Q4 2005 RAE Systems Inc Earnings Conference Call - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

OPERATOR: Good day ladies and gentlemen. Thank you for standing by. Welcome to the RAE Systems fourth quarter 2005 results conference call. My name is Angela and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to Mr. Bob Durstenfeld, Director of Corporate Marketing. Please go ahead.

BOB DURSTENFELD, DIRECTOR OF CORPORATE MARKETING, RAE SYSTEMS INC.: Think you Angela. Good afternoon everyone and thank you for joining us today. With me are Bob Chen, our CEO, Don Morgan our CFO and Rudy Mui, our COO. If you have not seen the earnings release, it can be retrieved from our website at www.RAESystems.com or from Business Wire, Yahoo! finance or similar websites. If you would like to hear a replay of this conference call, it can be retrieved later today from our website at www.RAESystems.com.

Today, Bob Chen will discuss the fourth quarter 2005 highlights and our revenue guidance for 2006 as well as our product and marketing strategies. Don will review in detail the financial results for the fourth quarter ended December 31, 2005. Before the Q&A section, Bob will provide a business summary.

Before I turn the call over Bob, I would like to remind you that matters we will be discussing today will include forward-looking statements and as such are subject to risks and uncertainties. And the assumptions could prove inaccurate or incorrect and there can been no insurance the results contemplated in the forward-looking statements will be realized.

Actual results may differ materially from those stated in the forward-looking statements based on a number of important factors in risks which are more specifically identified in our most recent Form 10-K and 10-Q filings with the SEC. Bob Chen, go ahead please.

BOB CHEN, CEO, RAE SYSTEMS INC.: Thank you Bob. Good afternoon. We're pleased to announce another quarter of solid revenue growth for RAE Systems. First, I will provide a brief summary of the financial highlights and a business update. And then our CFO, Don Morgan, will elaborate further on the financial results.

For the fourth quarter of 2005, revenue was $18.3 million as compared to revenue of $15.0 million for the same quarter in 2004, an increase of 22% over last year's fourth quarter. Income before taxes and minority interest for the quarter was $486,000 compared to $685,000 for the fourth quarter of 2004. Net income for the fourth quarter of 2005 was $283,000 or $0.00 per diluted share, as compared to net income of $379,000 for the same period in 2004 or $0.01 per diluted share. The balance sheet remains strong with cash and investments totaling $29.5 million and $1.7 million in debt as of December 31, 2005.

Now, I want to give you a few of our business highlights from the fourth quarter. Some of our Americas fourth quarter business included the sale of our 500th area rate network, the introduction of the first intrinsically safe radiation detector for first responders, the GammaRAE II. Area rate networks were deployed at the major league baseball World Series and playoff games as part of the public venue protection.

After Hurricanes Katrina and Rita, RAE Systems donated MultiRAE Plus, 5-gas with PID monitors, consumables and spares in addition to units that were purchased for the toxic cleanup and restoration effort. Several U.S. oil refineries deployed RAEShare, our Internet portal with the multiple area rate networks for simultaneously monitoring of [compliance] space during plant turnarounds. And the Las Vegas and Detroit Police Department bought AreaRAE Rapid Deployment Kits with PlumeRAE to protect the visiting public. The Detroit Police Department deployed the units during the NFL's February 5, 2006 Superbowl.

In Europe and the Middle East, our fourth quarter business included the purchase of QRAE Plus units by the Warsaw Gas Works in Poland to monitor for gas leaks. A major environmental company in Italy purchased the MiniRAEs for soil contamination cleanup. The Dutch utility company, Eneco, bought QRAE Plus units for leak detection and work safety. And the Israeli Air Force selected RAE Systems Wing tank entry kits for flight line and Fleet maintenance.

In Asia, our fourth quarter business included a purchase of ppbRAEs by the Canon Corporation for ethane analysis. The purchase of QRAE Plus units by the Hong Kong Lights and Power Corporation for worker safety. A major environmental cleanup site in northeast China purchased ppbRAE for their capability of detecting low levels of dangerous volatile organic compounds. The Shanghai Police and Shanghai Fire Department's special rescue team purchased GammaRAE IIs for radiation detection to protect a city of 14 million people. The Chang Quing oilfield in Xian, China purchased fixed system RAEGuard detectors and controllers to monitor various toxic gases in one of the largest petrochemical reserves in the world.

During the fourth quarter, sales in the Americas represented about 49% of our total business -- still our most important market. Our overseas business continued to grow, particularly in the far east, and Asia now representing approximately 41% of our total business in the fourth quarter 2005, up from about 35% in the fourth quarter of 2004 and up sequentially from 34% in the third quarter of 2005.

Total international sales represented 51% of our business this quarter, up sequentially from about 43% of our business in the third quarter of 2005. The primary driver for this success in international markets continues to be our investment in China through our 64% ownership of KLH. We believe the total global market for our product is about 40% in North America and 60% in the rest of the world. So our work to continue the expansion of our overseas business is important to our success.

For total year 2005, we achieved the top end of our guidance, coming in at $60.3 million in sales for the year, a 33% growth over 2004. This growth included KLH sales of $18.0 million for twelve months of 2005 compared to $7.9 million for seven months in 2004.

On a total year basis, 56% of our business came from the Americas and 33% in Asia, with the remaining 11% coming from Europe. Because of seasonality in Asia with a typically very strong fourth quarter, we think that the total year business percentage are more representative of our geographical sales distribution.

I would now like to turn the call over to Don Morgan, our CFO, for the financial review. Please go ahead.

DON MORGAN, CFO, RAE SYSTEMS INC.: Thank you, Bob. As Bob mentioned at the beginning of the call, for the fourth quarter 2005 our revenues were $18.3 million, an increase of 22% over the …