Image Sensing Systems' (ISNS) CEO Kris Tufto on Q2 2014 Results - Earnings Call Transcript

Aug. 1.14 | About: Image Sensing (ISNS)

Image Sensing Systems, Inc. (NASDAQ:ISNS)

Q2 2014 Results Earnings Conference Call

July 30, 2014, 4:45 pm ET

Executives

Al Galgano - Vice President of Investor and Corporate Relations

Kris Tufto - President, Chief Executive Officer, Director

Dale Parker - Chief Financial Officer, Chief Operating Officer, Treasurer, Director

Analysts

Eileen Segall - Tildenrow Partners

Eric Burnside - ACME Capital

Mike Arnold - Private Investor

Joe First - First Associates

Operator

Good day, ladies and gentlemen, and welcome to the Image Sensing Systems' second quarter 2013 earnings conference call. Today's conference is being recorded.

Now I will turn the conference over to Mr. Al Galgano, Investor Relations for Image Sensing Systems. Please go ahead, sir.

Al Galgano

Thank you, Kelsey. 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 would 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 2014.

With that, I would like to turn the call over to Kris.

Kris Tufto

Thanks, Al, and thank you everyone for joining us today. On today's call, I will summarize our second quarter 2014 performance before turning the call over to Dale to provide more detail regarding our financial performance. After Dale discusses the second quarter financial results, I will return to recap our ongoing initiatives for future growth and then we will open it up to your questions.

So looking at the second quarter, revenue totaled nearly $6 million, up significantly from the previous quarter. Second quarter was impacted by some timing and Polish office closure. We also completed the sales seven back-office full-service solutions for our traffic and safety management sectors further validating the acceptance of our product and solution offerings in the markets that we serve. This was in fact a pivotal quarter for Image Sensing Systems as we took steps from a financial, operational, customer experience and product perspective to ensure that the company is successful in the second half of the year and beyond.

Financially, we focused on expense management and creating a scale on leverage on our platform to make us successful in any environment. Operationally, we continue to put our warranty issues behind us and completed the consolidation of our Polish operations. We believe that going forward, customer experience is critical to our success. We are working diligently to ensure that any time a customer or partner touches our company, they have a first-class experience.

To meet this objective, we have brought on a Director who will be responsible for order performance, product support, customer service and any other area where a customer or partner interacts with Image Sensing Systems. And from a product perspective, we were excited to introduce our first software-only product. We believe that our product and service offerings are unparalleled in our industry and will create more selling opportunities for us as we move forward.

So before I give you a little more detail on the milestones we achieved in the quarter, let me briefly summarize for those you who are new to following our company, how we view the marketplace so that you have some context for my comments. We separate our business into three segments, intersection, highway and license plate recognition or LPR. Autoscope Video is our machine vision product line and is normally sold in the intersection segment. Autoscope Radar is our radar product line, and that's sold in the highway segment. And lastly, Autoscope License Plate Recognition is our LPR line and that's sold in the crime and parking market segments.

We continue to integrate these technologies amongst these segments in order to provide more comprehensive solutions to our customers. Including this integration is the development of our software applications, including our CitySync solutions. These are technologies that support the activities of law enforcement, security, traffic and parking management: Hopefully it gives you a better picture of how we view our business and have organized Image Sensing Systems around market opportunities.

With that as a backdrop, let me give you little more detail on our second quarter achievements. First was the expansion of our cloud offerings through our first software-only product, CitySync Recognition as a Service or RaaS. This breakthrough cloud solution gives any and all businesses the power to use and access our state-of-the-art CitySync license plate recognition engine. It significantly enhances the security and LPR infrastructures that have been deployed by cities and businesses and we believe this is an industry game changer.

Image Sensing Systems' solution goes beyond just being useful for law enforcement agencies. License plate data can be used to solve a wide variety of problems, from parking enforcement to commercial data-gathering to providing VIP concierge services to private security solutions. The uses are truly endless and we are excited by its potential. This standalone solution can be implemented into any size organization or infrastructure without the need for purchasing expensive software or hardware.

CitySync RaaS is a cloud-based solution, but alternatively it can be installed as an on-premise solution and is adaptable to the needs of any business. Through this new product, we have not only expanded the availability of this technology to multiple markets, but we have also reduced the cost of entry for end-users, a true win-win for customers.

We are also proud to see that an independent test showed that the Autoscope Ex-122 fixed license plate recognition camera and our CitySync license plate recognition engine exceeded the U.K. national ANPR standards for policing performance requirements. Tests were performed using a camera installed over a two-lane highway on two separate days with varying weather conditions. These results achieved were a capture rate of 98.74% and a correct read rate of 99.61%. These are awesome results, and we are clearly thrilled. So it's clear that the combination of our world-renowned CitySync LPR engine with the highest quality fixed camera provides our customers with the best LPR solution available on the market today.

We also recently announced our amended agreement with Econolite which transitioned the domestic marketing and manufacturing of the Autoscope RTMS radar product line from Econolite to Image Sensing Systems as of July 14 of this year. Econolite will continue to manufacture and market and distribute Image Sensing Systems' video detection products for the Americas and both companies will work together to make this radar transition as seamless as possible for customers, partners and distributors. Due to the Autoscope RTMS position as a market leader in the side-fire vehicle detection radar market, we are confident that this transition will benefit Image Sensing long-term, as it allows to have greater control over this successful product.

As I stated earlier, during the quarter, we reduced our expense base and created a platform with scale and leverage. We accomplished this by addressing our organization's capacity and streamlining our operations to create scale and leverage in our operating model. We also completed the integration of our Polish operations during the quarter. That business was consolidated into our U.K. and Romanian offices. We believe strongly that these actions position Image Sensing Systems to generate growth going forward as we take advantage of the acceleration that we anticipate in the second half of this year.

Finally, we are very, very pleased with our progress internationally. This was evidenced in the large Chinese city of Jining, located in the coal mining area in the southern part of Shandong province. Jining has a population of over 8 million people and has had significant problems with traffic congestion due to rapid economic growth and explosive increase of the individual vehicle ownership. To-date, our wholly-owned Hong Kong-based subsidiary has supplied and installed 360 units of Autoscope video detection equipment for integration with traffic signal controllers in Jining.

In general, Chinese intersections have traditionally used intrusive loop detection leading to expensive and cumbersome maintenance issues. We are very pleased to see this trend towards non-intrusive technologies such as Autoscope video and there are increasing number of Chinese cities evaluating video image processing for intersection detection and considering the success we have seen in Jining, we are optimistic of our near future opportunities in the Chinese market. Due in part to these recent successes, we remain confident that our investments will continue to yield benefits and increase shareholder value.

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

Dale Parker

Thank you, Chris, and good afternoon, everyone. For the second quarter ended June 30, 2014 Image Sensing Systems' revenue totaled $5.9 million, down from $7.5 million in the second quarter of 2013. Revenue from royalties was $3.3 million in the quarter, compared to $3.2 million in the second quarter of 2013. Product sales of $2.7 million, a decrease of $4.3 million from the prior year period. Autoscope Radar product sales and royalties were $765,000 and $329,000 respectively in the second quarter. Autoscope video product sales and royalties were $666,000 and $3 million, respectively in the period. Sales of LPR worldwide for the second quarter were $1.2 million.

We saw product gross margins of 37% in the second quarter. We expect product gross margin improvement and the company will return to historical levels in future periods. In the quarter, Image Sensing reported a net loss of $1.5 million or $0.31 per share, compared to a net loss of $1.7 million in the prior year period. The second quarter of 2014 net loss includes operating expenses of approximately $5.8 million, down from $7.1 million in 2013. This decrease in operating expenses primarily reflects 2013's investigation matter and the Polish office closure. The previous disclosed investigation is ongoing and we will continue to cooperate with authorities. We are currently unable to determine the likely outcome or range of loss, if any, or predict with certainty the timeline for final resolution of these matters.

On a non-GAAP basis, excluding intangible asset amortization, restructuring expense and the cost of the investigation, the net operating loss for the second quarter was $1.1 million compared to a net operating loss of $688,000 in the same period a year ago. On the balance sheet, cash and investments at June 30, 2014 totaled $2.6 million, down from $2.9 million at March 31, 2014. We believe that we have sufficient capital to operate our operations. Our strong balance sheet, which contains no debt, allows flexibility as circumstance dictates.

With that, I would like to turn the call back over to Kris for some final thoughts. Kris?

Kris Tufto

Thanks, Dale. Before we open up the call to your questions, let me just reiterate how encouraged we are as we progress through 2014 and the growth opportunities we see before us. From a product and solution portfolio perspective, we are more focused than ever on user and customer experience and needs and believe that ISS is a strategic value-add to our customers' operations in traffic and safety management markets. All of our segments remain on track with their internal growth expectations and we see tremendous growth opportunities in both domestic and international markets and believe we are well positioned for the future.

So to close, we are confident in our future and the ISS team is passionate about returning the company to historical profitability levels and growing shareholder value. Thank you again for joining us today. I look forward to updating you on our next call.

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

Question-and-Answer Session

Operator

We will take a question from Eileen Segall with Tildenrow Partners.

Eileen Segall - Tildenrow Partners

Yes. Hi. A good job on getting the expenses down. Can we expect to see more of that sequentially? And how might the new relationship with Econolite affect expenses as well? Are you going to have to bring in more in sales force people/ Thank you.

Dale Parker

Yes. This is Dale Parker. To answer your question, specifically, we constantly look at our expense base and when we look at it, we look for results from the individuals if it fails clearly, and this is not brain science. So we want people who bring results in. So we are constantly churning our expense base to get the right mix of people. To answer specifically, we feel comfortable with the expense level we have today. We think we are structured to handle significant volume improvements and volume increases. So I wouldn't rule out expense reductions but I also wouldn't rule out some small increases in certain quarters depending on what our actions might be and that's going to reflect itself through SG&A or R&D or whatever the opportunities are, we will look at it, but clearly our expenses will be tied clearly to our revenue generation capabilities. As far as the new product line that we have acquired from Econolite, we basically added that three to four people in the sales department. It has increased some expenses but on the other side of the coin it also will improve our revenue line. So we think that, at the end of the day, in a very short run, that the expense in the gross margin versus expenses will be about equivalent to where we are today, but long-term we would expect it to be a very positive event.

Kris, would you want to add anything?

Kris Tufto

No, I would agree. I think having control of the U.S. or North American market on the radar side is a positive for us from a go forward perspective.

Eileen Segall - Tildenrow Partners

Okay, great. Thank you.

Dale Parker

Thank you.

Operator

We will move on to Eric Burnside with ACME Capital.

Eric Burnside - ACME Capital

Hi, Kris and Dale. Thanks again for giving us, the shareholders, an update and taking the time to do that. Really appreciate that. I just have a quick question about, and maybe you guys can comment, maybe not, but LPR software sales so far into the third quarter, can you give us any indication? Seemed like there as a little bit of a note in the press release about a possible order for the CitySync software.

Kris Tufto

We can't comment on and we don't give guidance and we can't comment on the quarter. I think though what we can say is, we are very excited about our product mix on the LPR side from a go forward perspective and we really like our positioning there and we think RaaS, Recognition as a Service, is a really innovative product and it opens some interesting doors for us. So from that perspective, I don't now, Dale, do you want to add anything to that?

Dale Parker

No. I think you covered that. I can't add anything.

Eric Burnside - ACME Capital

Okay. Thanks. No problem. Really appreciate it. Thanks for the question.

Operator

(Operator Instructions). We will now hear from Mike Arnold, a private investor.

Mike Arnold - Private Investor

Hi, Kris and Dale. How are you doing today?

Kris Tufto

Good, Mike. Good.

Mike Arnold - Private Investor

Good. I was having some technical difficulties and actually I had Eric ask my questions for me, but I guess I just to get your take on, what do you think the future business is going to be like in a couple of years? Are you really trying to take this down the software path? Is that the endgame here? Or are you guys looking at it from an all approach with manufacturing, the license agreement and then adding another revenue stream with the software?

Kris Tufto

Well, we clearly think it's more of a solutions integration path. So from that perspective, we believe sensor and software solution is where we are heading from a market segment perspective. And I think you can see that from our past efforts that we have done, both was CitySync Safety and CitySync Metro. CitySync Safety is our license plate recognition solution offering and CitySync Metro is our traffic management offering. So I would say, we are really focused on that solution and integration piece, from a go-to-market perspective.

Mike Arnold - Private Investor

Okay, and then in terms marketing the solution, it seems like you guys are etching on all the big points, big data, cloud, SaaS. Are there any marketing techniques you are going to take this product to TechCrunch or any sort of distribution that would get the word out that you guys have this product now?

Kris Tufto

Yes. We do have some pretty sophisticated marketing automation pieces that we do use. So we do work on awareness quite a bit, from that perspective. It's very rifle shot though. It's not a shotgun approach. So I would say the answer to your question is, yes, but it's targeted and it's a very, very rifle shot from a perspective of going after the correct end-users.

Mike Arnold - Private Investor

Okay. Thanks a lot. Appreciate for giving the update and good luck in the second half.

Kris Tufto

Thank you. Thanks Mike.

Operator

We will move on to Joe First of First Associates.

Joe First - First Associates

Thank you. Good afternoon, gentlemen. I just wondered, what do you see out there in the marketplace that makes you have a more optimistic idea of sometime in the foreseeable future achieving a profitability and being able to sell enough of your systems and services to people? It just seems continually you are losing money but you sound like you are much more optimistic, but I don't really, other than thinking you have the greatest products, what do you see out there that makes you believe you are going to be able to sell a lot more of them?

Dale Parker

Why don't you take the final piece of the question?

Kris Tufto

So on the selling side, I think having more control, let's just take radar, for example, having worldwide control of our channel and the end-user mix, in our thinking it makes a big difference from a go forward perspective. I think we have to get our product set right and we believe we have got that right now and our markets are growing. So the markets that we are attacking are growing. And so we feel pretty good about it from a go forward perspective of where our product mix and where our solution mix is. So from that perspective, I think we are in a very, very good place from that perspective. Dale?

Dale Parker

I would comment on the breakeven, because you talked about profitability. If you look at the company several years ago, it was very close to relatively small profitability, but when you look at the numbers and I talked about this in other calls, is that our breakeven is somewhere around the $28 million to $29 million range with improved gross margins. When you look at our P&L today and you look at the gross margin on our non-royalty sales, it's at 37%. Historically when you go back two or three years ago, it was closer to 60%. So we are quietly and diligently working on that margin number. We feel strongly that we are starting to make a turn. It hasn't quite reflected in the numbers this quarter. Our warranty expense and some of our products was just overwhelming for a period of time. We have corrected that. We have engineered the issues out of these products. We are seen acceptance in the marketplace, not only in the U.S. but worldwide. So we are very comfortable that we are right on the edge of breakeven in the next several quarters, we hope. But we will see. I am not projecting that but we are very positive about the future for the company, both in the sales area and the expense area, and again, I will repeat what I said earlier, from an expense standpoint, we are constantly reviewing expenses. We are looking at ways to reduce them to get a better ROI on those expenses that we do to spend. So we are very comfortable and yes, we are very bullish about this company.

Joe First - First Associates

Thanks. That's quite helpful.

Dale Parker

Thank you, sir.

Operator

Well, we have no further questions at this time. Mr. Al Galgano, I will turn the conference back to you for closing or additional remarks.

Al Galgano

All right. That's it, operator. Thank you everyone for joining us and we look forward to updating you on our third-quarter conference call. Thank you.

Operator

And again, ladies and gentlemen, that does conclude our conference for today. We thank you all for your participation.

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