LRAD's (LRAD) CEO Tom Brown on Q3 2014 Results - Earnings Call Transcript

Aug. 8.14 | About: LRAD Corp (LRAD)

LRAD Corporation (NASDAQ:LRAD)

Q3 2014 Earnings Conference Call

August 7, 2014 4:30 PM ET

Executives

Brian Harvey - Director, IR and Capital Markets

Kathy McDermott - CFO

Tom Brown - President and CEO

Analysts

Les Sulewski - Sidoti & Company

Jonathan Manela - Rainmaker Associates

Anne Margaret Crow - Edison Investment Research

Operator

Good day, ladies and gentlemen, and welcome to the Third Quarter 2014 Financial Results Conference Call. All lines have been placed on a listen-only mode and the floor will be open for questions and comments following the presentation. (Operator Instructions).

At this time, it is my pleasure to turn the floor over to your host Brian Harvey. Sir, the floor is yours.

Brian Harvey

Thanks you, Catherine. Good afternoon. And welcome to LRAD Corporation’s fiscal third quarter 2014 financial results conference call. I am Brian Harvey, the Director of Investor Relations and Capital Markets for LRAD, and on the call with me this afternoon are Tom Brown, our Chairman, President and CEO; and Kathy McDermott, our Chief Financial Officer. Ms. McDermott will recap our fiscal third quarter financial results, which will be followed by a brief presentation from Mr. Brown. After their presentations, we will open up the call to questions.

But before I turn the call over to them, I would like to take this opportunity to remind you that during the course of this call, management will make forward-looking statements. Other than statements that are historical facts, statements made during this call that are forward-looking statements are based on our current expectations.

During the call, we may discuss the company's plans, expectations, outlook or forecast for future performance. These forward-looking statements are subject to risks and uncertainties and actual results could differ materially from the views expressed today.

For more information regarding the potential risks and uncertainties, see the Risk Factors section of the company's Form 10-K for the fiscal year ended September 30, 2013. LRAD Corporation disclaims any intent or obligation to update those forward-looking statements, except as otherwise specifically stated.

I will now turn the call over to Kathy, for the fiscal second quarter 2014 financial results recap. Kathy?

Kathy McDermott

Thanks Brian. Good afternoon everyone and thanks for joining us today. Our fiscal third quarter results were very strong. Our revenues for the quarter were $8 million, significantly exceeding revenues of $2.2 million for the fiscal third quarter of 2013. Third quarter results were primarily driven by a $4 million in the Middle East for border and perimeter security.

Much of our growth continues to be generated in international markets, with 82% of our year-to-date revenue shipped to international customers. This is more than offsetting a decline in revenue from the U.S. military.

In the third quarter, we continued to sell into many diverse markets, including international police and public safety, bird mitigation for our mining concern, international defense and navies, and maritime application.

Year-to-date revenues through June were $17.2 million, more than double our revenues of $8.3 million for the same period in the prior year, and in the first nine months exceeding our full year revenues for fiscal 2013. Our fourth fiscal quarter looks to continue strong, although its difficult to predict, if year end defense spending would be available, and if so, it will be at the same level as our fiscal fourth quarter of 2013. Our revenues will continue to fluctuate on a quarter-to-quarter basis based on the nature of our business and customer base.

Gross profit for the quarter ended June 30th, 2014 was $5 million or 63% of net revenues, compared to $915,000 or 42% of net revenues for the third quarter of the prior year. Year-to-date gross profit was $9.7 million or 56% of net revenues, compared to $3.8 million or 45% of net revenues.

The increase was primarily due to the increased volume, favorable channel mix and increased fixed overhead absorption. The higher gross margin is partially offset by increased commission expense towards third party sales reps that's reported in operating expense.

Operating expenses for the third fiscal quarter increased 53% from $2 million in the quarter ended June 30th, 2013, to $3.1 million in the quarter ended June 30, 2014, primarily due to increased commission expense towards third party sales reps, and bonus accrual, based on meeting targeted performance goals, partially offset by reduced legal and other professional fees incurred in the prior year related to a lawsuit.

Year-to-date operating expenses increased 31% to $7.1 million in the first nine months of 2014, compared to $5.5 million in the first nine months of the prior year. The increase resulted from increased bonus accrual, commission expense, and salaries and consulting expense primarily due to increased business development personnel, partially offset by a reduction in legal and other production fees.

We reported a net income of $1.9 million or $0.06 per diluted share in the fiscal third quarter of 2014, compared to a net loss of $1.1 million or $0.03 per share in the third quarter of 2013, as a result of the increased revenue and gross margin, partially offset by higher operating expenses.

Year-to-date net income as $2.6 million or $0.08 per diluted share, compared to a loss of $1.7 million or $0.05 per share in the prior year. We currently have no income tax liability due to prior net operating losses.

Our cash balance increased by $5.4 million year-to-date to $21.2 million at June 30, 2014, primarily generated from net income, collection of our accounts receivable compared to prior year end, and increased accrued liabilities, primarily due to accrued commissions and bonus expense, partially offset by a reduction in accounts payable, compared to our September 30, 2013 balance. Working capital is $26.6 million at June 30, 2014.

And with that, I will turn it back to Brian.

Brian Harvey

Thank you, Kathy. I will now turn the call over to Tom, for a brief management presentation.

Tom Brown

Thank you, Brian. Thanks for joining our call. Great quarter. As I have mentioned on previous calls, in May 2013, we restructured our sales and business development team, and at June, brought on several new members. Since these changes, if you look at our trailing 12 months results, our sales exceed $26 million and we have generated $5.5 million of profit, a greater than 20% of return. We are extremely pleased with our team, feel real good about our business and its future potential. We are off to a good start for our fourth quarter, and we are on target to achieve one of our best financial performances in the company's history.

As Kathy indicated, international sales, continuing from last year, have been strong, and remain strong. Demand for our product in Asia, the Middle East, and Africa continues to grow. From an overall standpoint, yesterday we responded to an RFI fro the U.S. Coast Guard R&D Center. We have been working for more than seven years, trying to obtain business from the Coast Guard. Acoustic hailing devices are a perfect tool for their mission set, and we have provided product to the Indian Coast Guard, the Japanese Coast Guard, and the Chinese Coast Guard. The U.S. Coast Guard has not purchased product. So hopefully, this RFI is a sign that they are beginning to consider acoustic hailing devices for their fleet.

On Tuesday of this week, the U.S. Army put out an updated RFI for acoustic hailing devices. The original RFI from the U.S. Army came out in 2010, followed by issuing the same RFI in 2011. Unfortunately, both of these RFIs went unfunded. We are very optimistic, that this RFI should, could lead to an RFP. All internal DoD program paperwork has been completed, in their prepared defense budgets, the presidents, the house and the senate provide for 2015 funding for this program. In all likelihood, my opinion, the 2015 budget will not get approved, until after the mid-term elections.

Hopefully, we will see an RFP for the program in early 2015. On a positive note, we have received recent orders from the U.S. Army for the LRAD 500X, which are being shipped to Afghanistan for deployment. Field demand is there for this product.

Another positive development in the U.S. is that the house has included acoustic hailing devices, as authorized equipment for NGREA funding. NGREA is the National Guard Reserve Equipment account, with a budget of approximately $2 billion. We are seeing strong interest in the various state national guard units for our product, and this will help facilitate future purchases.

I want to talk about some deployments and developments in Mass Notification. We continue to receive orders from Japan, and anticipate some additional orders over the next couple of months for certain small cities working with our Japanese rep. We have responded to two large RFPs for two large cities in the Middle East. The bids have been received, and the bidding process is closed.

We have been informed, that we are one of the finalists in both cities, and we feel fairly confident, that we are well positioned on one of these bids. Ramadan has just ended, the process is, that the proposals go through a technical review, and then a financial review, before being submitted to the Minister of Interior. Timing of the award would be some time in November of December this year for delivery in early 2015. We are very aggressive with our proposal, we see we have the best product offering, and are very hopeful. We see Mass Notification as a major growth area for our company, anticipate strong growth in 2015.

2014 has been a very successful year, and it will be our sixth consecutive year of positive cash flow, fifth consecutive year of reported profitability. With our new team, new product offerings, especially in Mass Notification, we are very excited to end the year on a positive note, and look forward to continued growth in 2015.

With that Brian, let's go to Q&A.

Brian Harvey

Okay, thank you, Tom. We'd like to now open the conference call to questions for management. We encourage callers with questions to queue up with the operator as soon as possible, so there will be minimal lag time between each caller. Catherine, would you please instruct the callers how to queue up for their questions?

Question-and-Answer Session

Operator

(Operator Instructions). And our first question comes from Les Sulewski from Sidoti & Company. Les, go ahead.

Les Sulewski - Sidoti & Company

Good evening gentlemen, thank you for taking my questions.

Tom Brown

I think we slaughtered your name there, Les.

Les Sulewski - Sidoti & Company

Well, that's okay. So I just wanted to look at last year's quarter, do you have the percentage of total revenue from international?

Kathy McDermott

For last year's same quarter?

Les Sulewski - Sidoti & Company

Yes.

Kathy McDermott

Or last year's --

Les Sulewski - Sidoti & Company

Third quarter of last year.

Kathy McDermott

Yeah last year -- for the total year for 2013, it was about 59% international compared to about 82% for our year-to-date this year. The year prior to that, there was less, it was more like 35%, 37% or so. Year prior to that though, we had a large international MoD order, which bited [ph] up quite a bit in 2011. So it does fluctuate a little bit, but the last several years has been steadily increasing.

Les Sulewski - Sidoti & Company

Okay. And then in this quarter the $4 million that came in from Middle East, any of it remaining to flow into the fourth quarter?

Tom Brown

From that order, Les, no, but we are anticipating some additional business from that country. Probably, we will see something at our first quarter, but the product has been well received, and we did a complete one week training session here in San Diego for the team that's going to do the installation, and it very well, and we anticipate some additional business coming from that one.

Les Sulewski - Sidoti & Company

Okay. And your visibility on the fourth quarter then, do you have a backlog number perhaps? I know you have mentioned it, I believe for a year end, you don't do any quarterly backlogs, do you?

Tom Brown

We don't. We only do backlog at the end of the year.

Les Sulewski - Sidoti & Company

Do you have like an internal ones, nothing to give us though, right?

Tom Brown

No. Nothing that we give out. The only thing we could say is, the fourth quarter is off to a good start, and its timing issue, because we do a lot of build-to-order, and if the order is getting here in time, that we can get them built and shipped, we can recognize the revenue, otherwise it will flip into the first quarter, but we are not losing any revenue, its just a matter of timing of getting it in and out the door.

Les Sulewski - Sidoti & Company

Okay. So if I understand your prepared remarks clearly, you are looking a strong quarter in the fourth quarter, yet it could be maybe not as strong as the fourth quarter of 2013. Is that kind of the way to look at it?

Tom Brown

The fourth quarter 2013 is a real tough comp, because we did about $9 million of revenue and a $3 million of bottom line. But we are looking at a very positive fourth quarter, so we are not -- and there are still some orders that we are working on, and again as I said timing is -- if the timing is positive, it will be a very good quarter. But right now, it's going to be a good quarter.

Les Sulewski - Sidoti & Company

Okay. That's helpful somewhat. And then just one last one for me; what was the legal expense from -- regarding the lawsuit, and how much was it for this quarter?

Tom Brown

Actually it was last year, Les, and Kathy can give it.

Kathy McDermott

It was for last year, and so this year we have got, probably about -- on the quarter about a $400,000 reduction in expenses that we have last year, that we do not have this year.

Les Sulewski - Sidoti & Company

Okay. I see, that's helpful.

Kathy McDermott

And then year-to-date, about $745,000 that was down.

Les Sulewski - Sidoti & Company

So a run rate typically on a $8 million revenue line, would run somewhere around that 31% you would say in SG&A, moving forward?

Kathy McDermott

One of the things that fluctuates quite a bit is the commission expense. So commission, depending on whether we sell direct to our customers or we sell through resellers, it has an impact on our gross margin on the top line, and then it also affects our operating expenses. So that number can fluctuate a bit, and also the bonus expense can fluctuate, depending on where we are in hitting targets and so forth. So those are kind of the two big variables. The lot of the base expenses though are pretty steady.

Les Sulewski - Sidoti & Company

Okay. And maybe just one more then, a follow-up on that, what was the percentage that you sold through third channels?

Kathy McDermott

We don't really have that broken out. We do have, like for example, the $4 million with the direct sales, so we did have some additional commission related to that. So that's where we are reporting higher operating expenses as a result of commission, that's a big piece of that. Gosh, it's hard to say -- its hard to really break out what percentage is direct versus reseller, because it will vary on a quarter-to-quarter basis, it all depends on who the customer is, and what country.

Les Sulewski - Sidoti & Company

Okay. That's understandable. Thank you. Appreciate that.

Tom Brown

Thank you very much Les.

Operator

And our next call comes from Jonathan Manela from Rainmaker Associates. Jonathan, state your question.

Jonathan Manela - Rainmaker Associates

Thank you. Hey guys, great quarter. Apologize in advance, if my cell phone [indiscernible]. Kathy, did you mention share repurchase for the quarter?

Kathy McDermott

We did report that. The repurchases for the quarter was 123,000 shares, $227,000 worth of stock, and year-to-date $256,000, almost $0.5 million we bought back so far.

Jonathan Manela - Rainmaker Associates

Okay. And Tom, could you talk about your expectation for the Mass Notification business for 2015, as your expectation, maybe as a percentage of total business or could you talk about expectations in terms of top line revenue, as it relates to the opportunity for 2015? Just maybe some structure around that?

Tom Brown

Well Jonathan, the one city that I mentioned in the Middle East, if we are successful, and I think we do feel confident right now, but if we are successful, we will find out in the first quarter. We are talking about somewhere between $6 million to $10 million, just for that one installation. And our expectation right now, we haven't put together our plan for next year, we are working on that in the fourth quarter, but our hope is that we can get somewhere above $12 million next year for Mass Notification.

We are -- I am working on a -- there is going to be an RFP coming out within this month for a Southeast Asian country, for a tsunami warning system. I have meetings with our rep on Monday. So we are working on that, and that's very sizable.

So the Mass Notification business is really, the installations are, for the most part, really large, and the two cities, if we can dream, the two cities would total almost $20 million of revenue, so that we could blow away about $12 million. But we are looking at realistically, conservatively $12 million and we think we will continue to grow our LRAD business. We are getting very good response internationally, and hopefully, the army is finally going to come through for us. There is a budget this time, which we haven't had in the past. So we are feeling really good about the business. We are excited about 2015. We think we can grow it pretty substantially. We grew it substantially, and we think we can do it again. So we feel real good right now, and we have a real good team, which is a big change.

Jonathan Manela - Rainmaker Associates

Well sounds exciting. Sounds exciting Tom. Keep up the good work.

Tom Brown

Thank you, Jonathan.

Operator

And our next question comes from Anne Margaret Crow from Edison Group. Margaret, state your question.

Anne Margaret Crow - Edison Investment Research

Good evening. Thank you very much for taking my call, and congratulations on another great quarter. I got a couple of questions. Looking back through my notes from some while ago, I guess back nine months or so, you were very positive about what was happening in China, and within the oil sector, and also very positive about the prospects of Brazil. I was wondering, what has happened in each of those three factors over the last six to nine months?

Tom Brown

Well China, we are still very excited about, and we have achieved -- by the end of this month, we will have achieved -- over 10% of our business will be in China, and we have growing business, we are looking at a couple of good opportunities for -- beginning of the next year in China. So China has been very good for us, and it continues to grow.

In terms of oil platforms, we did submit and deliver a number of our units for a Nigerian oil company, and we just delivered some units this past quarter off the coast of Australia, for another oil platform operation, and we are bidding on a couple right now. So that business is still growing, and its looking good.

And in terms of Brazil, we are very disappointed. We felt that we had an opportunity to get product into the World Cup, and unfortunately that didn't happen, but we are meeting with the Brazilian army next month for an exercise, and we have made some inroads with the Brazilian police.

Unfortunately, a lot of these business development opportunities take a long time. As I mentioned in the fall, we have been working with the Coast Guard for over seven years, and finally it looks like they might be getting interested, but it takes a long time to develop these opportunities.

Brazil was a disappointment, but we have the Olympics coming up, so there is still some opportunities in that country.

Anne Margaret Crow - Edison Investment Research

All right. Okay. And I got another question, has there been any change in the competitive environment over the last six to nine months? Clearly, this is a good space to be in, you're doing very well. So I was wondering if that did distract anybody else in the market?

Tom Brown

Well, we do have some competitors, but we haven't seen any big changes. There is a couple of smaller companies that have been in the space for a while. We still, we have some competitors in China, some knock-off companies in China, but still, our business in China is growing pretty strongly. So we have to stay ahead of the game. Competition is good, it makes us more competitive, and keeps us on our toes, so that we keep in improving our product offerings, and try to stay ahead of anybody who tries to answer. But right now, we still have over 90% plus of the worldwide market, and unfortunately, we are at $17 million through nine months. So still, we are growing this market. We are the pioneers. We are the guys who started it, and we are the guys who are trying to continue to develop it.

So we are making progress, but I don't think we are at a level, that is going to generate any large companies who are trying to jump into this space right away.

Although the RFPs, if they do come out, I think we will see some additional competition. If we see an RFP from the army, early next year.

Anne Margaret Crow - Edison Investment Research

And then, my final question, looking through the Q1 commentary, and it mentioned that there had been a delay in an order from a national police force in South East Asia, because of a component supply issue, which of course is something you couldn't do anything about; and it was saying, that you were hoping to ship the order during Q2, did that happen?

Tom Brown

Yes it did. Yes it did. We are working on a future order from that same country.

Anne Margaret Crow - Edison Investment Research

Excellent. Thank you very much.

Tom Brown

Thank you.

Kathy McDermott

Thanks Ann.

Operator

(Operator Instructions). There appear to be no further questions at this time.

Brian Harvey

Okay. If there is nothing further, we'd like to thank everyone for joining us today. And if they have any follow-up questions, feel free to reach out to any of us in the coming days.

Operator

There appear to be no questions at this time.

Tom Brown

Okay. Thank you very much.

Kathy McDermott

Thanks everyone.

Tom Brown

Thank you for joining the call.

Operator

Thank you. This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time, and have a great day.

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LRAD (NASDAQ:LRAD): FQ3 EPS of $0.06 beats by $0.04. Revenue of $8M (+263.6% Y/Y) Shares +4.6% AH.