Brian Harvey - Director, IR Richard Danforth - CEO Dennis Klahn - CFO

Josh Nichols - B.Riley, FBR Steve Wagner - Wagner Financial

Good day, ladies and gentlemen and welcome to LRAD Corporation's Fiscal Year 2017. 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.

Thank you, Kat. Good afternoon, everyone and welcome to LRAD Corporation's fiscal year 2017 financial results conference call. I'm Brian Harvey, Director of Investor Relations and Capital Markets for LRAD. On the call with me this afternoon are Dennis Klahn, LRAD's Chief Financial Officer; and LRAD's CEO, Richard Danforth. In just a moment, Mr. Klahn will open today's call with a recap of our fiscal fourth quarter and 2017 financial results. Mr. Danforth will then provide an update on our business; afterward, we will open the call to questions. But before I turn the call over to Dennis, 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 as to historical facts, statements made during this call that are forward-looking statements are based on our current expectations. During this 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 potential risks and uncertainties, please see the Risk Factors section of the Company's Form 10-K for the fiscal year-ended September 30, 2017. LRAD Corporation disclaims any intent or obligation to update those forward-looking statements, except as otherwise specifically stated. I would now like to turn the call over to LRAD Chief Executive Officer, Richard Danforth.

Thank you. At our conference call last August, I introduced Dennis Klahn as our Interim CFO; in early September Dennis accepted a permanent position here at LRAD as its new CFO. Dennis brings a platter of experience in small and large companies, both public and private but predominantly public. He has been under a great deal of activity since he joined us and done a terrific job, we're all glad to have him. So with that introduction, Dennis?

Thank you, Richard. LRAD Corporation finished fiscal year 2017 with fourth quarter revenue of $7.5 million, a 53% increase or the $4.9 million in the fourth quarter 2016. Gross profit for the quarter was $4.4 million or 58.8% of net revenues, this compares to $2.3 million or 47% of net revenues for the fourth quarter of 2016. Operating expenses in the quarter increased by 53.4% from $2.2 million in the fourth fiscal quarter of 2016 to $3.3 million in the fourth quarter 2017. This is primarily due to higher incentive expense this year, higher commissioned expense related to increased sales in the period, expense associated with the implementation of a new ERP system and increased sales and marketing activities. The company reported net income of $166,000 or just under $0.01 per share for the fourth fiscal quarter in '17 compared to a net loss of $514,000 or $0.02 per share for the fourth fiscal quarter of the prior year. Revenues for the fiscal year ended September 30, 2017 were $20.3 million, a 24% increase over $16.4 million in the fiscal year ended September 30, 2016. Gross profit for the year ended September 30, 2017 was $10.3 million or 50.6% of net revenues compared to $7.7 million or 46.9% of net revenues for the same period in the prior year. The increase was primarily due to the higher 2017 revenue. Operating expenses for the year ended September 30, 2017, increased by 19.7% from $9.3 million to $11.1 million. The increase was primarily due to an increase in accrued incentive compensation based upon a team and the certain financial goals, an increase in non-cash compensation, investments in sales and engineering personnel and expenses related to the implementation of the new ERP system. Year-to-date, the Company reported a net loss of $877,000 or $0.03 per share compared to a net loss of $1.3 million or $0.04 per share in the prior year. We recorded income tax expense of $198,000 in fiscal 2017, primarily due to a change in the deferred tax asset compared to income tax benefit of $186,000 in the prior year. On our balance sheet continues to be strong, our cash and cash equivalents as of September 30, 2017 was $12.8 million compared to $13.5 million at the end of the prior fiscal year. The $700,000 decrease in cash and cash equivalents was primarily due to an increase in inventory and accounts receivable as a result of the higher shipments in this year's fourth quarter. Working capital increased at $2.3 million from $23.1 million at September 30, 2016, to $25.4 million at the end of September 30, 2017; primarily due to the movement of $1.5 million of long-term marketable securities into short-term securities plus increased revenues in 2017. In fiscal 2017, we did not repurchase any shares of our stock. However, the share repurchase program has been extended through December 31, 2018. With that, I would like to turn the call back over to Richard.

Thank you, Dennis, and good afternoon, everybody. We finished fiscal year '17 with a strong fourth quarter. Our bookings for the quarter were $12.5 million, and totaled $28.4 million for the fiscal year, that's a record for LRAD, a 195% increase over the prior fiscal year and more than the previous two years combined. This increase was led by North America achieving $16.5 million of bookings, up 166% over fiscal year 2016. In FY17 we received our largest domestic order, a $6 million U.S. Army order. This order was for more than 2 times that was originally budgeted for the army to buy in FY17. Half of this order is for a product that incorporates recent customer requested changes and is expected to deliver in our fiscal second quarter. The increase and the customer requested changes plus the army's completion of the operations and maintenance manuals, logistics and spares provisioning further demonstrates the army's commitment to LRAD. New customers accounted for $10 million of our $28.4 million in bookings, last notification, bookings were exceptionally strong increasing to $8.7 million from $1.6 million in fiscal year 2016. Off note, most of the mass notification bookings in fiscal '17 came through the channels originally developed to support the acoustic hailing device sales. Our revenues for the quarter were $7.5 million, a 53% increase from the same quarter a year ago and $20.3 million for the year, as Dennis said, a 24% increase from the prior year. We ended FY17 with a backlog that is orders to be delivered in FY18 of $11.9 million versus $3.1 million in FY16 over a 300% increase. Gross margins for fiscal Q4 was 58.8%, up from 47% to the same period a year ago. For the fiscal year gross margin was 50.6%, up from 46.9% in fiscal 2016. Operating income and operating cash for fiscal '17 improved to 54% and 42% respectively as compared to fiscal 2016. Q4 operating income was $1.1 million compared to FY16 Q4 of $163,000. For the year the operating loss was $808,000 compared to an operating loss of nearly $1.6 million for FY16. Cash at September 30 and equivalence was $12.8 million, after having a positive operating cash flow for most of FY17, in Q4 we ended with a use of $677,000 of cash. Our receivables were up $2.3 million from the same period a year ago reflecting the significant shipments of orders near the end of the fiscal year. In addition to receiving our largest domestic and national guard orders to date, in fiscal Q4 we received several mass notification orders that included mobile military systems, college cancers [ph] installations and satellite activated systems for our hydroelectric plant. Our acoustic hailing device order for the U.S. Navy and for public safety in Southeast Asia were also received. We expanded our mass notification product line in Q4 introducing the LRAD 360XL and the LRAD SoundSaber-X; orders for both of those systems have already been received. In FY17 we booked $10 million from new LRAD customers, $8.7 million in mass notification orders, realized bookings growth in all geographic sales region and our pipeline increased by 30%. We're making good progress in our growing and diversifying our customer base and our products offerings. In fiscal '18 we expect the U.S. Army to release an RFP for our multi-year program, this award is of course dependent on an approved FY18 defense appropriation bills. We're continuing to pursue global market opportunities for acoustic hailing devices and mass notification systems with the support of our expanded sales team and the 17 new domestic and international resellers added to our sales network last year. Increasing and strengthening partnership and pursuing acquisitions to broaden our product line are among our fiscal 2018 business priority. Based on the strong bookings trend, the significant growth of our addressable backlog and our recent order announcements were off to a strong start in fiscal year 2018 and positioned for growth in fiscal 2018. With that, I'll turn it back to Brian for Q&A.

Thank you, Richard. Kat, we'll now like to open up the conference call to questions. We encourage callers with questions to queue up with the operator as soon as possible so that there will be minimal lag time between each caller. Kat, please instruct the callers on how to queue up with their questions?

[Operator Instructions] And our first question comes from Josh Nichols from B.Riley, FBR.

I was wondering, seems like the business is on a good track here, could you talk a little bit about the direction you see the company moving longer-term as we look over the next, say 12 to 24 months?

I mentioned in my remarks Josh, our backlog is very healthy going into '18 to support the next 12 months of sales. The growth we have experienced in bookings, particularly in the mass notification area is very encouraging. As I said, we booked $8.7 million in 2018, that was up from $1.5 million in 2016. So we expect the mass notification to continue to grow; we expect to continue to grow our acoustic hailing device bookings and sales as well.

And then just looking here; just for housekeeping, when is the K going to be out, I guess…

It should be within the next day.

And you talked a little bit about some of the new resellers that you have, could you give a little bit more color and maybe quantify some of the specific areas of additional investment and like engineering regarding the acoustic hailing devices and mass notification that company has made and the traction you're seeing now that they are ramped up a little bit more?

Yes, so first rising to the resellers in the sales network. We added three direct sales people in 2017 and we added 17 resellers, the majority of those or 12 of those were in North America and 5 outside the U.S. It takes a bit of time for them to spool up but they all have pipelines that they are pursuing and we expect good things from them. In terms of the design activities that occurred during the fiscal year '17, we -- through the course of the year announced -- I think it was 8 new acoustic hailing device products and 2 or 3 mass notification system products, all of which have been -- all of which are products with systems that we have taken orders for in 2018 and 2017 [ph]. I expect that level of activity in new product development to continue from 2018 and beyond.

And our next question comes from [indiscernible].

Could you give me a little bit of color on how we're looking for the fiscal first quarter here given that we're almost done in terms of bookings activity?

That's a tough one, we don't give up guidance. So…

Are you more focused on fiscal Q2 at this point in terms of booking business?

No, we still have two weeks left in fiscal Q1 and we still have more to do but I don't think anybody will be disappointed.

Excellent gross margins that you just recorded for the fiscal Q4 here, any detail on what drove that -- I mean, is it a one-time thing or just -- with some efficiencies?

No, the gross margins have improved quarter-over-quarter through 2017. Obviously, Q4 had a larger revenue base so more base went through the factories which [indiscernible] in that resounding [ph] gross margin. But in addition to that, we've been very pleased with the gross margins we've been achieving with the mass notification product line. We did expect to see that more depressed than the actuals, in fact the actuals are coming in quite strong.

So if we see a bigger mix of mass notification, that's overall accretive to the gross margin for the business?

The more revenue, better the gross margin. So again, I -- from a directionality perspective, we look at the executable backlog, I want to -- what everybody know at the bookings were in Q1 and we're up -- as I said, we're off to a terrific start.

What was the split between mass notification revenues and you'd said our bookings came in at -- revenues and [indiscernible]?

I don't have that unless -- Dennis, do you have that handy?

I don't have the numbers in front of me.

I will say Greg, that it's -- the bookings is going to follow, we're going to follow bookings precisely. So our bookings for mass notification were 8.7 of the 23.4.

Okay, I'll use that as a rough benchmark. So the backlog that you gave us at the end of September, I assume all that's shipping in the current fiscal?

Yes, in fiscal year. What's the portion again, let me make sure.

Yes, the current fiscal year, yes.

The current fiscal year, yes.

Yes.

Not all Q1, only half?

Only half, right.

So in terms of fiscal '18 -- nice growth in fiscal '17, a little over 20%, I mean, is it unrealistic that you can't -- at least kind of be in that same trajectory and let all good things be talked about and the backlog is up 300%?

I'd say connect the dots and you'll get that answer.

How about on the inventory turns, any objective there or if you kind of built it up in anticipation of revenue ramp or it seems little…

Well, the inventory net went up approximately $400,000 for the year. And I can point to nearly $2 million in finished goods that almost made it into revenue but didn't make it into revenue in Q4. So I think our practices and as you've heard earlier, we went live with the new ERP system which is certainly a tool that help in material management, I think we'll continue to see improvements there.

And our next question comes from Robert Smith from Center for Performance [ph].

The order that you mentioned that's being attended upon the defense budget being improved; can you give us some kind of parameters on what is the opportunity there?

We've mentioned this before Robert but it's a multi-year procurement for AHDs for the U.S. Army, it will cover FY18 through FY22, we'll be at competition, however in a terrific position to win that competition but we must win it. And as I said in my remarks, we expect the government to put that order under contract in this fiscal year but it is dependent on the budget being passed and some of the very [ph] out of DC.

And it's size?

I won't know that precisely until we see it but it's size is intended to fulfill the requirement that is between 800 and 3,500 units.

And Robert, we don't want to get into too much pricing on that right now because we know some of our competition is listening to this call and we don't want to give them an idea on what we might be bidding.

And the next question comes from [indiscernible].

I'm wondering if you give me an idea of the size of the market and the products you currently have?

That's somewhat of a debatable item. So mass notification, this public information available that will size the market in the billions with a double-digit CAGR; so even if they are wrong by 50%, it's still a substantial market for LRAD to continue to grow into. The acoustic hailing device market; LRAD enjoys the position there, that would suggest that the more products and the more people we can put on it, the more market we will generate.

The sales are obviously ramping up, what's your ability in your cost of -- can you deliver a lot that's bottom-line?

Sure. Our labor content in our product assistance is relatively small, so our ability to ramp up is first and foremost a material management issue, and then for the labor, so space is a constraint here in this facility, the lease is running out and we will likely move to a larger facility to support the anticipated growth.

That cost a lot?

Everything costs out here.

Also, let's talk about your competition. Is there a new competition into the market? How severe is it and how much are you ahead of them, if at all?

Well, the competitive landscape hasn't changed, it's dramatically different in the two markets we serve and there has been no change to that since our last call in the recent past.

Well, I want to thank you. Last quarter is very encouraging and I hope it continues.

Your next question comes from Steve Wagner from Wagner Financial.

$7.5 million revenue in the final quarter but only $0.01; I know you mentioned an inner source resource planning software package. Was that the reason for it or was it some other accounting issue where the non-cash charges? Can you elaborate on why it wasn't more than $0.01 in terms of profitability?

The biggest challenge was the tax expense in the fourth quarter, year-to-date through June, through nine months of operations we recorded a tax benefit and at the end of the day when we trued up the tax accrual, there was actually tax expense of 197. So tax expense was $951,000 in the quarter.

Yes, prior to that tax expense we had generated over $1.1 million of operating income but because of what Dennis just discussed, there was $950,000 charge charged for tax.

Going forward, is that -- again, I'm not a CPA accountant, so apologize for the naivety perhaps in the question but it just seems like, with that kind of revenue we should have better earnings; I mean is this something that's going to continue in terms of what you have to report for taxes? I thought we had a significant tax loss carry forward, maybe just briefly clear that up for me, help me understand that from an accounting standpoint why would you need accrue for taxes when you've got a big carry forward that perhaps could be used?

Sure, no problem. Deferred taxes are a challenge for probably 105% of the population. It's an asset on our book at the present times, at the end of September it's $8.3 million, so we will continue to report income tax expense, however it will not be a cash charge, it will only be used to reduce that tax asset. It should be much smaller amount compared to income on going forward basis, this was really -- we had been taking, adding to that tax asset in prior quarters and as we look at it now, that most likely will not happen again.

Excellent, because axe that out -- I mean just a quick calculation in my head; I mean we would have probably been able to report what roughly $0.04 a share, right?

I've not done the math but certainly, right [ph].

And then again, look, I think we're all related not so much with the EPS but more importantly, the revenue, that's what the story is all about right now and that's just remarkable as is the kick-off to next year. The other question, Richard, for you would be; in past calls you've talked about one of your goals being in acquisition, can you give any indication or any idea on where you are in the stream of things there?

Steve, in the prepared remarks I told you that one of our business priorities for '18 is, we'll continue to be at the pursuit of acquisitions and we have been active in that since I got here and as soon as we close one we will let you know; that's high on my priority list.

I, for one feel, the move to a much larger facility can only be viewed as amazingly great news, so good luck on that move and obviously what you're doing; you guys are doing a great job and thank you so much for all your hard work.

That appears to be the last question.

Well, if you want to pull one more time, and if not, if no one else is there, we'll wrap it up.

[Operator Instructions] And someone did pop in there. [Indiscernible].

I did pound in earlier but I guess it didn't go through, maybe I was too quick. But anyway, I'm certainly glad to see the increasing revenue and new customers and orders, and thank you guys for the effort that it takes to accomplish what you've accomplished. What's going on with Homeland Security National Guard? Can you fill me in a little bit on our potential and where we are?

Sure. National Guard, we received the largest National Guard order we've ever received in Q4 and we've put a public release announcement out, it happened to be a brand new design mass notification system in keeping with a team of designing and selling pretty quickly. We will see additional orders for the National Guard this year and to standby for the press releases. In terms of DHS Homeland Security, we actually did book our first order for DHS, it was a small order but it was a start. Remember the DHS is budgeted in the same circumstances the rest of the DoD, so we'll see what 2018 brings for them but it will be much more robust than it's been at '16 and whether there is a wall, or another wall, I don't know yet but we are active with most of the wall manufacturers and we are active with the prime contract of that has the virtual wall contract for the southern border of the United States. So there is a lot of pots in the fire, so I think we'll see more and more bookings and revenue from that area in 2018.

What's happening with Japan; I know we were doing a lot of business with them, is that continuing?

It is. One of our other products we released this year, the SoundSaber-X as I know in some of our remarks, we took an order for over 100 for the Tsunami warning and mass notification in Japan. In fact, our direct sales guys in Japan this week, the orders in '17 were sort of consistent with what we did in '16 but we expect more in the near future, especially with the new product that we've introduced in the country.

Just my way of understanding that product a little; for now what we've been generally selling into Japan is the speakers that go on top of buildings or on top of poles. Japan also for each speaker that's on top of a building or a pole has tens dozens of additional line array speakers that we are now beginning to sell, so rather than just have that one that's on top of the building will be able to sell -- expand our product offering within that, so we think it's actually very exciting opportunity for us and that's why one of the reasons we developed this on Saber.

And also what's going on with China?

China continues to move along. I think we announced an order in Q1 for -- got to continue this to move along…

Does that mean there is a China order coming?

No. If there was anyone of any significance we would have put a press release out. We don't put releases out on everything but the significant ones we do.

It's nice to see the new orders coming in, some from new people and thank you for all your efforts and for the growth and continue a great 2018. Thank you.

And our next question comes from Paul Loki [ph] from Edge.

Lloyd took all my questions.

We're happy to repeat them, they were good questions.

Great quarter, great year, thanks for all your help.

Perth [ph] has another question.

I wonder if you could expand on talking about your competition a little bit; it's -- no people or new people into the market but is it extensive or big companies than…

Yes, they are all of the above; there is large publicly traded companies, there is small companies, there is companies in the United States, there is companies in Europe and elsewhere. So it's -- the robust feels of competitors in the marketplace.

Especially when it comes to the mass notification because that's -- we are a new entrant, we're entering with a better product that's starting to gain a little traction, whether it's college campuses, critical infrastructure facility as we're doing with the National Guard that we announced, mass notification for our National Guards; so that's a more highly competitive space but as far as the acoustic hailing device market, there are a few competitors that are smaller than us generally or at least the divisions of the companies that are competing against us are much smaller and one of the advantages we think we have in that and you've seen throughout the year we announced our largest National Guard order ever, we announced our largest army order ever, we're continuing to work with the navy and expanding programs with some of their fleet, and we're continuing to work with the marines which we announced. So within the U.S. military, we still dominate the market and that's the gold standard worldwide for acoustic hailing devices. So while there is some smaller competition out there and they do listen to our calls, we believe we continue to offer the best value proposition and then most importantly, the best product. And so while we see them in the acoustic hailing device market, we're not too worried about them but mass notification is a much more expensive set of competitors but we still believe we're competing with the best product.

Do you protect some of this or can you with patents?

Yes, for patents and company proprietary software and designs.

You're spending much money with your R&D?

Yes, we are and that was part of the expenses of this year was investments in engineering and R&D to produce the new products in the large percentage of our new products. I mean, new products made up a large percentage of our revenues this year, so we're very excited about that, new customers and new products came into LRAD this year and we're excited about both of those.

And the products that you're producing, are you outsourcing certain percentage of them or how much of it is done in-house?

As I mentioned a moment ago, the labor content for our products is relatively small. So it's a material management issue first and foremost.

The assembly is done outside; so it is…

No, not yet. It's done inside [ph].

Our next question comes from [indiscernible].

Going to the backlog, I think you said $11.9 million at the end of September, is that correct?

Yes.

Can you update that maybe to the end of November?

No, I had to do it too quickly. So -- our backlog continues to remain strong. We'll finish this quarter in two weeks and you will know what precisely it is.

And our next question comes from Greg Weaver from Invenka [ph].

Can you give a little color on go-to-market in fiscal '18; we talked a while back about how you're cleaning the channel out so and so forth. I mean are there any priorities here in terms of changes made, etcetera?

Yes, Greg, there are. I figured where it was last night but I'm sure I told you we have an active program to refresh and change out and add to our reseller network. And to that end in North America, we doubled the amount of resellers that we had in the past and swapped out some of the lower performing ones as well, outside the United States we've added 5 new ones and I think Greg will see that program continue.

Maybe tweak the sales comp plan at all to -- I don't, try to prioritize certain products or shuffle in terms of territories versus direct…

No, the sales comp plan is heavily, almost entirely weighted frankly on -- not entirely weighted on bookings and based on the $28 million bookings here. Again, one point of curve does not make a trend but the results were very, very good from a bookings perspective.

And our next question comes from Robert Smith from Center for Performance [ph].

I just want to congratulate you on a very upbeat nature of this call, it's been wonderful here and I also want to say kudos to the girl that's been sharpening the call because she is on a bang up job.

And the next question comes from Bob Stone [ph] from Investor.

I just have two simple questions; I don't know what an ERP is?

ERP is Enterprise Resource Planning, it's a software tool to run your business from receipt or order to collection of cash.

Thank you. The other is labor versus material management; I don't know what material management -- is that your raw materials?

If you look at typical LRAD product, those systems -- if it costs a $100, approximately 85% of those or $0.85 of that dollar will be bought as opposed to manufactured here. The 15% is all of the assembly and test.

That appears to be the last question at this time.

Okay, great. Well, everyone, thank you for participating in LRAD Corporation's fiscal year 2017 conference call. A replay will be available in approximately four hours through the same link issued in our November 28 press release. Once again, thank you all for participating.

Thank you. This does conclude today's conference. We thank you for your participation. You may disconnect your lines at this time and have a wonderful holiday.