Transcript of the Q1 2008 CC
If I knew for sure who was talking, I put his name. Otherwise, just A for Answer. Also, I missed the very first part, so it starts in the middle of one of the CFO’s sentences.
Mike did an excellent job of pulling out a lot of specific facts and figures from the CC in his posts # 306, 309, and 311. As I listened to the call over again, I realized there are a lot of other positive aspects and statements that are worth highlighting. Some of those statements are in this first section of excerpts.
The full transcript is below these excerpts.
EXCERPTS
1. Base Business, Reorders
From Tom’s opening remarks, concerning the fact that their average invoice is $9,600: “What that tells me is that we’ve built up a base, we’re getting repeat orders, we’re getting orders every day. It’s becoming our base business if you will, and it’s very repetitive in nature.”
Stan’s opening remarks: “The thing that I take away from it and enjoyed seeing is that we’re up to 1,700 customers, and a lot of those customers have just made their initial orders.
Ken in Q & A: “I think this quarter we almost had 2/3rds of our orders were repeat business from customers that have bought from us before.”
“We have got, I think, six to eight under state contract. Four of those, Highway Patrols that we are on multiple-year contracts that we expect to outfit if we haven’t already all of their police vehicles as evidenced by the continued reorders from the West Virginia State Police, the Arkansas State Police, and some others that we expect later in ’08.”
2. Gross Margins and Lack of Pricing Pressure
From Tom’s opening remarks: “Internally, we’re looking at 60% as a good guideline for us for acceptable gross margins. We haven’t seen pressure on the topside in terms of pricing. We’re getting some leverage on our cost of sales, and we’re getting some supply chain improvements, so we’re hopeful to be able to improve that margin down the road.”
Stan opening remarks: “And we also like this model for to be able to go out and show and have people back into some numbers because we think that there’s still quite a bit of room for improvement.”
3. Operating Margin
Tom opening remarks: “If you recall in our previous teleconferences we’ve issued guidance that we were comfortable that the operating margin would be at 21%, which was equivalent to what it was in the fourth quarter of ’07. We actually reached 29% operating margin in the first quarter of ’08, so quite an improvement on that, and we hope that can continue.”
4. Inventory Reserves Pointing to Improving Current Products, Also New Products
Tom opening remarks: “The primary reason for those reserves are the fact that we are actively improving our products, introducing new generation products, and therefore we’re obsoleting some our own products and components.”
Later: “Incidentally from first quarter of ’07 we tripled the size of our engineering staff and we – that does not include a couple of contract engineers that we employ as well. So we’ve invested heavily in the engineering side and we hope that the products they’ve been working on will come to market very soon.”
5. Quality
From Tom concerning warranty reserves and product returns: “We continue to see very, very good results and indications that our products are not being returned. Our return percentage of cumulative units continues to decline quarter after quarter.”
Stan in the Q & A: “I mean sometimes they talk about us, you know, there’s been talk about a tremendous amount of returns we’ve been having. That’s just not the case, either. I mean we’re probably – our warranty work is probably 1%. And it’s just a low number. And a lot of times that’s due to the fact that someone may have installed the flash card wrong. I mean it’s more human error than anything.”
6. DVM-250 Market Penetration
Stan in Q & A “…we believe that we can be very, very effective in getting a piece of that market.”
Stan later in Q & A: “It’s actually a lot larger than the law enforcement obviously…. But we’ll be able to get into that market fairly quickly. We have our eye on several key personnel that would come on that has already been in that particular market that would be of benefit to us.”
Stan in Q & A concerning insurance companies: “I think the DVM-250 is probably going to open up that market even more. It’s actually in a lesser price range and it has just enough features that the insurance companies would want, so it could open up a totally different market than what we’re currently addressing.”
7. Reliability of Their Projections
Stan in the Q & A: “There is, as you know, in this business you do have a little bit of insight into what the future holds because of the way the bidding works and how many units out there and you somewhat know even when their money’s coming in.”
And later concerning the 21% operating margin they projected: “I think you could throw that out the window I mean that’s why I was trying to – the reason that we picked the 21 is because we had evidence that we were going to hit that. Now, again, that number was a fourth quarter number. And we had a pretty good idea that it was going to be substantially higher, but we didn’t have anything we could sink our teeth into that, you know, with a lot of credibility to it until we actually did it.”
8. Larger Municipalities and Government Agencies
Ken in Q & A: “One of the reasons, again, in ’07 and really actually early ’08, the larger cities, most of them have been interested in a wireless downloading option, which in ’07 we did not have. We introduced it late in ’07 and are now in various test and evaluation departments – the larger ones around the country with the wireless downloading option available as well as a network backup of software.”
Ken in Q & A re Homeland Security and other government agencies: “I mean, again, the wireless download feature is something that even they were wanting to see come to the forefront.”
Stan in Q & A: “We know we will be very competitive when we go to the bigger municipalities and government agencies and we’ll just see how it plays out.”
9. Getting Known in the Market: Just Reaching that Threshold
Ken in the Q & A: “And in this marketplace it does take a year or two, maybe three before you really get known. And so every day, every month, we get better known out there. Word of mouth advertising is paying off for us.”
Stan in the Q & A: “So we’re getting out there, and as Ken said, the name’s starting to carry itself to where people are not needing to set there having units evaluate and test. They know that the department down the street has it, they’ve heard great things, and they want some.”
Stan in the Q & A: “I’m optimistic. I’m very optimistic. I mean, just because of the fact that is sort of truly going to be like our third year, we really should be getting some momentum with the DVM systems that we have currently out there. And so ’09 ought to be a lot of fun. Let alone the fact that we’re going to have three additional products out there.”
I wonder which one is Ken.
TRANSCRIPT
DGLY Q1 2008 CC
April 30, 2008
STAN ROSS, CEO
KEN McCOY, VP of Marketing
TOM HECKMAN, CFO
TOM, CFO
,,,revenues 22%. Gross dollar change of 1.5 million. The thing I key on there is that we increased sales by $1.5 million and our operating increased by over $1 million. So the leverage we’re getting on our infrastructure is just tremendous and we’re dropping dollars to the bottom line.
The increase – let me talk a little bit about the revenues. The fourth quarter was dominated by that international order that was shipped in December. Well over 50%, well over 70%, of the fourth quarter sales was international in nature and therefore the lower margin on that. In the first quarter, it reversed, our domestic sales was 88% of total sales. Our average invoice was at $9,600, which is roughly 2 to 3 units. What that tells me is that we’ve built up a base, we’re getting repeat orders, we’re getting orders every day. It’s becoming our base business if you will, and it’s very repetitive in nature.
From there I look at the gross margin that we generated. I want to look at last year’s first quarter of 57.8%. We improved to - I’m sorry – the fourth quarter of ’07 was 57.8%. That included the international order. We improved that to almost 62% in the first quarter of ’08. A good improvement. Internally, we’re looking at 60% as a good guideline for us for acceptable gross margins. We haven’t seen pressure on the topside in terms of pricing. We’re getting some leverage on our cost of sales, and we’re getting some supply chain improvements, so we’re hopeful to be able to improve that margin down the road.
From there I look at the operating expenses. Operating expenses totaled $2.8 million for the quarter. I’m going to look at the changes. R&D actually declined about $25,000 when compared to the fourth quarter. Really the fourth quarter had some abnormal expenses where we purchased some outside R&D to look at some go/no go analysis on some critical product improvements and some new products. So this quarter was more or less – it didn’t recur this quarter, so basically people costs and our R&D effort. So 400,000 – 430,000 seems to be a pretty good base for us for the year upcoming.
On the stock compensation line, it declined $230,000. Tomorrow at our Annual Meeting we’re asking shareholders to vote and approve an option plan for the 2008 year. Assuming that is approved, then we will expense the option expense, the stock compensation expense, from that point forward. So the first quarter was relatively light on stock compensation because of that. We expect it to come more in line with prior years and prior quarters later on in 2008, assuming the option plan is approved tomorrow by the shareholders.
After that, $347,000 increase in commission expense. That’s expected because the fourth quarter was the international sale, which we have lower commissions. The first quarter of ’08 was primarily domestic sales, which we pay full commissions on.
If you look at the operating income line, that line is fairly exciting to us. We had almost $2.5 million in operating income for the quarter. That compares, and I’m looking at the whole year of 2007, we had $2.8 million of operating income for the full year of 2007. We nearly matched that in the first quarter of ‘08, so that’s an exciting look.
If you recall in our previous teleconferences we’ve issued guidance that we were comfortable that the operating margin would be at 21%, which was equivalent to what it was in the fourth quarter of ’07. We actually reached 29% operating margin in the first quarter of ’08, so quite an improvement on that, and we hope that can continue.
If you look at the income tax expense line, we provided income tax at 33.5%. Most of that is non-cash from the standpoint that we had some NOL carry-forwards that we utilized coming into this year and then also we have stock options that are being exercised that create non-cash deductions for us on our tax return. So although we did provide $846,000 worth of taxes in the first quarter, that is primarily a non-cash charge at this point based on where we’re at.
In the press release we also put in adjusted EBITDA, which is a non-GAAP measure. We internally look at that as a good indication of how healthy our business is. It’s basically our cash earnings as we look at it. It reached 2.75 million for the first quarter of ’08, or 32%. Looking at prior year, I’ll walk this up from the first quarter of ’07 and go quarter by quarter. We were 739,000 in the first quarter of ’07, or 22%. 841,000, or 22% in the second quarter. 1.2 million, or 24% in the third quarter. 1.9 million or 28% in the fourth quarter. And now of course we’re 2.75 million or 32% in the first quarter of ’08. So we’re seeing our earnings magnify. It’s translating into cash earnings, which is evidenced by the adjusted EBITDA line and we’re very pleased with that metric.
And the bottom line, we earned $1.7 million for the quarter, which is almost 20% of sales at the net line after tax, translated at $.12 per basic share or $.10 per diluted share.
Now turning to the balance sheet. I’ll point out a couple of items there. Our balance sheet continues to improve. Our working capital is now over $10 million at the end of the first quarter, that’s up $3 million from the end of the year. Very healthy. The primary increase is in the working capital area, Accounts Receivable. Accounts Receivables increased 2.5 million and that’s primarily because at the end of the fourth quarter of ’07 we shipped the international sale and _____ a lot of backlog into the first quarter of ’08. So we shipped that backlog and now receivables are at a more normal level of $3 million. Incidentally our days outstanding in receivables is 32 days. So that’s a very good measure for us, 32 days in collection in receivables.
We continue to have good experience from a bad debt perspective. You’ll notice that our allowance for bad debts is at 30,000, a slight increase from the end of the year, 12/31/2007. We continue to see turnover in receivables and no real significant issues in collection.
If you look at inventory, inventory increased about 300,000. Incidentally, we did increase our reserve by about $70,000 from the end of the year. We have obsolescence reserves and excess inventory reserves of 266,000 at March 31, 2008. That’s about 8% of our gross inventory balances, so we believe we’re pretty conservative and pretty healthily reserved there. The primary reason for those reserves are the fact that we are actively improving our products, introducing new generation products, and therefore we’re obsoleting some our own products and components.
On down the line. If you look at Accounts Payable, the interesting thing there is Accounts Payable was reduced by 110,000. The beauty of that is that because of our significant cash balance we’re able to go and negotiate with vendors, significant vendors, which we did at the end of the quarter, and negotiate cash discounts with them. In essence what we did is we paid several large vendors about 20 or 25 days before they were due and got a 3 to 4% discount, cash discount, so we thought it was a pretty wise use of our cash. And we still have healthy cash reserves at the end of the quarter.
Accrued Expenses increased about $380,000. The important thing in the accrued expenses is that our warranty reserve, our reserve for warranty returns net, was slightly down from the end of the year. We continue to see very, very good results and indications that our products are not being returned. Our return percentage of cumulative units continues to decline quarter after quarter. We’ve got up over 8,000 units in force or in the field right now, and if you think about it we did provide a two year warranty and we shipped our first units in the first quarter of ‘06. So every unit we’ve ever sold has been under warranty. Now they’re going to start rolling off as of the second quarter of ‘08. So very good experience on our warranty returns. And therefore we reduced our warranty reserves just slightly. I think it’s roughly $200,000 at the end of the quarter.
The big change, though, the big increase in accrued expenses is payroll and commissions payable. We changed the way we pay our payroll from twice a month to every other week so that created an accrual that we didn’t have before. Our commissions were up because at the end of ’07 we had just shipped the international order, which we had very low commissions on, and then at March 31st of ’08 we had regular sales, domestic sales, which we had full commission _____ on those.
The other item I’ll mention is, customer deposits did decline about $220,000 from the end of the year. That’s primarily because we did ship the backlog from the end of the year and at the end of March 31, 2008 we were virtually caught up on all of our backlog orders that we carried into the quarter.
Our Stockholders Equity increased about $3 million to over $12 million. Some of that, about 800,000 shares were issued when stock options and warrants were exercised and brought in about $750,000 in cash, but the rest was due to earnings.
By and large it was a great quarter for us. Our cash reserves went up by $600,000. We also did not have to use our line of credit at all, it’s still available, $1.5 million. So we believe we have a very strong balance sheet and ability to go forward.
Just a couple of other metrics I’ll give you. In terms of our staffing levels, we’re at 81 people at the end of the first quarter. That’s up 9 people from the fourth quarter of ’07, 4 of those being engineers. Incidentally from first quarter of ’07 we tripled the size of our engineering staff and we – that does not include a couple of contract engineers that we employ as well. So we’ve invested heavily in the engineering side and we hope that the products they’ve been working on will come to market very soon.
Production level employees only increased by four people. So we did $1.5, $1.6 million more in sales with only four more production people. If you look at a sales per employee, which is a productivity measure – now this does include the engineers, and engineers don’t typically work on current production, they more or less work on future production, future products. Ours sales per employee improved from 185,000 in the fourth quarter of ‘07 to almost 205,000 during the first quarter of ’08. So we’re getting productivity.
I think that the main thing that I take away from the quarter results is that our operating margins are expanding, we’re getting sales dollars drop to our bottom line and you know that are being magnified by the infrastructure we have in place and how efficiently we’re able to use that.
So all in all, a very good quarter, and I hope to repeat this down the road.
STAN ROSS, CEO
Thanks, Tom.
You know, those are exciting numbers and one of the things we actually received a couple of e-mails and a lot of people have been asking us, “It’s such an exciting story, how come you’re not out hitting the streets and talking about it?”
And one of the things that we elected to do is, we wanted the first quarter numbers to get out there because it is a true quarter in which I think there are some numbers and a template that can be developed from the first quarter. In other words, we’re not real heavily slanted with international orders, we’re not real slanted with a one-time big order from any individuals. It’s more of what you would look at on a yearly basis kind of template.
And we also like this model for to be able to go out and show and have people back into some numbers because we think that there’s still quite a bit of room for improvement. As Tom has mentioned, we continue to be able to be a little more efficient with what we’re doing with our cash ______ on hand as far as being able to get some discounts, we’ll be able to buy in better quantities, get better discounts. We think that we have a pretty solid template that’s going to be laid out there now for analysts and others to look at what we may be able to accomplish here in ’08, and even starting to look into ’09. It’s something that we will feel very comfortable with going forward that we’re controlling expectations and we have the ability to deliver better than this.
So anyways we did receive a couple of e-mails and some calls requesting that, and just to address that, we will now be out and about and start doing some road shows, start attending some conferences. We will try to coordinate those conferences and road shows with events that Ken and his marketing team have going on so that not only can we get a group of brokers or analysts together, but if they really want to see things first-hand we’ll take them over to the trade show and we’ll let them look at our system vs. maybe some of the competitors that are there and let them draw their own conclusions on everything.
Anyways, we’re quite excited about what we’ve kind of laid out here in ’08 and to be quite honest I may be a little more excited about what ’09 is looking like due to the fact that as we mentioned we are going to be introducing three new products this year. As a matter of fact we will be demonstrating – not demonstrating, but we will unveil the DVM-250 at our Annual Shareholders Meeting tomorrow. It is basically an event recorder. It is a real slimmed-down version of our DVM-500 that the law enforcement’s using. This model will be ideal for taxi cabs, your town cars, you know the mass transit, and even have a market potentially maybe in the consumer side.
Price is considerably less, but again it will have the features where if there’s an incident that does occur, whether it’s an accident, whether speeding, movements, this device will be able to capture that. It will also have GPS so that for instance if a taxicab company is utilizing this unit and a guy comes back and says, “Fares just weren’t very good today” and the guy can pull it up and see that he actually hung out at the horse track all day. No wonder he didn’t get any fares.
So we sort of put that particular product to the forefront of our product development stage due to the fact that we know of competitors that are out there that have sold as many as 70,000 of this type of unit and we believe that we can be very, very effective in getting a piece of that market. Again the unit will be totally enclosed in the rear view mirror and have all the features with cameras going forward and backwards so it’s exciting for us to ________.
We’re still on track to be able to introduce a system to the school bus market and the mass transit. That’s coming along real well. The engineers are doing a great job on getting that product ready, and we anticipate that we could be introducing it later even this quarter but feel real comfortable with that. It’s going to be able to get it out there and we’re going to be able to see some revenues generated from it yet this year. And then the helmet cam that we’ve talked about, it got pushed back a little bit due to the fact that the DVM-250 jumped to the forefront, but we’re real close on it.
So we’re already real excited and we’re real comfortable with the guidance we gave based upon the two unit – two products – we have out there today, both the mirror and the flashlight. But ’09 with us having five different products out there and actually getting different sectors along with improvements that we’re making on our DVM-500 unit with the additional models coming down the pipeline later on. We think we really are starting to get some traction in this market.
The thing that I take away from it and enjoyed seeing is that we’re up to 1,700 customers, and a lot of those customers have just made their initial orders. And if you sit there and you start doing the math on averages, I think the average municipality, the number comes out to be about 25 vehicles that they would have. Now, granted a lot of ours are smaller municipalities but we are getting some of the bigger ones that you see in some of our state contracts. But by getting our foot in the door and getting those first couple of units, that really goes a long way in sort of establishing a revenue stream that we’ll be seeing later in ’08, on into ’09, into 2010. They get the initial units, they like it, they get more, and then next thing you know you’ve outfitted their whole fleet.
So that being said, I think I’d like to go ahead and open up the phones for questions and answers.
Q & A
[Operator instructions.]
[?] MR. OSTEN – VENITOR CAPITAL
Q. Hi guys, congratulations. That was an incredible quarter.
A. Thank you.
Q. If I’m looking at the $40 million guidance you guys are talking about, you didn’t have any big deals in Q1; it was a very well-distributed quarter. Are there any large, potentially large, international or domestic orders built into that guidance or would anything over like a $1 million order or something be additive to that guidance?
STAN. Couple of things, Brandon. Good question. There is, as you know, in this business you do have a little bit of insight into what the future holds because of the way the bidding works and how many units out there and you somewhat know even when their money’s coming in. We have – the 40 million, the guidance, was basically given based upon just domestic business and some international business that we pretty well have a good feel for that we’re going to get, and that equates to about 17% is what we’re looking at as far as international vs. domestic.
Now, Ken you might talk ______ some surprises that may happen.
KEN. Well, we’re continuing to work on some additional state fleets, the Highway Patrol type of departments where we’ve got units in for evaluation at several of those as well as several law enforcement agencies internationally. And we do expect – later in the year I’m expecting late third quarter, early fourth quarter, having some very significant large orders coming in.
Q. And those large orders, if they come in, would be additive to the $40 million?
STAN. No, we had figured those in our projections. That still just only equates to about 17%, Brandon. What we’re saying now, there are some things that are out there that we do not have in the $40 million number but that Ken is working on but we just don’t have a sense of the timing of them yet.
Q. OK, great. Can you maybe comment a bit about progress that you’re making with the flashlight?
KEN. Yeah, this is Ken again. The flashlight, we saw a definite increase in the first quarter over the last year in it in that we got the unit in production and we got the ________ conducive with our back office software on our DVM. So the unit is finished. We are getting very good response back from law enforcement agencies. Again, ____________the flashlight right now in the law enforcement agencies. Haven’t went out of there too much in that we feel that we need to establish the usage of it with law enforcement. That will make it easier to go into security [?] departments and everything, which we will be doing later this year. But we feel like the DVF will give us a steady increase each quarter this year. Honestly, I don’t feel like we’re going to have any huge numbers with the DVF especially in first half of ’08 but we feel the second half we’ll definitely see some much better increases with it.
STAN. ______ the numbers in regards to the $40 million, I think the flashlight’s probably only about 5% of what our estimates are. So we have - still not expecting a whole lot out of it to hit the 40 million number.
Q. Right. Thank you, guys.
RONALD ROTTER – RLR CAPITAL MANAGEMENT
Q. Hi, guys. I’m relatively new to the company, and could you explain what the competitive advantages of your products, the DVM-500 being the major product. Then the second question I have is, since you’ve introduced the product you’ve introduced the product you’ve had successive sequential increases in revenues. I’m guessing, and correct me if I’m wrong, that in as much as you worked off of your backlog in Q1 and that’s why you have such large receivables, that it might be difficult in the current quarter to continue that trend.
KEN. This is Ken. I’ll answer the first part of that question for you as far as the advantages of our unit over the competition. And there’s two basic advantages that we offer. One, because we offer the only unit that’s integrated into a rear view mirror, our unit is much smaller than anything out on the marketplace. It will fit in any vehicle and install much easier than any of our competitive units and it takes up no space in the police cars, which is – space is at a premium with police cars. Some of our competitive units, they have even part of their unit in the trunk or underneath the seat or the dash or up on the headliner, and installation itself may take two or three hours a unit where ours is generally less than an hour to put in. So we offer, again, not to repeat myself, but I guess I will, is the size and uniqueness of the design being in the rear view mirror gives us a heads-up over our competition. And therefore that’s – we not only have that uniqueness but also we offer all the features that all the other units have, so we’re not at a loss anywhere. Plus the fact that in most cases we’re quite a bit less money per unit than what our competitors are.
STAN. We’ll average probably on just a heads-up anywheres from $1,000 to in some cases as much as $2,000 less than our competition. And again having the same features they’ve got. The fact that when they’re switching out their vehicle from Ford to Dodge they know that our piece of equipment will be able to transfer over. Others may not. They don’t have a real good sense of what Detroit’s going to be doing. So I think that there’s also some forward thinking that a lot of them are doing when they look at our unit. The fact that you know virtually – every vehicle that I’m aware of, most of them have a rear view mirror. And there’s a lot of product out there that was designed to go into double DIN radio slots, and those have sort of disappeared. So it makes it a little more difficult; they have to try to figure out a different spot in the vehicle for that.
In regards to the revenue growth question that you asked, Ken’s been doing this for about 35 years in this particular industry and of course I ask him that every quarter, “Ken, what are you thinking here?” And we recognize that there’s going to come a point in time where we may not achieve sequential growth like we’ve been seeing over the last eight quarters, but at this point in time we’re still staying the course We think that we’ve got good, steady growth that we’re going to see throughout. We’re very confident that second quarter’s going to be a very solid quarter. Don’t have enough of a feel yet for what kind of number by any means and so we’ve been trying to stay away from quarterly guidance, but ….
Q. Do you expect to see sequential growth in the second quarter over the first quarter?
STAN. It’s just too early to tell. It’s just too early to tell. I mean the first quarter was a good big number and ….
Q. And you had worked off all the backlog as evidenced by the big receivable you had at the end of the quarter.
STAN. And that is correct. And it’s one of those things that Ken can have a – one of the deals that he’s working on show up and all of a sudden you’ve got 1,000 units that you weren’t expecting, you know wasn’t in the, I guess, the ….
Q. Is there a real short lead time from the time you get an order to the time you ship?
A. Yeah, we’re doing pretty good. I think the worst case is we may have as much as 30 days. But we’re doing a pretty good job of getting some inventory on the shelf and then when we do get an order we’re able to get it out the door.
Q. Thank you.
JIM STONE - PSK ADVISORS
Q. Thank you. It’s redundant, but a fantastic job.
A. Thank you, Jim.
Q. First question is relative to the forward guidance. I gather you’re still sticking with the $40 million, but what about the 21% operating margin in light of the 29% you achieved in the first quarter?
STAN. I think you could throw that out the window I mean that’s why I was trying to – the reason that we picked the 21 is because we had evidence that we were going to hit that. Now, again, that number was a fourth quarter number. And we had a pretty good idea that it was going to be substantially higher, but we didn’t have anything we could sink our teeth into that, you know, with a lot of credibility to it until we actually did it. So you know again I like, I think if people would utilize the first quarter percentages – the numbers – as sort of a template, I don’t think we’re going to disappoint anybody by the end of the year.
Q. OK. Thank you on that. Next question. Can you give us a better feel for what’s actually happening in the marketplace? Can you give us a little bit more about where you’re penetrating, how many of the top 50 municipalities, how many out of the next couple of hundred. How are those numbers changing, etc., etc.
KEN. The – this is Ken – as far as the marketplace goes – could you repeat that question for me please?
Q. If you pick whatever your number is, the top 50 municipalities or the top 30. The next 100 or so, how many of those are you in and how do you expect that number to be changing as you go forward?
KEN. OK. Thank you. Basically, to date if you possibly look back at some of our other releases and what-not, the bulk of our business is coming from the small to medium-sized police departments and sheriff’s departments throughout the country. We have got, I think, six to eight under state contract. Four of those, Highway Patrols that we are on multiple-year contracts that we expect to outfit if we haven’t already all of their police vehicles as evidenced by the continued reorders from the West Virginia State Police, the Arkansas State Police, and some others that we expect later in ’08.
One of the reasons, again, in ’07 and really actually early ’08, the larger cities, most of them have been interested in a wireless downloading option, which in ’07 we did not have. We introduced it late in ’07 and are now in various test and evaluation departments – the larger ones around the country with the wireless downloading option available as well as a network backup of software. So it’s hard to give you what percentage of the top 100 cities or departments that we’re in or may expect to get this year. Again, we want that business. We’re going after it now with our new add-ons, but again the bulk of the business, the bulk of the market, is really in the small to medium-size police departments.
STAN. We look at our market, you know probably 50% of it at least is in those small to medium municipalities. We like that because of that the fact that you can go in there from day one and in some situations it’s quicker than this, but on the outside, most of those smaller municipalities are able to make a decision within 6 months, from start to finish. From the testing, going out for bids, having bids submitted, and cutting checks, and giving us the order.
The bigger municipalities we’re finding that they’re taking as much as two or three years. Granted we’re a little late to the game, but we do have units out there and we are starting to have our units being evaluated by the New York Police Department, some of the largest municipalities there are around. We just don’t have a sense on how quick that will happen because there was a – L.A. bought some from a competitor of ours. That process was going on almost three years and they’ve yet to fund that contract. So we’re still real happy with going out and beating streets and getting the smaller mom and pops and we’re not even getting close to the penetration that we would like. And you’ve got about 18,000 agencies out that there we’ll be calling upon.
Q. Can you give us some feel for who you’re penetrating abroad [?] and why you’re making inroads there _____ similar _____ to the U.S.? What’s happening?
KEN. It’s a little different in the international marketplace. In most countries you’re working with the government. Not that many countries actually have the structure like here where local police, local counties, and states, and the federal government all buy from us. Most of those are directly to a federal, if you will, government. We are working with several of those in various locations and just can’t disclose right now but we are expecting some very significant orders from our international countries during ’08.
Q. Are you at critical mass now from the standpoint that folks are talking about you, more than enough references, or do you think you still have a bit to go to reach that critical mass?
KEN. In the marketplace it’s really coming on board with the word of mouth getting out there. Stan indicated earlier our repeat orders, I think this quarter we almost had 2/3rds of our orders were repeat business from customers that have bought from us before. We – every day now it gets easier in that we don’t have to supply so many demonstration evaluation units, we don’t have to get so many references out because people have already heard about us. We do a tremendous amount of advertising: trade conferences all over the U.S. and actually expanding into the international marketplace as well. And the word is getting out there. And in this marketplace it does take a year or two, maybe three before you really get known. And so every day, every month, we get better known out there. Word of mouth advertising is paying off for us.
Q. Thank you very much.
GEORGE WHITESIDE – SWS FINANCIAL SERVICES
Q. Stan, congratulations. That is a blow-out quarter, that’s really remarkable. Considering your success in the small and medium sized markets, are you pursuing such items as Homeland Security, DoD, etc.?
KEN. We are. We are. We just really started getting into that area as well. I mean, again, the wireless download feature is something that even they were wanting to see come to the forefront. So we have started pursuing that and do have units that are being evaluated. I don’t anticipate them moving very quickly but again we’re there and we’ve got units that have been sold to the FBI. _______ a lot of units out there in the - I’ll call it the government agency side.
Q. Well, it’s certainly understandable with the success that you’ve enjoyed in those other markets that getting tangled up in all the various rules, regulations and the long sales cycle of governmental business, it’s certainly understandable that you haven’t just tried to break into that market in a big way. It’ll happen when everything is organized and there is the demand, etc.
STAN. Yeah, I mean our business model – I mean we set out in – this company raised roughly only $6 million unlike some of our competition that’s had a war chest thrown at ‘em to try to get into it. And one of the things that we did is we set there and wanted to make sure that we were going to and after those markets that we were going to be able to generate sales and revenue quickly from. And we continue to do that. And I think you can see by our cash balances being increasing so rapidly and you know like almost a $3 million increase just reported to the first quarter [He’s actually referring to working capital here (Current Assets minus Current Liabilities). Cash increased $600,000 in Q1.] and that seems to be accelerating a little bit as we go out through the year. You know there is a big, big advantage to be going to those smaller to medium markets because you can make things happen. And granted your business model, if it’s backed by government contracts, huge government, Homeland Security or something like that, you’re really swinging for the fence and betting everything on that. So we like the position we got. We know we will be very competitive when we go to the bigger municipalities and government agencies and we’ll just see how it plays out.
Q. Great. My second question has to do with your earlier commentary on the fact that you’ve used rear view mirror system and it’s apparently been a competitive advantage. And speaking of your completion, are they reacting to that in any way? Are they trying to come up with their innovative method of mounting the unit?
STAN. I’ll let Ken address that. At least from where I’m setting – when I try to stay on top of the marketplace, at the shows I’ve been to, I haven’t seen anyone trying to duplicate what they’re doing. I mean there’s a lot going on in that little package. And Ken, I don’t know, you seen anything out there?
KEN. We’re not aware of anything at all as far as somebody trying to come up with anything else in the rear view mirror. We have applied for several patents on that design and we feel like that we’re going to get issued in the near future, and hopefully think that would deter anybody from really trying to design this thing in a rear view mirror. The other companies as well, they’ve made their decision in the past of the design that they’ve got. I’m sure they’ve spent tremendous amounts of money designing the product as they thought was best. And for them to 1) make a decision to drop that to try to design something else is going to be 1) quite expensive for them. They’re going to have to admit that what they have is not right for the marketplace and it’s going to take them some time I would think for them to bring something new into the marketplace. So from what I’ve seen so far everybody is trying to sell the goods that they have and make the best of whatever they have.
STAN. All in all, it’s a big market. I mean, again, there’s 450,000 vehicles out there right now, over half of them don’t have any type of recording devices in them. You have about 70,000 that are coming into the market every year. ________ that little number, I mean the number, the $40 million that we threw out there, that’s only 10,000 units. So we’re only looking at 15% of new vehicles that are coming into play let alone the existing market that we’re going after. So it’s a big market out there, and hopefully we’ll continue to get a larger market share.
Q. It certainly sounds as though you played the marketing issue extremely well by targeting the markets in small and medium sized arenas, and that you benefited because of the decision-making capabilities within those smaller entities.
STAN. You’re right. They just can make a decision so much quicker than the large ones. It may not have the glitter of an order from Chicago but it works on the bottom line.
Q. Great. Well, keep up the good work.
A. Thanks, George.
MARTIN YOKOSAWA - OBERWEIS ASSET MANAGEMENT
Q. Hi. Just clarification, you said there was 18,000 to call but you target the small to mid size, can you tell me how many small and mid-size agencies are you targeting, what’s your penetration and what’s your target penetration?
A. There’s about 80% of those is what we consider small and medium size.
Q. OK. And what’s your penetration into that market?
A. Not very large, yet. Under 10% I think for ’07 at the last I looked.
A. 8 or 10 %, something like that.
A. We only have 1,700 customers so far.
Q. What do you think you can get? What’s your target?
A. [Laughter.] 100%. [Laugher.]
Q. What’s your realistic target?
A. [Laughter.] Yeah, OK. I would like to think in another year, we could be somewhere around 30 to 35% and go on from there.
Q. On the supply chain, you’re getting more efficiency out of there, how much more do you think you can squeeze out of your supply chain costs?
STAN. Well, we continue to look at that. We’ve hired an engineer to do some of the product purchasing, our component purchasing, and he has been able to go in there with his background and knowledge and help us out quite a bit in the purchasing side. Coupled with the fact we’ve got almost $5 million in cash end of March and we’re accumulating more as we speak. You can buy in larger quantities obviously and as I said before we can go get better terms if we’re cash buyers up front, as well. So we think there’s a lot of efficiencies there. We’re only running one shift as well, so if we needed to put more product out on the shelf or out in the market, we can just add another shift pretty easily.
I mean the, lets call it the 1,000 a month type of goal that we set ourselves at the end of last year, we easily were able to reach that. And we think that realistically again the efficiencies continue to happen, and we probably can do as much as maybe as much as 1,500 without having to go to a second shift. So, a lot of efficiencies are starting to come into play. There is – you can sit there and probably have a pretty good feel that if we start buying in quantity we’re going to get anywheres from a minimum of 10, maybe as great as 30% discount if we’re buying in bulk. So there’s room for improvement.
Q. The – you have the new products for school bus, mass transit, taxicab, and the others, is that a push or a pull situation. I mean is there pre-orders set up? With the 70,000 ______ from your competitors, do you have to go in there and wait for replacements to get that business? Or what ….
STAN. It’s actually a lot larger than the law enforcement obviously, I mean you know _______. But we’ll be able to get into that market fairly quickly. We have our eye on several key personnel that would come on that’s already been in that particular market that would be of benefit to us. But you know one of the _____ talked about the school busses, our existing sales reps are already calling upon those municipalities, and the fact that Digital Ally is being sold to their law enforcement will give them a lot of credibility when they’re in front of a school board or something along those lines. So I think the school bus market’s going to be really easy for them. I think Ken and some of the guys he’s talking to in regards to the new markets – we’re going to have the right guy in there to help us with the marketing. So it should - once the product is actually going out the door, I think we’re going to have the orders coming in to match them.
KEN. In many cases actually that’s still a very new concept of having digital video in the fleet systems and this kind of thing. So it’s by no means a saturated or replacement market. There’s still a lot of pioneering to do in that market to show the people the worth of video in their vehicles. And then again we’re going in there with the uniqueness of our design is in the rear view mirror, so even the existing products after they may be buying clutter up the interior of the vehicle and don’t have the advantages of ours for installation and the other things.
STAN. Yeah, I mean again it’s one of those things we’re having to do a little bit of educating our, I guess our audience, as far as not only – not so much the law enforcement, they’re grabbing it, but the ________. Those numbers that we’re talking about, the 450,000 vehicles that are out there, the 50% of them that may have some type of recording, of that 450,000 you may have 20,000 units that have solid-state digital recording, in other words, no moving parts like Digital Ally’s system is. And the reliability of that and the quality of that goes a long way.
So I mean it’s sort of when everyone was starting buying their first digital camera, 3 megapixel and now it’s 10. I mean it’s that kind of leap in regards to quality that is out there and the fact that you don’t have any moving parts like hard drive or DVD’s, just the quality and reliability is so much better and it’s a big advantage for us. So the market itself, again 450,000 vehicles that we believe at some point in time a video recording device will be standard in it just like a radio or maybe a radar is, we think that solid state video recording will be that as well. It’s a big market and we’ve just barely scratched it.
Q. ______ stock comp. How should we look at that. I know the vote is coming up, but compared to last year and the year before, how are you going to be reporting that in coming quarters?
TOM. This is Tom. We really won’t know those numbers until we know what happens tomorrow at the Annual Shareholders Meeting., and based on the close of business tomorrow the stock price. Then we can run out numbers and see exactly what the cost of that is. Now, it is all non-cash, obviously. But what we’ve done to kind of smooth that out and make it palatable, is the options issued under the ’08 plan have 4-year graduated vesting. First year 10%, second year 20%, third year 30%, fourth year 40%, so that tends to stretch it out as well. So to answer your question we don’t know what the cost will be until we know if it passes and if it does pass, what the closing price is tomorrow. And then we got to do all kinds of calculations, volatility and on and so forth. But my guess is that it will be similar to prior years or, if anything, maybe a little less.
Q. Thank you.
BRANDON OSTEN – VENITOR CAPITAL
Q Thanks. Just a couple of follow-ups here. First of all, I mean I guess there was questions earlier about sequential growth. Obviously it’s kind of early in the quarter but is it fair to say, given your guidance, your visibility suggests that Q1 was not going to be the best quarter you’ll see this year. You’re expecting to have record quarters as the year goes on to post continual record quarters?
A. Yeah. I mean, we – I guess I’m sort of – from what I can tell as of today, I mean I know I’ve got a solid quarter going here in the second quarter. But the third quarter and maybe even both the fourth quarter could be somewhat classified as exceptional. So yeah, we have some – we’re very comfortable with our 40 number that we’ve thrown out there.
Q OK, great. And can we just – I mean I just wanted to delve into the competitive landscape again. I mean you guys are doing really well here and you’re public so all your information is out there for your potential customers to see. So a lot of your competitors are private and I guess there’s one, ICOP, that’s public, and they’ve had really weak results and big losses and a rapidly-deteriorating balance sheet. Do the customers notice this? Is your strong financial position become a competitive strength when you’re pitching new deals?
STAN. You know – this is Stan – I can tell you this much, that some of our competitors because we are publicly held, and as you know when we first started, your accounting firms have to get in that “going concern” statement in there because you’re just a start-up. And our competitors were actually taking that material around and trying to use it against us. Now with the situation being what it is and the strength that what we are having, they basically do everything they can not to have us be known. [Laughter.]
So it’s a – the playing field has definitely – became more fair in regards to, you know there’s not a lot of things they can hammer[?] – I mean sometimes they talk about us, you know, there’s been talk about a tremendous amount of returns we’ve been having. That’s just not the case, either. I mean we’re probably – our warranty work is probably 1%. And it’s just a low number. And a lot of times that’s due to the fact that someone may have installed the flash card wrong. I mean it’s more human error than anything. So we’re getting out there, and as Ken said, the name’s starting to carry itself to where people are not needing to set there having units evaluate and test. They know that the department down the street has it, they’ve heard great things, and they want some.
Q. That’s great, guys. Thanks a lot.
JOEY SISK[?] - JM CAPITAL
Q. Hi, Stan, how you doing?
A. OK, Joey.
Q. Question about the business model. I see every dollar you bring in you bring a lot to the bottom line. More on the stock. Now that we got the Q out and you’ve briefly mentioned that you’re going to probably hit the street to tell the story. Help me understand something. If we’re projecting doubling our revenue and doubling our net here over the next year and we’re trading at 14 times future earnings and at a growth rate of 100% and we can peel that back [?] going forward in ’09. Why wouldn’t somebody on Wall St want to cover this stock?
STAN. Well, again, I need to take a little bit of the blame on this because you know I guess where I was trying to get the analysts that we’ve been talking to I really insinuated that, “Look I really think you should wait and see what the first quarter numbers are.” Because I really do believe that this gives them a great template to go by. And there won’t be any expectations that they’re putting out there that we can’t live up to and they ______ as well. So maybe a little bit of it was my fault by stressing that the fourth quarter being so slanted with that international order it doesn’t give you a good picture. The first quarter will give you a good picture of what to look at and so that may be the case. Now in _____ that we have had a tremendous amount of interest from analysts and others and so I do believe that you may be seeing something in the near future from several different firms that I know are on this call listening and definitely are looking at our numbers.
Q. Yeah, that makes sense. When you’re trading at 14 times future earnings at a minimum and a growth rate, I just – it makes all the sense. Plus ______ I’ve had call from people wanting ______. People are looking for stock out there.
A. Right.
Q. People are looking for stock. And, so anyway. Anyway, I appreciate it. Good job, guys. Great business model.
A. Thank you, Joey.
MARTIN YOKOSAWA – OBERWEIS ASSET MANAGEMENT
Q. Hi. I thought of another question. Are you talking to any of the auto manufacturers – you know, this is a premium add-on?
KEN. We have talked to some of them and we continue to visit with them. Most of the auto makers really do not want to get into the aftermarket business of specifying a particular unit or something for their cars. So we continue to go after that and visit with them but we just don’t feel that right now that’s probably going to be a very viable option.
STAN. One of the things, Martin, that we do have set up is there may be a particular, let’s call it a Dodge dealer, that provides a tremendous amount of police vehicles to a general area, and we definitely target that individual, that dealership, in which….
KEN. Right. We do have several dealerships set up, they have a fleet specially guided to the law enforcement market and actually we have some demo units in some of the car manufacturers’ sales people that travel around into the law enforcement departments and show them. We work with them but as far as Detroit giving us a big order for 10,000 of them we don’t see that happening in the future. But we definitely work with them.
Q. And you work with insurance companies, you know reduce their insurance in a traffic accident or something like that?
KEN. We do actually. We have several insurance agents that have actually funded either all or part of our video system for their local departments that they’re insuring. They feel like that it’s money well-spent if they can buy video systems for their clients, and keep them out of one lawsuit it definitely more than pays for the initial investment. We definitely work with the insurance companies as well.
STAN. This is Stan again. I think the DVM-250 is probably going to open up that market even more. Again, it’s actually in a lesser price range and it has just enough features that the insurance companies would want, so it could open up a totally different market than what we’re currently addressing.
Q. OK. Appreciate it.
TAYLOR THOMPKINS – ANDERSON STRUTWICK
Q. Hey, guys. Good quarter. What’s the price point on the DVM-250… you know you’re going to come out with?
A. We really haven’t set that yet. We want to get our final cost on it really and also we’re doing quite a bit of investigation as to what the competitive units are. One of – what we do have going for it is that it is going to be a professional ______ recorder. We definitely know there are some units coming out of Korea, Japan, Taiwan, and some of those places and mostly, however, being sold over in that area, that are very low-priced. But we don’t really feel like they’re competitors of ours. They’re targeting mainly just the consumer market and again not the United States. So, but the current units being sold in the United States.are around the $1200-1500 price range. And then you get add-ons and for wireless downloading and back office software and all this on top of it. So it’s not necessarily a low-end type of industry.
Q. OK. And of the $40 million, how much of that is going to be domestic, stays at 80% is that right?
A. Actually probably will be a little over 80%.
Q. How about ’09, what’s the mix going to be there?
A. [Laughter] I’m not ready to do that one, Taylor.
Q. OK, good job. Thanks a lot.
A. I’m optimistic. I’m very optimistic. I mean, just because of the fact that is sort of truly going to be like our third year, we really should be getting some momentum with the DVM systems that we have currently out there. And so ’09 ought to be a lot of fun. Let alone the fact that we’re going to have three additional products out there. So…
Q. Right. You said the other statewide deals you’re working on were Texas and Arkansas, is that right?
KEN. I didn’t say. Arkansas we already have and they, in fact, just this month re-ordered from us again. We haven’t told anybody but I guess ______ now. [Laughter.]
Q. And with Utah. Do you see that sort of playing out similar to the West Virginia deal? Order ramp and what-not?
KEN. Actually, Utah’s a little bit different from West Virginia. West Virginia, the State Police purchased,as we indicated, large quantities and continue to do so as well as cities and counties throughout the state of West Virginia. In Utah, it’s – we have our units into the Highway Patrol, they’re being utilized – being tested – but we haven’t gotten an order from them yet. It’s just a statewide contract that cities and counties and state agencies can order from. So I wouldn’t want to say that it’s like West Virginia at this point in time.
Q. OK.
STAN. _______ it’s widespread throughout – the municipalities know now that they can call up and they’re getting it at the same price that the State Police get it at. So it definitely opened up the door for our rep to be calling on everyone and making it real clear that here’s what the device does, here’s what the price is, and you get it the same as the big boys.
Q. There’s also an article today in The Washington Post in the Metro section about law enforcement surveillance. I don’t know if you saw that or not.
A. I did not.
Q. There’s a lot more stuff coming out about the whole industry it seems like. Anyway, thanks a lot.
A. Thank you.
OPERATOR. We have no more questions at this time. I would like to turn the conference back over to Mr. Ross for any closing remarks.
STAN. I would just like to thank everyone for participating and starting to learn the story about Digital Ally. It’s been an exciting ride for us. We definitely have some great expectations that we feel that we’re going to try to achieve this year and going on into ’09. And we’ll do our best to get out there and tell the story to the rest of the Street. And if any additional questions do pop up and we can answer them, feel free to give us a call. Our office number is 913-814-7774. Anyway, thanks again everybody for joining us. |
