the key economic indicators and believe we're well positioned to take advantage of future growth opportunities. We entered the second half of the year with renewed confidence and an increased commitment to our sales and marketing efforts.

Our formula for success is simple: We have the right team delivering the right products to the right customers. And as we've said before, we're committed to restoring Image Sensing Systems' legacy of innovation and our core values of honesty, integrity and transparency. We'll continue to manage the business to maximize long-term shareholder value and we are dedicated to returning the company to historic profitability levels.

Image Sensing Systems is generating growth in -- through strong partnerships and an industry-leading product and solution offering, and we look forward to the future.

Thank you, again, for joining us today. I look forward to updating you on the progress next quarter.

At this time, I'd like to open up the call for any questions that you may have.

Question-and-Answer Session

Operator

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

Brian Yurinich - Craig-Hallum Capital Group LLC, Research Division

Just a quick question. It looks like most of the upside quarter-over-quarter came from increased License Plate Recognition sales and it looks like we had $500,000 of that, that flipped out last quarter. Should I assume that we got all of that plus kind of the incremental $1.5 million?

Kris B. Tufto

Yes, and even a little bit more than that. Yes, we had a very good quarter on the License Plate Recognition side both domestically and internationally.

Brian Yurinich - Craig-Hallum Capital Group LLC, Research Division

Should we expect that to kind of continue at these levels, or did that fall off since we had a kind of the onetime benefit from lost orders in the first quarter?

Kris B. Tufto

Yes, we don't -- we don't talk about future revenue. So I would say right now, no, we don't have -- we can't comment on it right now. But I would say one other thing, though. We're pretty confident that we're making the right investments on the License Plate Recognition side across the globe.

Brian Yurinich - Craig-Hallum Capital Group LLC, Research Division

Is that -- would it be fair to say that, that's kind of shifted to be the core focus of the company now?

Kris B. Tufto

No, I wouldn't say that. We are -- we're focused on all product lines. And I think if you look at our radar sales for the quarter, they were very, very good both sequentially by the quarter and year-over-year.

Brian Yurinich - Craig-Hallum Capital Group LLC, Research Division

Okay. And then when you talk about gross margins kind of improving back to historical levels over the next few quarters, should we just kind of think that as sort of just gradual improvement kind of sequentially or how should I think about that?

Dale E. Parker

Yes, this is Dale. I think that's that right way to look at it. Clearly, what is taking place is that we're aggressive in the pricing area and as we go through the next 3 or 4 quarters, I think you're going to actually see that improving probably sequentially. But this business is not perfectly predictable, so there might be a little up and down in it. But yes, you should see a gradual improvement; nothing drastic in the next quarter.

Operator

[Operator Instructions] Our next question is from the line of Sheldon Grodsky with Grodsky Associates.

Sheldon Grodsky

What bothers me most of about the company right now is this Polish investigation and the money seems to be flying out to your doors to pay for the investigation. Is there any light at the end of this particular tunnel? Is anyone going to be charged? Do you know -- can you give us any update on exactly where you stand with the Polish investigator?

Dale E. Parker

Yes, that's a good question. This is Dale Parker, let me answer that. I was also the Chair of the subcommittee that -- of the audit committee that was in charge of this investigation. And what I can tell you is that the investigation is ongoing. But #1 -- that most of the heavy lifting, in my opinion, has taken place in the first 2 quarters of this year. As you can see from the financials, we spent approximately $2.7 million in legal fees, primarily to get to the bottom of it. We don't have any new information. Again, I do think that the spending levels will probably start to reduce fairly significantly. I can't report on any findings at this point because, frankly, I don't have any to report. But as we go forward, we'll keep you updated on anything that's happening. But again, I'll emphasize that I do think the spending is starting to decline as all the heavy lifting has been done.

Sheldon Grodsky

I assume, as of the latest we've heard, there were just a couple of former employees who were either charged or going to be charged. Is Image Sensing still so far charged with nothing?

Dale E. Parker

That is correct. There's no charges at this point. The investigation is taking place in Poland.

Operator

Our next question is from the line of Joe Furst with First Associates.

Joe Furst

The previous gentlemen asked the same question that I was going to ask. So it's been answered as much as possible.

Operator

Our next question is from the line of Eileen Segall with Tildenrow Partners.

Eileen Segall

I have several questions, I'll start with the OpEx level. Should we expect those to continue around where they are here for the next few quarters, obviously excluding the investigation?

Dale E. Parker

Yes, Eileen. This is Dale. I would -- I think that's a good assumption at this point. As Kris indicated in his presentation, we are investing in sales and marketing and there's some supply chain costs we're incurring. So yes. We're really trying to improve our penetration of some markets. We're looking at our sales force, both domestically and internationally, and adding people and products and R&D where we think it's appropriate. And again, I think you're starting to see the result of that in the second quarter sales of $7.5 million. But yes, I think that's a good assumption.

Eileen Segall

And then when you talk about growth accelerating, does that mean that you expect second half of the year to be higher than the first half, is that how to interpret that for total revenues or are you just talking about international revenues when you...

Dale E. Parker

Well, we're talking about total company, including royalties. Historically, the second half of the year for the company has been stronger than the first half. So number one, we would expect that to continue. Number two, with the efforts that Kris and the sales and the marketing team are putting into the marketplace, we would expect to see an improved second half. But again, that's our forecast or our speculation at this point. So we'll just have to see how it goes.

Eileen Segall

Okay, great. And you talked about your margins being down and some pricing pressure across all markets. But when I look at the revenue mix, it looks like the biggest impact was international radar, is that right because that margin there was particularly bad and could you give us some color on that?

Dale E. Parker

No, I don't think that's correct. Kris, do you know any specific reason in the marketplace that if the margins were down, any specific order. I don't have anything in my visibility on that right now.

Kris B. Tufto

No, no specific order, no. But I would say the non-Econolite business that we felt pricing pressure.

Eileen Segall

Okay. And speaking of the Econolite business, would you be able to give us any color on what's been going on in the U.S. in terms of budgets? Have you seen any improvements since the passing of the budget and how is the hybrid product being received?

Kris B. Tufto

Yes, good question. Let me just -- MAP-21 still has not filtered its way into the sensor market, in our opinion. We've seen that the initial 1.5 years of MAP-21 is one in the infrastructure for the most part, and it was -- most likely, in most states it was dated infrastructure projects that had to get done that states were delaying. With regard -- so I think the latter half -- we're optimistic that in the latter half of the 3-year period for MAP-21 that we're going to start seeing that show up into our business. With regard to Autoscope Duo, we are seeing increasing trials of that product and we're excited about that. We're on the Qualified Product List now in a number of states. So we expect that, that's going to start to have an effect in the out quarters.

Operator

[Operator Instructions] At this time, I would like to turn the conference back to management for any closing remarks.

Al Galgano

Thank you, everyone for joining us on the Second Quarter Conference Call. We look forward to updating you at our next conference call. And please remember that this call has been archived and is available for replay. You can access that via the website and it will be available for a period of 1 week. Thank you very much.

Operator

Ladies and gentlemen, if you like to listen to a replay of today's conference call, please dial 1 (800) 406-7325 or (303) 590-3030 and enter the access code 4628025 followed by #. This concludes the Image Sensing Systems Second Quarter 2013 Earnings Conference Call. Thank you for your participation. You may now disconnect.

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