Thursday, May 5, 2011

Image Sensing Systems ( Nasdaq - ISNS ) -- Follow-up Report

Image Sensing Systems (ISNS $12.00) reported poor Q1 results, consistent with the company's earlier announcement.  Sales rose 14% to $6.14 million.  A loss of $.08 a share was incurred.  Performance in China, which represents a huge opportunity, was far below internal targets.  Image Sensing's radar line produced unusually low sales levels, too.  That unit was acquired in 2009.  A final earn-out was paid in Q1 based on results through December.  Sales might have been accelerated into Q4 to ensure the maximum bonus was paid, leaving the cupboard bare in the March period.  A separate acquisition, Citysync, which makes license plate reading systems, also suffered in Q1 due to high costs.  Image Sensing is working to improve that unit's margins but some lingering effects are possible in upcoming periods.

Financial success hinges on the core machine vision line (Autoscope) over the coming year.  That technology remains the industry standard and a series of upgrades has broadened the potential market.  Image Sensing markets the intelligent intersection management system in the U.S. through Econolite, which packages the line in more comprehensive offerings.  Sales in North America have been affected by the economy during the past two years but Econolite has kept the business moving forward with an effective marketing effort.  Image Sensing declined to say that 15%-20% U.S. growth is a realistic target in 2011, but we can't see significant reasons why it isn't.

Image Sensing's direct sales activities are more of a question mark.  The company has been unable to make inroads in China despite years of trying.  Its two acquisitions are producing lackluster results.  Sales in Europe are okay but nothing to be excited about.  So it will be up to Econolite to save Image Sensing's bacon this year.  A new hybrid intersection product that combines machine vision with radar is rolling out of R&D at long last.  But that system probably won't generate a material impact until 2012.  We are maintaining our 2011 sales estimate at $35 million.  We are reducing our non-GAAP earnings estimate by 15%, though, to $.85 a share, to reflect the unanticipated rise in expenses.  Aggressive investors should exit the stock until either the problems are fixed or the new hybrid line proves it will become a success.  Patient investors can hold on because downside risk is limited by Econolite's involvement.  

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