Digital Ally Inc (DGLY) 2022 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to Digital Ally's 2022 First Quarter Operating Results Call. (Operator Instructions)

This conference call may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The words believe, expect, anticipate, intend, estimate, may, should, could, will, plan, future, continue and other expressions that are predictions of or indicate future events and trends, and that do not relate to historical matters identify forward-looking statements. These forward-looking statements are based largely on our expectations or forecast of future events, can be affected by inaccurate assumptions, and are subject to various business risks and known and unknown uncertainties, a number of which are beyond our control. Therefore, actual results could differ materially from the forward-looking statements contained in this document, and readers are cautioned not to place undue reliance on such forward-looking statements.

Digital Ally will undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. A wide variety of factors could cause or contribute to such differences and could adversely impact revenues, profitability, cash flows and capital needs. There can be no assurance that the forward-looking statements contained in this document will, in fact, transpire or prove to be accurate.

(Operator Instructions) Please be advice today's conference is being recorded.

I would now like to hand the conference over to your first speaker today, Stan Ross, Chief Executive Officer. Thank you. Please go ahead, sir.

Thank you. Thanks, everybody, for joining us today. I'm excited to be able to report our numbers. I have with me Tom Heckman, the company's CFO. He'll go into an in-depth details of the numbers in the operation. But excited to see us come in at the first quarter numbers in excess of $10 million. That was pretty much in line with what our expectations were, which also sort of helps us validate and continue to believe in our $50 million guidance that we've given for 2022.

So let's jump right into the numbers. I'll turn this over to Tom Heckman, our CFO.

Thank you, Stan, and welcome to everyone. I appreciate you joining us today. Just to let you know, we did file our Form 10-Q on Friday, and I do encourage everyone to take a look at that for a more in-depth analysis of what went on during the first quarter. My remarks here will be pretty summary in nature, and I do encourage you to look at the 10-Q for a more in-depth review of the quarter.

If you look at the first quarter on the surface, the first quarter revenues increased over 300% -- actually 306% to $10.3 million in the first quarter of 2022 versus $2.5 million in 2021. Obviously, the acquisitions were a big part of that as they represented $8.3 million of revenue in Q1 2022, which is over 80% of total revenue. So you can see the serious impact that these acquisitions are having, at least on our top line, which is very favorable for us. I will speak more on a segment-by-segment basis a little later in this analysis.

Net income for the quarter showed a loss of $6.7 million versus income of $21.7 million in 2021, the first quarter of 2021. But I will tell you, the primary reason for that is the derivative income that we record each quarter. And I think I've cautioned everyone previously that that's a noncash kind of an accounting fiction, if you will, rather than a true analysis or a review of our operating results for the quarter.

That was -- the derivative income for the first quarter of 2021 was $24.5 million in 2021 versus only $150,000 in 2022. So clearly, a decline of $24.3 million was attributable just to this derivative income that's representative of the change in the warrant value that are outstanding. If you exclude the derivatives, the income, our 2021 net income would have been -- or net loss would have been $2.8 million versus $6.7 million for 2022. So much more in-line with what we did in 2022.

Okay. Let's look at the segments. Let's look at first our legacy business, which is law and commercial video systems. Revenues from products declined to $1.3 million from $1.9 million in the year ago quarter. Service revenues were a little bit up to flat during that same period. What I attribute the change in the revenues in the legacy business is really due to the introduction of new products, which we're very excited about, by the way. It's in the body cam area.

We introduced the FirstVu Pro and the FirstVu II in the fourth -- late in the fourth quarter 2021. And as you might expect, our channel, our cost -- our inventory channels were clogged and we had difficulty getting them in. We have customers wanting to review and look at this new technology that we're putting out there, so they've delayed purchases, which we believe will come in later in the year. In fact, we're very happy with some of the preorder sales that we're seeing in those 2 new products.

We also continue to see a migration from outright product sales, hardware sales upfront to where people are using subscription model, which is more of a service method, which we amortize or receive payments over anywhere from 36 months to 60 months. So it really equals out the revenue stream over a longer period of time rather than having an upfront sales. So that was a contributory factor to the first quarter decline in product sales.

Our gross margins also declined to 13% from 32%, which is a pretty big drop. But as you might expect, once we've started introducing these new body camera models, we did take write-offs for older body cam inventory as well as some of the older in-car video systems. We did also have some sizable write-offs in our PP&E, our personal protective equipment group, which is our Shield business. So that's what happened to our gross margins in the first quarter for the legacy business.

If you look at the ticketing segment, the ticketing segment generated $6.4 million of revenue in the first quarter of 2022, which was -- which represented 60% of our total revenues for the quarter. That's a very nice number, but we were hoping for higher revenue figures than that. And our revenues in the first quarter were challenged by a couple of factors. Obviously, the overriding concerns, the Omicron variant and the effect it had on group gatherings and cancellations of events. And then especially some of our older audiences or customers that go to the ballet and the opera and such, which is a big segment of our ticketing business, shied away from that because of the effects of Omicron. So that did have a pretty big effect on us. But I will also say that we're seeing -- we were told and now we're really seeing that the ticketing segment is very seasonal in nature.

In the first quarter, you had the ending of college football as well as pro football, which is a very big part of our business. And then you coupled that with the fact that the Major League Baseball Players union struck during the first quarter, which delayed -- well, actually canceled some spring training games and also delayed the regular season. So we had kind of a double whammy from the Major League Baseball.

Also across the board and I've been looking it up and last year, there was a significant decline overall in attendance of Major League Baseball, we're seeing that continue in 2022. And obviously, weather is a factor to that. It has been cool and damp in a lot of the Major League cities. So that hopefully will bounce back for us as well, but it did have an impact on our revenues in the first quarter.

Overall, we're monitoring the health of our customers with inflation and all the other matters that are hitting our customer base. And we're monitoring why the reluctance to go to some of our bigger events that we have tickets to. So we'll keep an eye on that and hopefully be able to improve our revenues from that standpoint.

Our gross margins in the first quarter 2022 was at 15%, which is also disappointing given the level of revenues that we had. We did have a higher-than-normal write-off of unused tickets and below cost -- below sales, below cost in the first quarter, which is understandable based on the -- what we talked about in revenues. The seasonality, the Omicron, the cancellations of baseball games, all that led to a higher-than-normal write-offs of unused tickets and coughing out sales below cost in the first quarter.

Also I would tell you, we've entered into some rather large sponsorship deals late in 2021 and also in 2022. And I'll tell you why that matters. We did enter the USA Today Gannett contract, the iHeart Media contract, the Sinclair broadcasting contract, among a bunch of others, but those are the larger ones. And the way we account for sponsorships like that, meets our significant payments, meets significant obligations and investments that we have made in that business.

The accounting is that we amortize the cost of those sponsorships on a level basis over the terms of the agreement. So the expense of those sponsorships are the same in month 1 versus month 12, if it's a one-year contract or month 36 -- if it's a 3-year contract. So we level out the expense of that. However, if you look at the revenues, they're much more back-end loaded. As you can just start on a media campaign or a location that we're advertising on sponsoring, it takes a while for customers to get comfortable with that, see where it's at, know where it's at and be comfortable with the click-through revenue. So that the revenues are often back-end loaded whereas the cost of it are level yield.

So we do expect and have seen some losses early in these sponsorships only to reverse in the later months of those contracts. So we're hoping that, that trend continues and we see dramatic improvements in our cost of sales and therefore, gross margins on a go-forward basis.

If you look at our revenue cycle management segment, we did $1.9 million in revenue or 18% of the total. We completed 2 acquisitions in entire 2021, which began, I think, in June of 2021. During the first quarter alone, we completed 2 acquisitions in 2022. One was for roughly $2 million and one was smaller at about $350,000. So we're continuing our path of acquisitions. And as we acquire new businesses, medical billing businesses, obviously revenues will continue to increase, and that's what we're looking for by doing the roll-up strategy in that area.

Our gross margins were pretty strong at 37%, which was very good, but we could probably have done a little better. One of our major acquisitions early in 2022 was a dental billing company, whereas all the other ones have been medical billing. And our dental billing acquisition is kind of breaks the mold a little bit in that it uses a national footprint. They're recruiting and trying to acquire new customers on a nationwide basis, whereas our medical billing companies are much more regional -- local to regional businesses.

And their cost of customer acquisition is much higher than the medical cost of billings. So that hit our margins in the first quarter as well as this dental billing company is a high growth but high cost of acquisition of new customer business. So it did damage our margins and actually resulted in, I think, negative operating margins in the revenue cycle business. But we are very, very high on that business. We believe it's headed in the right direction. And we do believe that our success with all these acquisitions will really do nothing more than proved that our template, our acquisition template, is good and strong and appealing to customers.

And just on a general basis, we're looking for medical billing or dental billing agencies at about 1x revenue and 3x EBITDA. So very, very modest purchase template -- purchase price template from that standpoint, which we believe that once we get them inside the business and have time, and I'm talking 6, 9, maybe 12 months out, doing a full integration where we install our people, our systems and such that we'll even reap better margins and operating margins at the end of the day.

So on an overall recap for the first quarter, our revenues were very good for Q1. Our gross margins were not where we wanted them to be, but we know where our problems are and why that happened. We're working on those and we believe future quarters will prove that right with increased revenues, gross margins and operating margins.

If you look at our balance sheet, it remains very strong. We have cash balances of $2.5 million at the end of the quarter. We got positive working capital of $19.5 million and stockholders' equity of $47.5 million. So our balance sheet is very strong, and it will give us the backbone to go out and do more acquisitions on a selected basis and improve our business model.

So with that, I'll give it back to Stan.

Yes. Thanks a lot, Tom. And again, I just want to reiterate some of the things that both the medical billing division has been doing. As we mentioned on our year-end call, they have some letters of intent already out there for a couple of acquisitions that they hope to get completed fairly soon.

I will say on TicketSmarter, congratulations. Since the end of the first quarter, I think they've announced not only just recently a deal with sporting news, but also FanSided and the Professional Fighters League, which got quite a bit of exposure in the press as well. I've noticed a lot of the business wires picked that one up because of the attention that is given to that up and coming powerful league that's out there, rivaling UFC and others. So both those entities are really doing very well.

The legacy business with the new body cameras and the in-car system is doing very well. We're seeing some good opportunities in our commercial business that we hope to be making some announcements on very soon on some strategic alignments that we're making there. So it's been an exciting year far as 2021 and 2022. You can see why we're enthusiastic and still feel very strong about our ability to meet the guidance that we gave of $50 million for 2022.

So what I'd like to do is go ahead and open up the floor for Q&A and address any questions you all may have.

(Operator Instructions) Your first question comes from the line of Rommel Dionisio with Aegis Capital.

As you guys evaluate new acquisitions and are integrating the ones you recently made. Could you maybe walk us through some of the metrics you think about in terms of profit generation? Obviously, it's the time to be investing in these newly acquired businesses and so forth. But how do you think about that getting to a breakeven scenario for TicketSmarter and potential future acquisitions as well?

Yes. Thank you, Rommel. As far as TicketSmarter goes, that's a different business for us, and it really is temperamental from a customer standpoint. So it's a little more of a bouncing horse to ride, if you will, to create templates in that. But we're looking at rightsizing and being very much more selective, if we can, on our sponsorship and contracts that we get into. That will be much more predictable, if you will, in terms of the revenues generated by it.

Some of the problems we've had revolve around that and where these sponsorships that we have also provide us tickets where they provide us so much value in tickets and we pay them for the sponsorship. We turn around and have to sell those tickets. And as I mentioned in my part of the discussion here that we did incur some write-offs for unused tickets and tickets that were sold under cost. And a lot of that was from the sponsorships. So we're doing a better job in looking at the sponsorships we're getting into, the number of tickets we're getting in return. The types of tickets we're getting in terms and really the dollar in that we're required to.

As far as the medical billing business, man, that is very -- I like to call it mailbox money, if you will. It's very predictable. Other than this dental billing business, the businesses we buy generally 1x revenue, 3x EBITDA. And we believe that once we fully integrate those, we'll be able to double the EBITDA based on the same level of revenues. So that's very exciting for us.

And we're able to pretty much buy not as much as we want or every week or anything, but there is a peel-out in the marketplace to our template in how we're going about our business. And we have a line of potential acquisitions that we're able to select from. So that's kind of the way I look at it.

The TicketSmarter is much more difficult to predict and not very predictable from a revenue and cost of sales standpoint. But we are taking control -- more control of the sponsorships. And through that, we'll be able to control better write-offs of tickets in that. Medical billing, we're excited about. Obviously, it's been a bright point for us.

Yes. And I'll just add a little bit, real quick on the TicketSmarter and unleash a sector that I'm really excited about. And that is that we've been going out there. On some of our sponsorships have been, let's say, not only the naming rights for amphitheaters and stadiums along those lines to where not only we get the naming rights, but we also get the ticketing rights for all events that may be going on at that venue. And so that's one avenue that we're just there.

And as it happens, we're the primary ticket source, and there's a little caveat that comes into play here. Utilizing some of our background and some of the relationships that we have, we also will be in a position to bring additional business to those venues to where, again, we're not only -- have the ticketing capabilities, but we also have the capabilities of bringing in the proper acts that would, we do believe, will generate a lot of good revenue and profits associated in certain markets.

So the TicketSmarter is a lot more opportunities than just driving traffic through sponsorships through the relationships that we have with like iHeart and the others. But the capability of actually utilizing our relationships with acts that are out there and guiding them or being part of bringing them to venues that we have all the ticketing rights to.

Okay. And maybe one follow-up question. You guys gave us some commentary on the new product. The new body-worn cameras, the FirstVu Pro and FirstVu II. I wonder if you could just give us a little color in terms of the progress on those -- on that launch here thus far in 2022. Is that gaining some new customers for you? Is it mostly just kind of more deeply penetrating existing customers?

Great question. I'm glad you brought that up because it is such a game changer that we are seeing new customers that we're able to bring into the Digital Ally network as far as our legacy business. We're seeing customers that maybe decided that they wanted to go a different path several years ago that are saying, okay, you clearly have made the innovation again. We want to come back to you. So we're seeing not only our legacy customers, but some of them are returned, some of them are also new ones that we just have never had before. So great, great question. Thank you.

The next question comes from the line of Bryan Lubitz with at Aegis Capital.

All right. So sticking with the cameras Rommel obviously brought up, when you go to your guys' website now, it looks like you're almost giving the cameras away for free. Can you talk about that a little bit?

Yes. I think it looks that way maybe because -- I mean, the industry has really went to more of a subscription model, and so some of the people asked us a little bit about our cash burn and everything. Let's just say, round numbers, a small department orders, $0.25 million worth of body cameras or maybe in-car. And what we end up doing is we have a tremendous amount of that expense upfront, but then they enter into a contract that has been paying $50,000 a year over 5 years. And so the margins are really good. But that's sort of one of the biggest things that you got to notice is how the deferred revenue continues to improve as we continue to get these new and large contracts. I think what we'll do is some of the larger ones will go ahead and announce it and make sure and announced that it was in a subscription format.

But again, as we continue to build that up and the closer we get to the crossover number, the legacy business is just going to be cash flow in extremely well as we build on that. So it is a very, what you will say, low entry model that works very, very well in today's climate and environment. It also puts us in a little bit of a league to where there's not a lot of newcomers are coming in with the capability putting that program together.

You may recall, Bryan, many years ago, we battled that with Axon. I mean, they had the war chest to sit there and allow agencies of full year just trying the product. And at the end of the day, they got to pay the piper, they realize that. But we are now in a strong enough position where we as well can offer that type of service and that kind of business model.

So the business model that you're referencing is sort of like the cell phone model where you guys, with the right contract, are going to sign these guys up, I guess, with your partner, Amazon Web Services, for 3 to 5 years. Is that what you're looking to do there?

That is correct. Absolutely. That is correct.

Okay. Now does that -- obviously, is that what's playing into your SG&A with the expenses being up around 7.5% this quarter?

Yes, it comes into play. And then obviously, when you're looking at some of the acquisitions that we do and some of the partnerships, you get a little heavy on some of the legal side of things as well that come in and some of the fees associated with that. But yes, it's there.

Yes. And I would say insurance continues to be an issue for us. That's a big part of the G&A increase as well, just general inflation, travel for our people is up, the cost of travel is up. So yes, I mean we're getting hit from the inflationary side as well as we're reopening the business. A year ago, we were mothballed really and doing very little travel, if at all. And now we are able to travel and go see our customers and do our technical integration and such. So yes, we're seeing that.

So the expansion, obviously, is costing more. Where do you guys look for a sweet spot per quarter for that number? Are you looking to be in that 7? Are you looking to be 5? Or do you guys have an idea where we should expect to see those expenses?

Well, there's a component, especially in the medical billing area where you just going to have more G&A, if you will, as you acquire more businesses. So if you exclude that, yes, I think we're on track to maintain that line when you're looking at the legacy business plus TicketSmarter. But you got to realize that the medical billing is growing, and it will be linear, if you will, with the amount of acquisitions we do there.

Okay. Awesome. And now obviously, this quarter was hit a little bit by bad weather for the tickets and things of that nature. You guys still feel confident that you're going to look at $50 million for the year. So do you expect next quarter to be -- do you expect all the quarters to be the same around $13 million to $15 million? Or do you expect to back-end it? What should we expect in terms of revenues moving forward?

No. I think you're going to see them -- first and second quarter from everything we're learning is sort of the weakest of the quarters when it comes to at least the ticketing side of things, okay. And again, we think that the legacy business is, our T&Es that we've had out there and the new customers, the new product, filling that pipeline, we're gaining traction there. So I think you got to expect it sort of to walk up.

But with the third and fourth being strong because even in the second quarter, we're here, I mean you still got a lot of kids in school. They're just now wrapping up. I mean, my daughter, I think, finally gets out this week. And so when that starts to happen and everyone is out of school and they start going to the ballpark and the weather is better, you start to see that to pick up. I mean you'll start to see the music festivals pick up. You'll start seeing a lot more concerts and outdoor venues.

So it's just -- it gets stronger, I would say, about this time of the year. In June, it kicks in pretty good and then it should just continue to walk on up. And you got football around the corner. So yes, it is what it is in regards to the seasonality and that's only because of the amount of events that are available to go to in which ticketing is an issue. That's why I love the fact that we're looking at the diversification.

I mean, obviously, the legacy business is an essential business with law enforcement. The commercial business, when you're talking about trucking companies and fleets along those side of things, they're virtually essential. The medical billing, essential. So a little bit of the wildcard would be the ticket. But with what we're doing and picking up venues that are more stadium, maybe enclosed where weather won't come into play as much, some things along those lines, we can protect ourselves a little bit there.

Right. And this is my last one for you guys. So from when you guys acquired TicketSmarter, the traffic, if you will, to that site was minimal and you've expressed in the last call how much it's gone up, it's dramatically gone up. The thing we always talk about on these calls is getting you guys out there. You have a great story. You're up 300% revenue year-over-year and things of that nature.

What can we do to utilize that traffic, if you will, all of those people that are going to 2 million a month or whatever it is to TicketSmarter to try and generate marketing for Digital Ally. Do you guys have plans to utilize that data in any way for that?

Yes, absolutely. And again, I think when we acquired TicketSmarter, I mean they were less than maybe 1 million visitors, maybe even a year, when as far as organically. And we're seeing north of 5 million a month now. So we're getting the traffic. It's just, okay, are people ready to go? Are they going to buy? I mean we're very efficient in regards to how we go about growing these relationships, these partnerships and also like the professional fighters league. I mean I think Yahoo! Finance and Bazinga and Seeking Alpha, a lot of those entities picked this up as well. And we'll be on their website and these other website as official partners.

So again, we acquired them September 1. We're learning their business. We've given them the capital to seek out these partnerships. And now we've got to give them a little bit of time to make sure that all the integrations in there and then continue to see the growth. But I don't know, I don't even know the multiple to use in regards to how much we've increased traffic to TicketSmarter.

(Operator Instructions) Your next question comes from the line of Mike Albanese with EF Hutton.

Just kind of a quick follow-up. You guys provided a lot of great detail today. So much appreciated. I just want to go back to the RCM business real quick and hopefully just kind of get a little bit more color and a better understanding around the medical billing versus dental billing businesses.

You talked about how dental billing, high growth but higher cost of customer acquisition. Apologies if I missed this in kind of the prepared remarks. But just help me understand why that is and then kind of what your thoughts are on that moving forward now that you've had a chance to, I guess, kind of compare the 2? Do you want to continue to add dental billing companies? And maybe if you can just add some color on that, that would be great.

Yes, Mike, thanks for that question. Good question. Yes, the dental billing is new to us, new to even our Nobility partners in the joint venture there. What you see there is there's so many more dental practices, individual dental practices that need our service because they don't have the volume to employ a full-time billing and collection persons, if you will, that could spend their time and expertise learning the codes and all that, and getting good collection results. So we provide that. So it's a much more in demand, if you will, and new to the business.

The medical billing side is -- a lot of people have done this for a lot of years. It's normal. In the dental side, it's not so normal. So that's why it's a much higher growth business. And they do a lot of internet advertising and marketing that way and you get the click through revenue or click through inquiries on that. So they're doing a national search for new customers and to acquire those new customers is more expensive than sending somebody out to a clinic or a doctor's group to talk to the doctors and such on a local basis.

So yes, we want that business. It's -- the business we acquired was really overstaffed from that standpoint. And our template as to how we service those medical billing customers will help us in the billing side in the dental side as we integrate that and send it overseas to our billing practitioners, if you will, or our contractors. So we see great growth in there.

On the medical billing side, the growth is much more slow, if you will. I mean, they do grow, but it's very hard to acquire a new doctor practice or hospital or clinic or whatever for our medical billing much easier on the dental billing side, and it is national in nature.

I have no further questions showing on the phone line at this time. I would now like to turn the call back to our speakers for any additional and closing remarks.

Well, thanks, everybody, for joining us today. Again, we're excited to have reported the first quarter numbers. We will continue to keep you aware of events that occur when they occur, the best we can and look forward to continue our conversations in the coming months as we keep rolling out, making acquisitions and wrapping up some quarters here. So thank you all for joining us.

Ladies and gentlemen, this concludes today's conference call. We thank you all for participating. You may now disconnect.