Image Sensing Systems ( Nasdaq - ISNS ) -- Red Light

Image Sensing Systems (ISNS $12.00) said Q1 results will be significantly short of its internal target.  Sales are likely to finish in the $6.0 million range, approximately $2.0 million below what the company ordinarily would realize.  A non-GAAP loss in the $.10 a share vicinity is likely to be reported, $.30 a share below normal.  External economic conditions were not responsible for the shortfall.  North American and European sales of Image Sensing's traditional machine vision systems remained solid.  Problems emerged in the company's radar unit, which was acquired in 2009.  The general manager of that operation resigned after completing his earnout.  Sales might have been pushed forward to achieve that goal, leaving an empty pipeline in Q1.  Image Sensing's high potential Asian business fell flat, too, leading to another management change.  A replacement still hasn't been hired so further soft results in that region are possible in upcoming periods.

The next generation "hybrid" intersection management system is on schedule for a Q2 release.  That line combines Image Sensing's machine vision technology with the radar capability to see the traffic situation in all kinds of weather conditions, allowing intelligent changing of the lights.  That product also may include the company's Citysync license plate reading technology, which allows police and security forces to track vehicles as they drive around town without an actual tail.  It also notifies officials when stolen cars and other on-the-lookout type vehicles show up on the grid.  That segment remains a modest part of the overall business but it's growing fast and could help leverage sales of Image Sensing's other offerings.

We are reducing our 2011 non-GAAP earnings estimate 25% to $1.00 a share.  (See "Accounting Notes.")  We also are lowering our 2011 sales estimate to $35 million.  A timely and problem-free hybrid introduction will be required to achieve those reduced numbers.  The hybrid line is unique in the industry and has the potential to reignite growth over the next several years.  The internal missteps should be viewed as a warning, though.  Aggressive investors are advised to close out positions until the management questions are resolved.  Value investors can take heart from the recent addition of Econolite's CEO and principal owner to Image Sensing's board of directors.  (Econolite is the company's exclusive U.S. distributor and is believed to control the largest share of the North American market.)

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