Digital Ally Inc (DGLY) 2012 Q1 法說會逐字稿

Hello and welcome to the Digital Ally Inc. First Quarter 2012 Conference Call. All participants will be in listen only mode. There will be an opportunity for you to ask questions at the end of today's presentation. (Operator Instructions) Earlier today, Digital Ally Inc. issued a press release that included certain cautionary language with respect to forward-looking statements. The Company would ask you to review the language in the press release regarding forward-looking statements as they are equally applicable to any forward-looking statements made during this conference call. (Operator Instructions) Please note that this event is being recorded. Now I would like to turn the conference over to Stan Ross, CEO. Mr. Ross you may begin.

Thanks Keith. Thanks everybody for joining us today.

First quarter calls are always a little interesting because it was about 30 days ago that we just came off of our call as far as our year end. I can tell you though that 2012 has started off pretty much as expected, right in line with our expectations were. And timing wise, I think, we've accomplished pretty much what our objectives were, as well. The main thing that our goals were had to do with the restructuring of our sales organization, along with some major cost associated savings that we will go in to.

But what I'd like to do first, Tom Heckman our CFO is with me and I'll let Tom go over the -- do a little recap of the first quarter. And then I'll go into more of the details in regards to the marketing programs, some new product launches and also Tom, and I both will cover on some of the cost savings that we have implemented that you will see in 2012.

So Tom?

Okay. Thank you Stan and appreciate everyone joining us this morning.

I would like to let everyone know that we did file our form 10-Q this morning with the SEC. And in this conference I'll go over some of the trends and the important matters that happened during the quarter, but please do review the form 10-Q for a full analysis of the quarter and our financial position results of operations.

I guess from an overall standpoint, we'd have to say that the first quarter was somewhat disappointing, primarily from the revenue standpoint. It was challenging. It was 20% less revenue from a year ago, the first quarter 2011. And even more disappointing was it was 12% less than our Q4 2011 revenue total. However, even though we had challenges from the revenue side, we saw our gross margins and SG& A expense improve dramatically.

Our gross margins, from the standpoint of improvement, what happened was even though revenues were $1 million less than 2011, we actually generated more gross margins and an improvement in our net loss for the quarter year-over-year. Margins improved from 42% in the 2011 first-quarter, and 43% in the Q4 the fourth quarter of 2011 to 53%, almost a 10% increase year-over-year. So that was a pretty dramatic improvement and one of the big reasons we were able to generate more gross margin dollars. SG&A expense declined around $400,000 versus Q4 of 2011 and Q1 of 2011. So, that really helped us improve our net loss by about $300,000 for quarter-over-quarter.

If you look deeper into the revenues, the big thing that's happened there, obviously, is a complete reorganization of our sales force that we started late in 2011, continued in 2012, and is actually still continuing as we speak. Just to give you some statistics on this, and I'm sure Stan will go to more details on it. We replaced six of our low performing salesman from year ago. We retained two of our best performing third-party agents, and left them as third party agents on a go forward basis. So, we've not touched our relationship with our two best producers.

We converted three of our previous third-party agents to employee-based direct salesmen for us on our payroll. We've hired three new salesmen to cover open territories, and at this time we have five open territories, and a number of those we do have offers outstanding to people that we can hopefully fill those open territories with. If you do the math on that, we've actually expanded the number of territories from 14 to 19 domestically for law enforcement. So that's a significant increase, and consequently we've reduced the territory that each of these salesmen have to cover. So we hope that will improve their efforts and our penetration of the market overall.

During the first quarter, with all that activity going on and all that change going on, we obviously had more training costs, hiring costs, and just general disruption during the quarter to our sales process, that I guess it's not so much of a surprise that we would have some challenges revenue-wise with all that going on. However I will tell you that recently, we are very encouraged with some of our new salesmen to the point where our best producer for the month of April is actually one of our new salesmen, better than any of our existing salesmen that we've ever had. So, that was very encouraging. So, we believe that the sales force reorganization will be very fruitful and we'll see the benefits of that during the balance of 2012.

From an international revenue perspective, it was disappointing. We had $158,000 revenue in the first-quarter 2012, versus $450,000 in 2011 first quarter. Obviously, that's not a good number for us and it is disappointing. However, I know we've said this before, but we're very encouraged with the amount of bid activity and ongoing efforts internationally. But closing those deals is a challenge, and has been a challenge. I think a lot of that has to do with economics internationally, and some of the politics that are going and elections that are happening around the world. But we hope that we can get our way through that and close some of those deals.

Some of those deals are rather large in the balance of 2012. So we're looking to improve that international revenue number dramatically for the balance of 2012. Domestically, we're hopeful that the sales force reorganization will be completed in the second quarter. We'll get all of the territories manned with new salesmen, and we think we'll have an impact throughout the rest of 2012 with the reorganization that's in place.

From a sales perspective, the legacy -- out of total revenues the percent of total revenues, the legacy 500 Plus and 750 model represented 72% of our overall sales in 2012, versus 80% in 2011. So everything else including the new products increased from 20% of overall revenue in 2011 to 28% in 2012. We believe that the DVM-100 and 400 in particular are gaining traction. The price point is good, given the challenging economic times that police agencies are facing. And we are knocking on doors and getting opportunities that historically we would not have gotten with our higher priced models. So we're happy with the DVM-100 and 400 and we believe that's going to improve our revenue outlook for 2012.

Commercially, which is primarily the DVM-250 and the 250 Plus, our traction is improving. We have a very good foothold in the ambulance industry, and have a number of high profile clients and customers in that industry. We have tweaked our product somewhat, and are now into more of the airport bus market, which would include rental cars and parking lot type buses, paratransit buses, I guess is what you'd call them. We're gaining traction there. We've got a number of opportunities that we're chasing there.

And as well as the taxi industry. We've made some tweaks, particularly in the back office software that is more appealing to the taxi industry and we believe we'll see some traction there. Overall, (technical difficulties) sales improved during the balance of 2012, and obviously it needs to based on our Q1 results.

From a margin perspective, we saws a dramatic improvement, almost 10% from the prior year first quarter and also from Q4. I think what we're seeing here is the full impact of our supply chain initiative that we started last year. Where we were moving stuff offshore if we had to, and identifying better supply chains or suppliers for our products, outsourcing a lot of our component parts. The DVM-750 we've burned through our existing inventory, and are now in production mode. So we're seeing the benefits of the lower priced components in our DVM-750 production. And we have been seeing the DVM-500 Plus production already from probably the second or third quarter of last year we've been into the new DVM-500 Plus component market.

We see continued improvement in our gross margin, particularly if we're able to grow our revenue base. Our gross margin improved dramatically in the first quarter, even though our revenues were down over $1 million year-over-year. So, just think what would have happened if we had improved our revenues and were able to spread that fixed overhead over a larger base. Our sales mix also, as it moves to our newer products, the DVM-250, 100, 400, those all have higher gross margins than our legacy products, and we believe that will also tend to improve our gross margins. From an SG& A expense perspective, we continue to see the positive benefits of our cost reduction containment initiative that we started well over year ago, and we see no reason that won't continue throughout 2012.

From a balance sheet perspective, we still have a very strong balance sheet, working capital position of over $10 million of positive working capital. Our liquidity is down just a tad. We've got cash on the balance sheet as of 3/31 of $1.8 million, that's down about $0.5 million from year end. And that primarily went to a $0.5 million increase in inventory during the quarter. And most of that increase in inventory related to Laser Ally. We were successful in amending our supply contract on the Laser Ally to where we reduced it by over half our commitment to buy that product. But that, unfortunately, didn't start until March of this year. So we should see the impact of the reduction of that supply contract in the second quarter.

Our sub debt, and I know we've talked about that quite a bit on the last call, it does not come due in until May of 2013. So, it's over a year out yet. But we are planning on how we're going to liquidate that, and our intentions are to improve liquidity through operations and liquidate that debt by that. From a wrap up standpoint for the balance of 2012, we've obviously got to improve our revenue position and generation of revenues.

We think we've got the parts in place now with our domestic law enforcement sales force reorganization. And we think internationally, although the first quarter was not a good indicator of a good year, we think by the end of the year we're going to be happy with where we are internationally from a revenue perspective.

So Stan?

Great. Thanks a lot Tom. I think somebody ought to read your notes. You stole a little of my thunder. (laughter)

And what's going on with the sales side of things and also looking at how we're going to go about improving the revenue, which is, right now seems to be the real area that if that improves, then it's directly going to go to the bottom line. And just sort of recap a little bit, when we originally had the 14 territories that were out there covering 18,000 agencies, obviously that is a bunch of -- if it was divided up equally, that is a lot of agencies for one independent Rep to try to handle. By expanding to 19, we greatly improved that.

But when we did have the 14 independent Reps, we still had situations where we had three open areas. Whether it be a situation where the distributor had retired or whatever may have been the reasoning, we just did have openings. So when you look at the 11 independent reps that we had when we started our transition, we kept two of them. We brought to three of them on as employees. Since that time, we went ahead and expanded it to 19.

So we're up to roughly 14 full-time employees. To bring Tom up to date too a little bit as well. We currently have two new Reps starting on Monday. We have an offer letter out to one other Rep that is considering it over the weekend, and we'll see about bringing him on right away. So we really only have about two areas that are still open that we need to fill to make sure that we have our 19 territories completely covered.

The numbers in the way that we've divided up the territories, they're a lot more consistent with a average that an independent Rep can go out there, and again it'll still be a challenge to call upon every one of them. But with the assistance of the inside sales coordinators, which they now have for each territory, a phone call will be occurring. We will be staying in touch. And if opportunities occur, someone can easily jump in the car and get to that potential customer. So, I will tell you that where we're at right now with the 14 Reps that we have on, or employees now that we have on board, we sit there and I assigned what I believe to be fair quotas for each territory. I assigned fair quotas that I would believe would give us somewhere north of a 20% increase in revenues if they would meet those goals.

That being said, two of the 14 that are currently on for us the territories, I'm just talking about the territories right now. Two of them, and associated Reps or whatever are definitely ahead of schedule in regards to meeting their goal. Nine of them are right on track where they need to be, and there are three of them that are trailing behind. But there really -- it could be one order away from being either on track or even above schedule. So they're just behind the curve a little bit.

Of the five open areas, now again we've got two people starting on Monday. We've got an offer letter out there, and then we still do have two open. Those territories, while again this is sort of the timeline. I didn't realistic to think I would be able to get everybody on board until the second quarter. All five of those territories are still on track or even above what the schedule was that I had laid out in regards to being able to meet our goals.

So I'm feeling pretty good about us getting real good thorough coverage of the Reps, as far as the agencies that are out there. We're doing a really good job with the sales coordinators they're doing great in regards to assisting and making our employees aware of, as far as the Reps, where there may be potential leads that they need to be running down.

We have our internal marketing department doing a great job of identifying stories. They're finding out about grant money that may be available, along with assisting potential clients that need some assistance on going about doing the paperwork for grant money. So, I'm starting to really feel comfortable about the law enforcement side of Digital's team here, and what we're accomplishing, that it is the right way to go and everyone is on track to getting done what needs to be done.

In regards to the commercial market, mainly with the 250, they've made some unbelievable strides. And again, just elaborating on what Tom said, we've went from having a few customers that were interested in buying 5, 6, 7, 10 units to now some of the largest fleets. Whether be in the medical field, or now some of the parking areas or Rent-A-Car areas as far as airports, to true commercial fleet agencies that have as many as 5,000 vehicles out there, let's say. Along with that, we've also taken on and have visited with entities that have a need for our product, but provide complimentary services to fleet departments.

Just to give you one scenario, a company approached us. They have 35,000 customers. But what they don't have is a very good reliable video solution that the DVM-250 provides. So, in some areas we are going to go ahead and look at being associated with these guys, partnering up with these guys. Still flying underneath the Digital Ally flag, but working with them in both areas where our product will meet the needs that they have, along with being glad to sit there and say, yes there's a few things that our unit does not do, but here is a complementary product that we work with and we have a relationship with. So it's going hand-in-hand with the capabilities.

The other thing that's going to be exciting about 2012, and I've mentioned this on the year end call, is Digital Ally's engineering team is probably one of the strongest around. We have unbelievable talent pool here at Digital. And you're going to see some really exciting new products that will be coming out later this year, and again going on into the next couple years.

My objective, and I've said this to our engineering team, is that I'd like to get our salesman away from being salesmen who are out there trying to pitch our product to the point where they're order takers. In other words, the product is speaking for itself. It is by far the best mousetrap out there on the market. And all I'm trying to do is just get the exposure, and we'll be able to get the business. That was the case back in '06, '07 and '08, and we really are striving to get back into that position again.

So anyways, the cost reductions are in place. A few more little tweaks that we need to do, but all in all, right now it's to get that top line fixed and everything else should fall in place.

So, Keith we're going to go ahead and open up the call now for the Q&A session, if you don't mind.

Yes certainly, thank you. (Operator Instructions) George Whiteside with SWS.

Good morning. I recognize that certainly you are affected by challenging economic times. In previous calls, you've remarked on the fact that the potential for law enforcement applications was tremendous. Particularly, I think you talked about ambulance services and things of that sort. It appears as though you've not made as much progress in that area, and maybe that's due to your reorganization or the process of reorganization of your sales teams. Are there other factors that have contributed to that?

I guess George, could you give me a little clarification on exactly what you're asking there?

And other words, what are the fundamental reasons for not being able to realize the potential in the non-law-enforcement area? You've described some --

I got you. Well George, in the very beginning when we got in this and we're knocking on the doors, we tried to design a system that was a little generic in regards that we thought met just the basic needs that the industry was looking for. And once we started getting in there and really start talking to our customers, they loved the video side of it. No problems there. They just wish it would do XYZ also. If it would do XYZ, well that is absolutely what they wanted. So we found ourselves massaging the product quite a bit. And I could tell you that there has been unbelievable amount of improvements.

The original 250 that we started marketing well over six months ago, is nothing like what we have today and its capabilities. And it also even goes into the back office software from a generic system to a system that has a tremendous amount of reporting capabilities, different features whether or not you want to even do streaming video, whether or not you want it to try to do just incidents when they were occurring, that could be uploaded. Even fine-tuning the amount of time for pre-event. So, the real issue for us George was sort of the learning curve of what the customer was needing and we've now have been able to do that.

And not only are we able to do that, but we've also designed a platform that gives us a lot of flexibility to where if we do run into another -- or when we do address a potential customer and he indicates what his true needs are, we have the ability to get in there and make it happen in most cases for them. So, that's been a challenge on that. It's not that -- we get in the door. We get in everybody's door. They see the need for the product. It's just -- it is not as generic as we would have thought it to be. They all have their unique needs.

Well, that is certainly understandable. And this seems to be an issue in any kind of product sales. In that they would say, Oh I would love to have that, if it would do A, B, and C in addition to its present capability. I guess that's just a fact of life. My other question is, that you have remarked on potential for rather large fleets. I think you mentioned one on this call, about a 5,000 vehicle fleet. Can you describe some of the applications in those kinds of environments? Airport, delivery vehicles, or passenger transport vehicles, that I get. But a generalized fleet operation. It would be helpful to have a better understanding of how your products would be helpful to them.

And here's just a real example. A lot of them can get you the basic metadata. That's real easy, the metadata. And there's devices you can hook up to your vehicle, as you know. Even there's insurance companies that have these devices that help monitor your driving capabilities a little bit. But at the end of the day, if someone get in an accident, has -- hits their brakes real hard and it triggers an event where the metadata that is there, they can sit there and say a dog ran out in front of me. And without the video, you have to believe them. When the truth of the matter is, they may have been texting or picking up their cell phone or trying to eat their sandwich or something. So that is -- the larger fleets are definitely wanting to be able to capture the video side of things.

At the same time, those large fleets do not want all of this information coming to them on small incidences. And so it may be as much as air bags got to be deployed before we really sit there and get involved in it. So there's uniqueness to them all. Everything from wanting cameras to -- that are filming an individual when they're filling up their vehicles, because it's amazing how you've got a bunch of trucks that are out there and they all have 12 miles a gallon as far as big semi or something like that, but this one only has eight. Well, he might be filling up something else at the same time, instead of just his vehicle. So there's just a lot of uniqueness to that sector. But we've got a very versatile platform as I mentioned George, that will allow us to assist them. It just goes as far as your imagination almost can ask it to.

It sounds as though, say a video application, it would not be continuously running but rather it would be triggered by events, such as refueling, heavy braking, swerving --

You can do speed. You can sit there -- it could be as simple as an individual buys it for their kids, And says look, you can drive the car to and from school but if you get outside that bubble, I'm going to know about it. Because I have this unit in there and it is programmed to where if you get out of this bubble let's call it, it is going to let me know. So that's just taking the real basic situation there far as how you would monitor your kid's driving.

Well I think a number of families would find that application to be attractive.

(laughter) We agree.

Thanks.

Bruce Smith of Safety Vision.

Hello Stan, good morning. You broke down some of your sales, the DVM-580 and DVM-750 at 17% of sales. I'm wondering, can you give us a percentage of your DVM-100? The 250, 250 Plus? LIDAR? First View and then the DVF-500?

I'm looking at Tom, and he didn't go that far as breaking all that down right now Bruce. But I'm glad you brought that up. Will make sure the second-quarter call to have more of those details in those. I can say this much, outside of the -- I would say off the top of my head, the DVM-400 it seems to be extremely doing well. We have it in our 10-Q lumped in with the DVM-100. But the 400 seems to be really getting a lot of traction out there. The 250 is going to be one of those that will surprise people because we have a tremendous amount of pilots out there whether be 5 or 10. And in some situations, with these ambulance companies we may have pilots that consist of 50.

Those orders ran, some of them we've already been told this, that it is about to happen. Those may all of a sudden be orders of 250 units or higher right off the bat. So the 250, I think that line and the 400 are going to be neck-in-neck in a little bit of a race here staring in the second-quarter. And then the 100, while it's got just the basic features, it seems that the law enforcement departments have enough money to jump up to the 400 and sort of ignoring it for right now still. Okay. I will tell you this internationally, the LIDAR is getting a lot of traction too, Tom. We'd probably have to have 20 or 30 demos out there right now on large numbers on that.

Yes internationally the LIDAR, there's a variation of the Laser Ally that contains a camera for photo speed enforcement. And that seems to really be picking up internationally. And we've got a lot of bids out on it, and that's certainly a higher dollar sale force than the normal Laser Ally too.

Okay. And can you elaborate on the First View, how successful is the body cam currently?

We -- I would say it had not met our expectations in the very beginning. Honestly Bruce, I don't know if that's a situation that the guys, meaning the independent Reps may not have been pushing it as much because it is a lower end product. But I can tell you that again there's a situation where we're aware of some demos that have been out there. We know the specs have been written to it, because of the uniqueness to it. There should be some decent orders coming in there. But it's not going to be a big contributor in the second quarter. And maybe not even in the third quarter.

I will tell you that a intense, how do I want to say, an intense modification maybe or not even that, more of an improvement. Almost a total redesign has been talked about. And is in the works. So, it will be able to have us get into other areas outside of just law enforcement. In other words, more of true security type of areas versus just law enforcement. That's one of the new products that I was elaborating on or talking about a little bit earlier that we see coming out in 2012.

Okay thank you.

Thank you. (Operator Instructions) All right. There's nothing else at the present time, so I'd like to turn the floor back over to management for any closing remarks.

Thank Keith. Well listen everyone, I appreciate your participating in this call. I know it comes quick, right after the year end call. I really do feel good about how 2012 has started. I think that you're going to see the momentum of 2012 continue quarter-over-quarter now. And also the introduction of some new products. I will point out, Tom, May 25 is our Annual Shareholders Meeting. It will be held here in the Overland Park area, Kansas City area at the DoubleTree Hotel off of College and 69 Highway. But feel free to give us a call here. We hope that you guys can come back and attend. We'll have our Board of Directors there, all our officers will be there. Product displays will be set up. And I look forward to meeting everybody at that point. So anyways, thanks again for your participation. Have a good day.

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