Image Sensing Systems' CEO Discusses Q4 2013 Results - Earnings Call Transcript

Feb.26.14 | About: Image Sensing (ISNS)

Image Sensing Systems, Inc. (NASDAQ:ISNS)

Q4 2013 Results Earnings Conference Call

February 26, 2014, 04:45 PM ET

Executives

Al Galgano - Vice President of Investor and Corporate Relations

Kris B. Tufto - Chief Executive Officer and President

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

Analysts

Samuel Bergman - Bayberry Asset Management

Brian Yurinich - Craig-Hallum Capital Group

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Image Sensing Systems Fourth Quarter 2013 Earnings Conference Call.

During today's presentation all parties will be in a listen-only mode. Following the presentation the conference will be open for questions. (Operator Instructions). This conference is being recorded today, February 26, 2014.

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.

But 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, filed in March of 2013.

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 will summarize our 2013 performance before turning the call over to Dale to provide more detail regarding our financials. After Dale speaks I will return to recap our ongoing initiatives for future growth and then we will open it up to your questions.

Looking at the fourth quarter, revenue was $6.5 million, down slightly from the prior year period. This is in-line with our expectations and consistent with the seasonality we see during the winter months. However we continue to see our sales opportunities grow in terms of size and quality and across all product lines.

I am happy to report that product revenues in the quarter saw strong gains over 2012 fourth quarter, coming in at $4 million which is 11% point increase. That activity added to our full year momentum. Full year 2013 revenue grew 5% over 2012 to $26.3 million. Further our full year product and solutions sales grew 17% over 2012 to $14.7 million. Our Autoscope License Plate Recognition product revenue grew 34% year-over-year to $6.4 million.

We are pleased with the progress we made in product development and continue to gain traction in our sales pipeline. We are encouraged by the momentum we saw in product sales growth in the second half of 2013 and we are excited about the recent product launches, including our best-in-class CitySync Safety solution.

Our leading edge Safe City technology provides the data and analytics that law enforcement, security, parking and traffic management professionals need to construct and build a safe city. We are receiving positive customer feedback on our Safe City capabilities and getting great reception at industry trade shows. We have an early installation right now in U.S. city that’s showing great returns as far as solving crimes very quickly and we’ll have more information on that in the future.

In order to support our Safe City suite of products earlier this month we were excited to announce the release of our new intelligent license plate recognition camera, the Autoscope Ex-120 series. We believe that Ex-120 is the best of breed sensor and further enhances our LPR operating by providing more a complete solution to our customers. The combination of our world renowned LPR engine with the highest quality fixed cameras and a crime solving back office is an industry first.

In a market ripe for innovation we are shifting the focus to customer-led traffic-based high tech solutions. We are very excited about the growth potential we see from this suite of products and look forward to updating you in the future quarters.

As I mentioned last quarter this new breakthrough back office solution uses data collected from license plate recognition technology to provide investigators with critical evidence in a shorter timeframe and allows them to solve crimes quicker and ensure higher conviction rates thus a safe city.

In the traffic market we also launched the CitySync metro solution in December. This manages traffic real time and collects wide ranging data. We are gaining traction and interest with this product as well. The investments we made in our business in 2013 are starting to drive growth as evidenced by the accelerated sales activity and product revenues we are seeing. We remain confident that our investments will continue to yield benefits and increase shareholder value. We continue to focus on building our platforms and are enhancing our products and services to return to the historical profitability levels and maximize long term shareholder value.

Now I would like to turn over the call to Dale to cover financials.

Dale E. Parker

Thank you, Kris. Good afternoon everyone. For the fourth quarter ended December 31, 2013, Image Sensing Systems' revenue totaled $6.5 million, slightly down from $6.8 million in the fourth quarter of 2012. Revenue from royalties was $2.4 million in the quarter compared to $3.2 million in the 2012 fourth quarter. Product sales were $4 million, 11% increase from $3.6 million for the prior-year period. Autoscope Radar product sales and royalties were $1.7 million and $290,000, respectively, in the fourth quarter and Autoscope Video product sales and royalties were $1.0 million and $2.1 million, respectively in the period. Sales of LPR worldwide for the fourth quarter were $1.3 million.

In the fourth quarter, Image Sensing reported a net loss of $10.8 million or $2.17 per share compared to a net loss of $15,000 in the prior-year period. The fourth quarter 2013 net loss includes operating expenses of approximately $8 million, a $3.6 million increase from 2012. Included in the fourth quarter operating expenses are $509,000 of investigative expenses and sales and sales and marketing product investments of $2.2 million. Included in the fourth quarter of 2013 net income is $8.1 million non-cash charge related to the valuation allowance that we've established for our net operating loss carry forward position.

On a non-GAAP basis excluding intangible asset amortization, restructuring expense, goodwill impairment and the cost of the investigation non-GAAP net operating loss for the fourth quarter was $3.9 million compared to a non-GAAP net operating income of $567,000 in the same period a year ago.

On the balance sheet cash and investment at December 31, 2013 totaled $6.2 million, down from $7.6 million at September 30, 2013. The reduction in cash and investments primarily reflects the investigative costs, capitalized software costs and development investments. Product sales gross margins for the fourth quarter of 2013 was 16%, which includes charges related to the write-off of obsolete finished products and additional expenses related to the transition of the company’s warranty repair service for Autoscope radar products to our contract manufacturer.

These factors negatively impacted gross margin by approximately 21 percentage points. We believe that current margins are not indicative of future performance due to the impact of these non-recurring items. We expect the product gross margin was return to historical levels in the future period.

Looking at our full year performance, revenues increased 5% from 2012 to $26.3 million. Revenue from royalties was down year-over-year to $11.6 million. Product sales for the full year were an impressive 17% to $14.7 million including a $6.4 million worldwide LPR products and AutoScope Radar Product sales our royalties were $5.1 million and $1.3 million respectively. In AutoScope Video product sales our royalties were $3.1 million and $10.3 million respectively. The year-to-date net loss totaled $15.9 million or $3.21 per share compared to a net loss of $3.4 million or $0.69 per share in 2012. The full year 2013 net loss included $3.7 million of investigative expenses and a non-cash deferred tax valuation charge of $8.1 million.

On a non-GAAP basis, excluding intangible asset amortization, cost of the investigation, restructuring expense and goodwill impairment, non-GAAP net operating loss for 2013 was $6.7 million compared to a non-GAAP net operating income of $1.7 million in 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 loss if any or predict with certainly the timeline for resolution of these matters.

With that I’d like to turn the call over to Kris for some final thoughts. Kris?

Kris B. Tufto

Thanks Dale. Before we open up the call to your questions, let me reiterate how encouraged we are as we begin 2014 and then growth opportunities we see before us. We’ve spent the last year building out our suite of products and services and we believe that the investments that we’ve made will start to pay dividends in 2014. We are seeing increased momentum in our product and solution sales and confident of the spring board for growth that our platform provides.

I’m proud of the progress we’ve made and our dedicated team of employees who have combined to create our industry leading products and service offerings. We continue to see tremendous growth opportunities in both domestic and international markets and believe that we’re well positioned for the future.

Thank you again for joining us today. I look forward to update you on our next call. And at this time, I’d like to open up the call for your questions

Question-and-Answer Session

Operator

Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions). Our first question is from the line of Sam Bergman with Bayberry Asset Management. Please go ahead.

Samuel Bergman - Bayberry Asset Management

Hi, good afternoon gentlemen.

Kris B. Tufto

Hi.

Samuel Bergman - Bayberry Asset Management

Couple of questions. So first of all on the R&D side, can you give us an idea what the R&D will look like in 2014 versus 2013 and as it more geared to the first half than the second half?

Kris B. Tufto

Are any particular thought or just overall?

Samuel Bergman - Bayberry Asset Management

Overall?

Kris B. Tufto

Overall, I think in most part expenses will remain pretty much roughly the same. I won’t go up over '14.

Samuel Bergman - Bayberry Asset Management

Okay. And in terms of the pipeline can you quantify the pipeline at all versus in prior quarters?

Kris B. Tufto

We cannot. All I can say there is that we’ve expanded our marketing capabilities. So we’re doing a lot more outreach from that perspective. So I would say that we've made investments in marketing and that's increasing awareness of our products.

Samuel Bergman - Bayberry Asset Management

And I guess the last question, Kris when do you expect the margins I know they are not going to return to normal next quarter and probably [hedge] itself into the upcoming quarters. But realistically I mean when could we expect normalized margins?

Kris B. Tufto

I am going to pass that one to Dale.

Dale E. Parker

Yeah, this is Dale I think that's a good question. Our margins as I've indicated in the overview that I gave you, they have been deflated primarily by really three things. There has been some mix which fluctuates and is choppy from quarter-to-quarter and we've had a lot of warranty and inventory issues. So what I see going forward is that I think you are going to see an upward line probably reaching historical levels somewhere in the third and fourth quarters, hopefully we'll see some movement in the first and second quarters.

The first quarter is historically a low quarter. So I can't assure you a 100% there but I think you are going to see a trend by the ended of this year that we are back to historical levels somewhere in the low to mid 50% range.

Samuel Bergman - Bayberry Asset Management

Okay. Thank you very much.

Dale E. Parker

You're welcome. Thank you.

Kris B. Tufto

Thanks.

Operator

(Operator Instructions). Our next question is from the line of Brian Yurinich with Craig-Hallum Capital Group. Please go ahead.

Brian Yurinich - Craig-Hallum Capital Group

Hey guys.

Kris B. Tufto

Hi, Brian.

Brian Yurinich - Craig-Hallum Capital Group

What was the charge you guys called out in selling and marketing, $2.2 million what was that or was there something in there?

Dale E. Parker

There is nothing unusual. Are you looking for detail on that number or what do you…?

Brian Yurinich - Craig-Hallum Capital Group

I mean I thought you said there are some special charge in there but it looks like selling and marketing went from $2.8 million to $4.2 million what was that increase? It seems a little larger than usual.

Dale E. Parker

Yeah, there was a bunch of things there. There was some severance cost. We had to clean up some of our Asian operations. Basically there was some unusual consulting cost in that fourth quarter, it was kind of a little bit of a perfect storm in the fourth quarter as far as expenses were concerned and then there always tends to be a little catch up in December. So nothing unusual just the continued sales and marketing expense that we've been incurring the rest of the year.

Brian Yurinich - Craig-Hallum Capital Group

And what should be selling and marketing run rate going forward?

Dale E. Parker

Yeah, it's not -- the fourth quarter is not indicative of that and I think if you look at the other three quarters, probably the third quarter is more representative than the fourth quarter is what I'd say, Kris would you agree with that?

Kris B. Tufto

Yeah, I'd agree with that, yes.

Dale E. Parker

So Brian I understand your question and it is high in the fourth quarter but that is not going to repeat itself.

Brian Yurinich - Craig-Hallum Capital Group

And what's taxes, what should we expect taxes to be going forward?

Dale E. Parker

Well taxes going forward will, first of all remember that this is a non-cash charge basically it's required by GAAP and it's reversing, it's basically putting the reserve against our tax assets, because there would be from an accounting standpoint this question of profitability going forward. Clearly we feel strong about it but that's not what GAAP requires. We basically put up --- we put a reserve against that asset and then as we go forward and we actually generate profitability we have those tax assets available for tax calculation purposes.

Going forward it really depends on if and when we reverse that reversal or that reserve if you wish. And we will only do that after several quarters or even possibly a year or two of profitability. So as far as tax rate, that's hard to say at this point. It really depends on what our experiences are. If we have the next four quarters of profitability we will go back and reverse some of those reserves that are put on.

Brian Yurinich - Craig-Hallum Capital Group

All right.

Dale E. Parker

But remember these are non-cash reserves, okay.

Brian Yurinich - Craig-Hallum Capital Group

Yep. And then just finally what are you most excited about as we go through '14 and possibly in the '15?

Kris B. Tufto

I think we are most excited about our Safe Cities initiatives because we are at trade shows and a number of customer discussions, we are very excited about the response we are getting from that. So I would say we are the most excited about building out that platform and moving that forward, sorry mate I've got a nasty cold here.

Brian Yurinich - Craig-Hallum Capital Group

All right. That's all I have for you.

Kris B. Tufto

Thanks.

Dale E. Parker

Thanks, Brian.

Operator

Our next question is from the line of [Irene Figel with Rosenthal Partners]. Please go ahead.

Unidentified Analyst

Hi. In reference to the previous question about expenses, was your answer that you expect R&D expense on annual run rate to be the same in 2014 over 2013 or is that overall operating expenses?

Dale E. Parker

We would expect R&D to remain about the same and I would expect the sales and marketing expenses should not be reflective of fourth quarter but more of the third quarter.

Unidentified Analyst

Got it, okay. And then it looks like you might have had a tough quarter year-over-year in the North American Autoscope business, is there anything in particular there we should know about?

Kris B. Tufto

No. It's typically fourth quarter and first quarter are usually lumpy and they are lighter two quarters of the year as far as Autoscope videos concern. I presume we are talking about [Town Light], we didn't see any issues there. It's just lumpiness.

Unidentified Analyst

Okay. And then I also saw just on the front of Wall Street Journal today, Obama is announcing perhaps a major initiatives to spent $300 billion on transportation and roads et cetera. Is that something you guys might benefit from?

Kris B. Tufto

Yes. We would benefit from that. If he get it through Congress I guess, I think we would love to see it, he can think all right now and take back as we speak though.

[Multiple Speakers].

Unidentified Analyst

Okay. All right. Great. Thank you very much.

Kris B. Tufto

Thanks.

Operator

Our next question is from the line of [Ian Robertson] with RCM Partners. Please go ahead.

Unidentified Analyst

Hi, Kris, Dale. Good afternoon.

Kris B. Tufto

Good afternoon.

Unidentified Analyst

So I was curious also on the sales and marketing line. How much of that is driven by increase in headcount as you guys look forward to the opportunity in 2014?

Kris B. Tufto

Ian, mostly it was mostly two or three headcount, so very nominal.

Unidentified Analyst

And so, how has headcount changed over the course of 2013? Have you seen a significant increase or is that 2% to 3% increase indicative of -- we don't kind of what played out of the course of the year as well?

Kris B. Tufto

I would say, in North America we've staffed up. We've hired general managers of our two core markets, traffic management and safety management, and then also added are in the process of adding or excuse me, we added couple of marketing heads and then also added sales resources as well.

Unidentified Analyst

So as you look at those hires, what should we expect as far as the lead time to ramp over the course of next couple of quarters? Do you expect those hires to be fully reflected in first quarter results or is that something we should see later in the year as those guys ramp up?

Kris B. Tufto

Yes. I think onboarding and the way our markets are from the time you hire somebody to the time you start seeing revenues I would say is probably in the two quarters, three quarters time.

Unidentified Analyst

Okay. And then a quick question on the cash balance. Looking at the year, there was a significant decrease in cash and there is this outstanding liability associated with the potential issues that we see. I just wondered if you comment on your cash balance and how you see your cash needs going forward?

Dale E. Parker

Yes. I think that's a good question. Thank you. When you look at our cash balances, when we started the year, we had about $13 million in cash. At the end of the year, we had about $6.1 million or a change of about $7 million. So, if you break it down in the categories, $6 million of it is from operations, of that $6 million $3.7 million was pulled under the investigation and $2.3 million was operating losses which were driven primarily by the sales and marketing expenses. And the last piece of that $7 million cash drain was we spent about a $1 million on capital expenditures for software development, so that's the $7 million.

Going forward, we're pretty comfortable with what we are seeing now and our cash balance should run somewhere between $5.5 million and $6.5 million for the year. It could jump one direction or the other a little bit more and around numbers I would project and what I am seeing now that should remain fairly steady for the rest of 2014.

Unidentified Analyst

Okay. That's very helpful. I know you had a couple of questions kind of getting at this, but as you kind of comment and look to returning to historical growth levels, what do you think, are you comfortable throwing out any numbers as far as what you feel is achievable given opportunity you have and you have a few quarters under your belt here. Just any general thoughts?

Kris B. Tufto

Well, I think we remain positive on the business. I think budgets well, it's depending on how much software you have to buy here between now and end of March, I guess, we are a little concerned about those expenditures in specific states but that tend to come out of the same bucket as far as machine vision and those types of products. But I think we are bullish on governments having dollars to spend and our product set. So, I think we like where we are at and we like our strategy as well.

Unidentified Analyst

Okay. Thanks a lot guys.

Kris B. Tufto

Thank you.

Operator

There are no further questions at this time. Ladies and gentlemen, this concludes the Image Sensing Systems fourth quarter 2013 earnings conference call. If you would like to listen to a replay of today's conference, please dial 1-800-406-7325 or 303-590-3030, with the access code of 4669481. We'd like to thank you for your participation. You may now disconnect.

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