Perceptron, Inc. (NASDAQ:PRCP)
Q2 2016 Earnings Conference call
February 9, 2016 9:00 AM ET
Dave Watza – Senior Vice President and Chief Financial Officer
Ric Marz – Chairman, Interim President, Chief Executive Officer
Bobby Burleson – Canaccord
Greg Palm – Craig-Hallum Capital Group
Good morning, ladies and gentlemen, and welcome to Perceptron’s Second Quarter 2016 Investor Call. Please note that this call is being recorded.
I'll now direct the call to Dave Watza, Chief Financial Officer. Go ahead, Mr. Watza.
Thank you very much, Cynthia. Good morning and welcome to our second quarter conference call. We appreciate your attention and interest in our business. Yesterday, we issued our release on second quarter results and early today, we filed our second quarter 10-Q. Both are available on our website at investors.perceptron.com.
On the call from Perceptron today are Ric Marz, Chairman, President and Chief Executive Officer; Song Chung, Chief Technology Officer; and Michelle Wright, Corporate Controller. But first I need to you inform that some of the materials that we will be discussing today constitutes forward-looking information under the meaning of the Private Securities Litigation Reform Act. Any forward-looking statements we make are based upon information we believe to be true as of today.
Please see the release and our SEC filings for information on the risks and uncertainties that may cause actual results to differ materially from the forward-looking information provided. The Company is not responsible for transcription of this call made by independent third-parties.
I’ll now turn the call over to Ric for some opening remarks. After which, I’ll come back to discuss the results in more detail.
Thank you, Dave, and thanks to everyone who joined us for today’s call. It now over just two weeks since the Board asked and I stepped into service President and Chief Executive Officer for Perceptron on an interim basis. In a moment, I’ll speak to the results of the first six months and Dave will certainly cover them in greater detail. I wanted to begin a little more broadly. Although, we spoke to some of you in a day or two after the announcement was made about my appointment, this is really the first opportunity for me to share, a bit more on my background and to revisit my view of Perceptron’s strategic position and opportunities. I also want to start to address our next steps.
First my background, I’m a veteran of the semiconductor industry having spent over 40 years at Silicon Valley, with some of the major companies in that industry. My experience was largely in sales organization management leading global sales teams, marketing, channel and design engineering teams. I’ve always been very customer focused and I think that’s an experience that can help Perceptron’s sales, sales for us in the future. I also manage the large P&L vertical unit in the network and communication space. I’ve served on Perceptron’s Board since 2000 and I’ve been its Chairman since 2008.
In 2013, I was involved in Perceptron’s Board decisions to set a new strategic direction. That direction included a plan to leverage our technology, our global footprint and our experienced workforce. Key to the strategy was always to sustain leadership in our significant auto sector, but secondly to drive growth in new end user markets. Past two years have been marked with substantial progress and the highlights include the Coord3 and the Next Metrology acquisitions giving us important diversification.
Continuing our focus on our deep red blue technology is a great determinant in our success against growing competition. New product introductions have continued including this week’s Expert CMM announcement. The Board has committed to the diversification of the revenue stream and we continue to make progress in new markets specifically consumer like goods and aerospace businesses. The Board also remains excited about this strategic direction in place and remains intent on moving forward this path.
We do however see the imperative to urgently focus on profitability and cash flow metrics. The Board sees my background well suited to just focus on areas that include development of an improved sales strategy and structure, better motivation and incentivation for the team, to assist in new product positioning and pricing, and certainly internal process improvement for the best practices.
Before I turn the call back to Dave for details and the numbers in depth, a few observations in my first two weeks. First we are fully aware that revenue and profitability for the six months are very short of expectations, that said elements supporting Perceptron’s long-term potential can be seen in the results. Bookings were a record for second quarter. Backlog is about $40 million for only the fourth time in our history.
Coord3 is contributing and contribution show it has exciting potential. As I mentioned before, we continue to see opportunities developing in new markets. But the areas where we need to focus are clear. First there is an external staying at top of the various global challenges that range from the Chinese economy to Brazil and the competitive issues facing our customers.
Plus there will be an increased focus on all the items that impact the middle everything that falls between the topline revenue numbers and bottom line income including optimizing prices so we’re being rewarded for value we’re providing our customers. Driving cost reductions in many areas including procurement, labor, and installation costs.
Eliminating non-value-added activities in every functional area ranging from R&D to operations, to sales, to marketing and administrative activities, make certain all of our people new and long time employees are empowered to question existing practices. Those things that we have “always done”.
And finally, looking today from the entire executive team, is to make certain we optimize our use of the new ERP system to help us make a management decisions brought earlier in to business cycles.
The board remains confident that Perceptron will be able to achieve double-digit revenue growth over the longer term while also improving profitability and cash flow. After Dave has covered the results, we will open the call for questions. Dave?
Thanks, Ric. Before joining for Perceptron last fall, I saw a lot of opportunity in the business, both in the products we create and sell and in the markets we currently serve. And the markets that would benefit from our technology and expertise. From my perspective that all remains true today. I’m looking forward to working with Rick and the executive team to help put Perceptron back on track toward that future. Turning to the results for the second quarter and six months unless or otherwise noted, my comments use U.S. dollars plus references to years will be for our fiscal year which ends in June.
Let’s first walkthrough the income statement and balance sheet, and finish with a few comments on bookings and backlog. First, the income statement, revenues for the three and six months was below last year’s levels. Despite the contribution of CMM products they added $4 million and $7.6 million in the three and six month periods.
As you know the CMM product line came to us in the Coord3 acquisition and has been included in our results of operations from the end of February of 2015. Excluding the new CMM product line, sales were lower than the prior year by approximately $10 million in the quarter as well as year-to-date. I’d like to give you some insight into the comparison.
In last year’s second quarter revenue, there were coincidently several large orders with customers in the U.S. and Europe. And they helped contribute to last year’s Q2 revenue of $23.6 million, which was a record second quarter. The next highest second quarter in our history was $17 million back in 2006.
The backlog going into last year’s second quarter was $49 million, which was an all time high for any quarter. And the backlog was reduced by $10 million during that quarter. Whereas in this year’s second quarter, the backlog increased $3 million and ended the quarter over $40 million only the fourth time in our history we’ve crossed $40 million.
The strength of the U.S. dollar against several other currencies had an adverse impact on the revenue comparison as well. The U.S. dollar versus the Euro had an impact of approximately, $0.7 million in the quarter and $1.3 million for the six month period. The U.S. dollar versus the Chinese Yuan, Japanese Yen and Brazilian Real combined had an impact of approximately $0.3 million for the quarter and $0.5 million for the year-to-date basis.
Moving down the income statement to gross profit and gross margin, the single most significant reason for the lower gross profit and lower gross profit margins was the lowest level of sales and the reduced absorption of our fixed costs. In addition, CMMs are sold at lower gross profit percentage as they have less engineering and design. That said we’re seeing gross margins increasing from the start of our ownership to our second quarter.
The strength of the U.S. dollar against the euro caused our products sold in Europe, to increasing cost by approximately $0.2 million in the second quarter and $0.5 million in the six-month period. We’re continuing to work on the ERP systems to allow better matching of revenue and expense timing.
As we move down the income statement to engineering and SG&A expenses a few comments on those. R&D expenses were just over $4 million for the first half of the year well at approximately 13% of sales and increase of $0.5 million over the prior year. Mainly for engineering materials for new product development and increased employee cost.
Sales and marketing expenses were $5.1 million for the first half of the year and increase of $1.2 million over the prior year. The increase is primarily attributable to our expansion into new markets including the CMM product line. We continue to invest in trade shows and advertising in support of our topline growth aspirations.
As you know, this ability is leading us into a few different industry verticals. G&A expenses were $5.6 million for the first half of the year an increase of $0.4 million over the prior year.
We’re a small public company with a footprint that covers 13 countries. This is largely a fixed cost that we need to address by growing revenues. And the primary reason for the increase was the cost for running the CMM business. This year, legal costs mentioned previously for plaintiff and defense of our proprietary information and a related dispute with a former contractor were approximately $0.3 million and $0.6 million in the three and six months period ended December 31, 2015.
Last year, the company incurred transaction cost for the acquisitions of approximately $0.7 million in the second quarter and $0.8 million in the six-month period ended December 2014. Further down the income statement the low operating income, net interest expense was a slight expense in the quarter and year-to-date. As we incurred interest expense related to some liabilities that came with our Italian subsidiary. Foreign currency was favorable to last year in the quarter by $0.4 million and year-to-date by $1 million.
The prior year second quarter had some significant transaction related FX impacts in Japan and Brazil, which did not reoccur in this year’s second quarter. The year-to-date change in FX was mainly impacted by the euro and the Japanese yen. The tax rate was approximately 28% in the current quarter compared to 33% in the prior year second quarter. The year-to-date tax rate was 29% compared to 28% in the prior year six-month period. Mix of income between countries is the most significant driver.
Moving over to the balance sheet, year-to-date cash and short-term equivalents are down $6.9 million to $8.7 million at December 31 from $15.6 million at June 30 year-end. The main uses during that period were as follows; $2.6 million to fund the net loss, net of $1.0 million for DNA, another $1.5 million to fund the increase in inventories. $1.1 million for the payout of compensation related to compensation related accruals and the use of $0.8 million as we paid off a proportion of the long-term liabilities related to the Coord3 acquisition.
Finally, about $0.4 million in payments for European tax liabilities. As of now, we have approximately $3.5 million of customer payments that we are awaiting proper paper work with a local taxing authority. I’d like to add in my comments just some color on bookings and backlog. These two metrics offer the best insight into the health of the markets Perceptron is addressing as well as the demand for our products, which will impact Perceptron’s future.
Of note, bookings for the quarter were second quarter record and exceeded $20 million for only the fourth time in our history. CMM bookings in the quarter were $4.8 million was $1.1 million in the Americas, $3.5 million in Europe and $0.2 million in Asia. Asia bookings were behind prior year and we believe that customers are deferring orders not cancelling due to the issues in the Chinese economy. Bookings in Europe grew despite the currency headwinds of the euro, which was approximately $0.9 million for the quarter and $1.5 million for the six-month period as compared to the prior year periods.
The impact of all the other currencies was less significant at approximately $300,000 for the quarter and $400,000 for the six-month period. Backlog shows the pipeline and crossed the $40 million for only the fourth time in our history. Perceptron history says that 99% of the backlog, the backlog dollars converts to revenue over the next 18 months typically less than nine months.
I would describe the quarter as a transition, but we’re excited by what we see ahead. There is another observation to make from my seat. The finance function can contribute to the overall objectives by helping to optimize the efforts by making sure our teams have good data and by providing the necessary support and we’re on that.
With that, I’ll the call back to Ric.
Thanks, Dave. A few points in summary, again, as Dave said our external business will continues to be very positive. The strategy, I believe is very sound, we will – however continue to make course corrections as required.
We are launching multiple efforts to concentrate on internal cost savings initiatives and margin enhancements and I think the most important thing shareholder value in really continues to be our most significant forward focus.
At this time however, I’m unable give any future guidance, our Q3 revenue or beyond it and it is just too many moving pieces in this period of time, I think the only think I can do is, boy our confidence and the fact that the customers support and order business range continue.
With that I would like to open, for Q&A.
[Operator Instructions] we will take our first question from Bobby Burleson from Canaccord.
Yes. Good morning. Ric and Dave.
Good morning, Bobby.
Good morning, Bobby.
So, I guess, it’s sounds like we’re not going to be able to have guidance here and understand it’s a very uncertain environment, but you talked about backlog conversion happening within a few months most of it usually within nine months. Can you kind of just walk us through, what areas of your business might be tracking like to the 18 months versus the nine months so like, if you are talking about delays from some customers are there areas within your product line or geographies and or customers that are more cautious than others. Areas where you feel more confident than others? Can you give us just little bit more color on where you feel you have higher confidence and where you might have lower confidence in this environment?
Thanks Bobby. Looking into a bit of pick on that, as Dave said that, the solid aspect of our backlog is at 19 something percent eventually turns into revenue. So we don’t have, what I consider a perishable backlog, we do have a long order cycle. So however, that require a lot of upfront engineering, leading to extensive installation and acceptance by the customer testing. So it may be as in appropriate to – we are not talking about elements of our business to maybe in the future, will try to give you better look at how that is aging.
And what our expectations are for that revenue to fall into the bottom line overtime. Their aspects of our business particularly in the CMM business that can be relatively short almost churns oriented that is booked and shipped within the a 90-day period. That’s very different in the inline businesses that we have majority of our activity focused in.
So it was a good question. I don’t know if that give you the answer, but we have every reason to believe that the large size of the backlog at over $40 million probably suggests that you will see dramatic shifts in the quarterly income going forward. It would be an unusual situation, in which we can’t even foresee at this point in time.
Okay, great. And then I guess with – if you look at China in particular, you had some kind of lower cost solutions that were gaining traction there and I’m wondering if we can get an update on that, to that area where you’ve seen a push outs or you still see positive momentum in some of those new efforts.
Well. I think from what I see and this is kind of limited because this is a two-week absorption cycle, China inherently is a highly competitive market. And while we may see some movement towards low cost offerings that still shouldn’t – not allow us to make sure that those are good margin generating opportunities. Certainly it probably goes for the Indian market as well. So we’re going to look closely as I said in my original comments all of the working pieces that go into cost containment as well as importantly selling value on the front end and even if it’s selling value on lower end less complex products we have to preserve the ability to drop to bottom line.
Sure. And then just another one in the customer topic. Your largest customer, [indiscernible] prognosis there was getting a little better overtime versus the emissions announcement several months back in prior management kind of indicated that there wasn’t that much of a drop off from that customer and in terms of activity. Is that still kind of a take home thing that there hasn’t been a precipitous drop off in quoteactivity in just general kind of business activity with that largest customer?
Yes. I think that continues we’ve recognized there are time constraints inall of these things with our customers, decides the long order periods maybe there is a lot reaction periods, but today we have not seen or been discouraged by any changes with that customer.
Great. You mentioned taking a look at kind of being very efficient on spending and how you allocate R&D. If there are lot of regular room there just your initial take on that. Could there be substantial savings going forward or these just kind of modest kind of raining in the expenses.
Well. I’d like to take that when the new rise come in at this level of detail, they see things that become very obvious to a third-party or new individual. I see them as a result of may be the long history of the company organizational development the fact that we operate a little bit differently across geographies, some are local culture. But I think there is a great opportunity for internal process re-engineering. And it’s not just we’re going to buy smaller boxes of paper clips. In the future, we’re looking at substantial kinds of very, very big issues that really contribute to the GSA numbers and the number you see and more the indirect expenses throughout the world.
And each part of the globe operates little bit differently. Dave is working very closely with native. If you understand where we think the issues are and those issues all become opportunities. So I think it’s more than just a one belt tightening notch here that we’re potentially going to be able to derive. At the same time really improve the overall best practices of the company. So I see two benefits coming out of this. One immediate, which is going to help the bottom line, one which is a much more future oriented, which will help the company continue to be more competitive as we go in.
Okay, great. Thank you.
Thank you, Bobby.
[Operator Instructions] We’ll take our next question from Greg Palm from Craig-Hallum Capital Group.
Good morning, guys. Thanks for taking my questions.
Good morning, Greg. Thank you.
Good morning, Greg.
May be big picture question for Ric. You briefly touched upon this, but what are your most immediate priorities here. I mean is it continued revenue growth, is it diversification or may bring the business back to profitability.
Okay. So I’ll just may be a front to back or prioritization kind of thing. Certainly, we can’t ignore the rapid change in cash flow. And so they are going to be tourniquets and they are going to bandage, that’s not a bandage item. So Dave is working very, very diligently to make sure that, that is being scrutinized. And so we can start to reflect some changes, I mean even in the immediate quarter. However, we have to do something’s in parallel and I think those address more of the best practices, the internal flows, each organization looking into their own to see where we can either reduce, spending, and or retrain, re-channel, human resources in to areas where they can better benefit the company. And as time goes on I mean things just kind of pop up that I didn’t know that was happening once put somebody on the out and knock that one out.
So I see a target rich environment for opportunities there. In fact, I think the prioritization or the triage is just going to say, hey, let’s solve the biggest problems that have bigger solve first with an eye of saying and by the way do they bring the greatest amount of value when it comes to ordering them. So that’s the one thing that really drives me, but very positively is seeing all the opportunities to do some simple things. As somebody new coming in from the outside questioning, why do we do that? Why do we do it that way? And more importantly, why do we do it at all?
So I think there is a lot of the built-in inertia that’s – doesn’t well aimed and well attentioned and may be was significant and important at some point in the past, but I have to question whether it’s going to be important in the future.
Got it. And just sort of more selling on the profitability line, any thing structurally different on the gross margin line. Just trying to figure out how much of the weakness here in the first couple quarters, is just due to mix in revenue rec. And may be secondly, on the past, when there has been sort of a few quarters of gross margin weakness in the row. There has been a big bounce back in the following quarters. Any reason you won’t expect that to happen here in the second half of the fiscal year?
Yes. We are sorting lot of stuff here, right now. But I think I’ll ask Dave to may be just comment on some of their recent quarter’s topline.
Yes, Greg. That’s a tough one from being here for just over four months. I have to look back at a lot of the quarters and the gross margins and the lumpiness. And I guess, but I’d tell you, as we move forward with ERP that’s going to help us quite significantly get better visibility on margins. I have to believe it’s a mix issue and a bit of revenue recognition issue. But I’m not positive that said. I do know that the sales volumes being down compared to last year is a big deal. And I do know last year’s gross margin percentage was a pretty high one as well in the second quarter?
No, that’s helpful. I mean you’re not seeing any competitive issues though or you’re having a discount or anything like that?
Yes, sure. There are always competitive pressures on an order by order basis. And I like to say that – in my experience and I’m going to certainly point this out to the teams and the sales organization. As we have to be reasonable for doing this slightly better job really getting our value message out for our customers. In some cases, we will be having too good a product with too many features and we got a closer look at that. I don’t want to start de-featuring products when they can be important to the customers in the future. And it rather have the talents to convincing them. But he’s got to make that investment now, which will enhance the overall gross margin on new business book and I think I have a lot of experience in that area.
Okay, thanks. And I guess just lastly from me. On the CMM business, another good quarter and really nice bookings there for the outline. When that business was acquired about a year-ago, I think one of the immediate priorities was to get that product in front of Perceptron’s core customer base and also in front of the new – some new customers as well. So where are we there, are you starting to see some traction?
I think, we are, certainly, it was a very different metrology industry when you look at the CMM business. But when we looked at it – we looked at it really as a synergy opportunity. And that is – I think the accepted and predictive, stability, accuracy, et cetera, in industry that we had participated in. And saying how can we add our technology and our value with outstanding and laser capabilities to actually create a new product entity that is starting to emerge not only here, but a few other areas. I think we were early on to do that. And I think our basic laser technology is certainly enhanced compared to a lot of competitive offerings. And so that has opened up new business opportunities for us as we’ve mentioned particularly in the aerospace area for example.
Thank you, Greg.
That is all the time we have for today’s question-and-answer session. Mr. Marz, at this time, I’ll turn the conference back to you for any additional or closing remarks.
Thank you, operator. At this point in time, I just want to thank everybody for participating in the call. I recognize that there is a lot of new question and we don’t have the answers for today. Frankly, there is a lot that I am questioning and don’t have the answers for today, so looking forward to the next call. Thanks so much.
That concludes today’s conference. Thank you for your participation.
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