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LoJack Corporation (NASDAQ:LOJN)

Q3 2008 Earnings Call Transcript

November 4, 2008, 9:00 am ET

Executives

Paul McMahon – Director of Corporate Communications

Richard Riley – Chairman and CEO

Ronald Waters – President, Interim CFO and COO

Brian Boyce – Chief Accounting Officer and Corporate Controller

Analysts

Paul Coster – JP Morgan

David Gold – Sidoti

Jeff Rath – Canaccord Adams

Jeff Blaeser – Morgan Joseph

Scott Sutherland – Wedbush Morgan Securities

Operator

Hello and welcome to the LoJack Corporation third quarter results 2008 conference call. Later there will be an opportunity to ask any questions you may have. It is now pleasure to turn the call over to Mr. Paul McMahon; please go ahead.

Paul McMahon

Good morning and thank you for joining us today. Our moderator is Richard Riley, Chairman and Chief Executive Officer. He will be joined on the call by Ronald Waters, President and Chief Operating Officer and Brian Boyce, Chief Accounting Officer and Corporate Controller. An archive of the webcast will be available through lojack.com in the Investor Relations section.

Any of our statements during this call that are not statements of historical fact are forward-looking statements. These forward-looking statements are based on a number of assumptions and involve a number of risks and uncertainties and accordingly, actual results could differ materially.

For further information regarding forward-looking statements and the factors that may cause such differences, please see the warning regarding forward-looking statements in Item 7 of our Form 10-K for the year ended December 31, 2007.

I will now turn the call over to Rich Riley.

Richard Riley

Thanks, Paul. Good morning everyone. Thanks for joining us on the call this morning. I will begin the call today with a few comments on our overall performance for the third quarter. As part of that overview, I think it is important to touch on the effect of the broader domestic auto market and on the more sweeping general economic factors that are having an impact on consumer confidence, general business conditions and our performance this year.

Finally, before turning the call over to Ron, I will provide an update on guidance for the full year. Ron will review the detail around our specific financial performance for the third quarter and will provide some insight into our current operational performance and our continued efforts to mitigate the effects of these general economic conditions wile further diversifying our business. As he completes his comments, we will open the call up for your questions.

As now for other way we are operating in very challenging economic times. The current international financial crisis has lead to a worldwide liquidity problem a widespread credit freeze, the worst level consumer confidence in decades and a dramatic decline in the capital markets. All of these factors are now having a powerful impact on the performance of most businesses with the domestic auto industry particularly hard hit.

Domestic auto industry has joined to its worst year and almost 16 years with annual new car sales projected to be approximately 13 million to 13.5 million units in both 2008 and 2009, compared to new car sales of over 16 million units in 2007. Yesterday there was a fair amount of bad publicity or bad news reported with respect to the auto industry and the units sold in the month of October were in all time low, I think a 25 year low.

I do want to point out that we have also made significant investments in the construction and the motor cycle markets over the last five years, in order to diversify our business. While these new businesses have grown over that period, they provide a little help in the current year as a widespread economic problem in the U.S. have also had a negative impact on these markets. Ron will touch on our specific performance in these areas when he makes his comments in a few minutes.

While our financial performance in the third quarter was negatively influenced by the broad economic factors that I just reviewed, there were also some very positive items that both Ron and I will address. Consolidated revenue in the third quarter was down only 4% over the prior year as a strong international results how to mitigate our performance in the domestic markets.

Domestic revenue was down 21% from prior year levels for the third quarter on a declining unit of 22%. Strong results primarily in Latin American and Africa generated an increase in international revenue of 47% over prior year levels for the third quarter. The recent trends in the domestic business are now expected to continue to the end of the year and well into 2009.

While the international markets appear to be softening we continue to expect a double-digit increase in this area for the full year in 2008. Consolidated gross margins for the third quarter decline 9% from prior year levels due to the effect of the decline in domestic units and the impact of accounting for our investments absolute software.

In the third quarter we continue to make changes and modifications to cost structure in related sales and operational infrastructure to address the specifics decline in domestic business. While we make considerable progress over the first few quarters of this year, we will continue to make adjustments based on the recent acceleration and the decline of domestic market.

Ron will review some anticipated changes before year-end during his comments. The other significant factor that I want to address is the write down of the goodwill associate with Boomerang. In the third quarter we took $37.7 million non-cash after-tax charge related to the impairment of the intangible assets recorded at the time of the acquisition of Boomerang Tracking.

As we have discussed during previous calls there is a mandate in Canada it requires us to convert our long-standing customers from analog to digital technology by November the 16, 2008. This conversion would have been challenging in strong market conditions given the unprecedented economic times that we find ourselves and currently the negative impact of the transition on customer retention has been magnified.

Additionally the Boomerang business is impacted by the fundamental shift in the Canadian market away from high-end vehicles, but Boomerang historically had a high penetration to fuel efficient and less costly vehicles. This adjustment and the intangible assets related to Boom reflects our estimates for the current fair value of the business as we work to generate new customers and convert our existing customers to digital technology.

I would also like to say a few words about our diversification efforts over the last several years. LoJack had an almost exclusive dependency on the auto markets recently 2003. In light of that single market focus we imparts on a planned diversification. Over the last several years we have leveraged the strong LoJack brand and made investments to enter the construction, motorcycle, laptop, cargo and people at risk markets. All of this, while increasing our focus on some key international opportunities. Several of these new initiatives develop to mitigate the effects of the depressed domestic auto market in the third quarter and for the full-year.

I touch on the performance of international business, which delivered strong results for the third quarter, as expected to deliver double-digit growth for the full-year. International business delivered strong results in revenue and profitability for the last several years, is on track to ship more units for the full-years on our domestic business to the second consecutive year.

While it is still early, we are encouraged by performance of our cargo tracking business for Supply Chain Integrity. The business continues to evolve, providing comprehensive tracking, monitoring and information system solutions to help companies manage corporate risk as it relates to the integrity of the Supply Chain.

Our investment to buy the asset of Locator Systems and tend to the market for tracking peoples with Alzheimer’s and autism has also been well received. More than 6 million people in U.S. alone have from Alzheimer’s or autism, but very percentage of those individuals expected to wander and become loss. We work aggressively with law enforcement with expanding access to our proven solutions for its many individuals as possible.

I am also pleased to report that in September, the Federal Communications Commission granted LoJack’s 2005 petition allowing the nationwide frequency, on which we currently operate to be used from more than just on debt recovery. For the slowing, the network may never used for diverse tracking and recovery applications including cargo, hazardous materials, missing people at risk and individuals of interest to law enforcement. Having our petition approved is another milestone in our diversification efforts and enables us to leverage our proprietary technology and the unique relationships with law enforcement.

I think, if I put them all together before turn it over to Ron, while we were operating one of the most challenging economic periods in this industry, we continue to manage the business aggressively, deliver a moderate profitability on our pro forma basis, generates strong cash flow and are the making necessary investments to diversify the business for the future. As the size and strength of our balance sheet, we generated more than $8 million in net cash during the third quarter, one of the worst economic periods in decades.

Finally, turning to our guidance for the full-year; we now expect revenue to be between $199 million and $202million. Pro forma earnings per fully diluted share to be between $0.50 and $0.53 and gross margin as a percentage of revenue to be approximately 53% for the year. The pro forma numbers exclude the charge for the Boomerang impairment, the Supply Chain Integrity items and proposed restructuring in the fourth quarter. It also excludes any possible valuation adjustments in the fourth quarter to our equity investments.

With that I will now turn it over to Ron.

Ronald Waters

Thanks, Rich and good morning. Before I take you to the details of our financial results, we will provide some operational highlights. I want to you aware that, yesterday we announced that our search for Chief Financial Officer is complete. I’m very pleased to tell you that Tim O’Connor, will be joining LoJack’s Chief Financial Officer and Senior Vice President.

Tim comes to us from American Power Corporation, where he served Senior Vice President of Financial Operations, prior to that he served his Vice President for Finance for the Global Technology and Manufacturing Group with Procter & Gamble from 1988 to 2005, Tim held various finance, administration and internal audit positions with the Gillette Company.

Tim brings to LoJack’s strong financial background and extensive international experience. He is provided financial and strategic leadership to Global Manufacturing, research and development, new product development and consumer product marketing organizations. He will be a key member of our executive team as we move forward with our plans for diversification and global expansion. We look forward to his arrival later this month.

Turning to our financial results. On a consolidated basis excluding Boomerang, units sales for the quarter increased 12% year-over-year, domestic unit volume for the quarter decreased 20% over the prior year levels, while international unit volume in the quarter increased by 40% over the prior year. Third quarter consolidated revenue decline 4% from prior year levels to $52.9 million. Domestic revenue for the quarter decline 21% from the prior year to $29.9 million and our international revenue in the quarter increased 47$ from the prior to $17.7 million.

Boomerang Tracking had revenue of $5.3 million in the third quarter compared to $5.4 million in the third quarter of 2007. Domestic revenue includes $500,000 related to Supply Chain Integrity due to it’s inclusion in our consolidated financial statements as a ownership share has now increased to 60%. For the quarter our consolidated gross margin dollars decline 9% from prior year levels to $28.7 million and our gross margin as a percentage of revenue was 54% compared to 57% for the same period in 2007.

For the quarter, our domestic gross margin dollars decreased 29% and gross margins as a percentage of revenue decreased to 55% compared to 61% for the third quarter of 2007. The single largest reason for the domestic gross margin percentage decline was the lower domestic dealer volumes and to a lesser extent normal amount Absolute Software related contra revenue for the quarter as a result of the decrease in Absolute Software share price since December 31, 2007. This compares to approximately $600,000 of revenue in the same quarter one year ago.

International gross margin dollars for the quarter increased 60% from prior year levels and gross margin as a percentage of revenue was 56% compared to 51% one year ago. The mix by license fee and by product contributed to the percentage increase as well as decreased operating costs in Italy in the quarter.

Boomerang gross margin dollars for the quarter were $2.4 million, which represents the 5% increase over the third quarter of last year. Gross margins as a percentage of revenue for Boomerang was 46% compared to 43% in the third quarter of 2007. The increase was primarily related to lower product cost.

To summarize, breaking down the approximate 270 basis point decrease in consolidated gross margin percentage year-over-year, the reduction in domestic units represents the single largest driver at just under 640 basis points. Lower Absolute Software related revenue represents a 60 basis point impact. International license fee unit volumes were 47% higher than last year in the related increase in revenue contributed to a 380 basis point increase. Other factors affecting gross margins were nominal.

The third quarter results reflect a non cash after tax charge of approximately $37.7 million or $2.23 per fully diluted shares related to the impairment of the intangible assets establish upon the acquisition of Boomerang Tracking. The impairment charge reflects our estimate of the fair market value of the business, as we work to generate new customers and complete the conversion of our existing customers from analog to digital technology. Due to the impairment charge, the reported operating loss for the third quarter was $33.2 million compared to operating income of $8.2 million for the same quarter a year ago.

Pro forma operating income for the third quarter, excluding the impairment charge in 2008 and the collection of a judgment against Clare, Inc. in 2007 declined 34%, to $4.9 million. The net loss calculated on a GAAP basis for the third quarter was $34.7 million or $2.05 per fully diluted share down from net income of $6.3 million or $0.33 per fully diluted share in the same period of the prior year.

Pro forma net income from the third quarter declined 36% to $3.6 million from the same period last year, while pro forma earnings per fully diluted share was $0.21 compared to $0.29 for the same period last year. The pro forma results exclude the impairment charge the reversal of a deferred tax asset taken as a result of the consolidation of Supply Chain Integrity and the collection of a judgment against Clare Inc. in 2007.

In July 2008, we along with three original investors in Supply Chain Integrity invested in additional $1.9 million into Supply Chain Integrity. Our portion of this additional investment was $1,415,000, which coupled with a conversation of a $389,000 note receivable into common stock, resulted in our owing approximately 60% of Supply Chain Integrity after this financing round.

As a result of our increased interest in Supply Chain Integrity, the third quarter results are consolidated rather than be included in other income and expenses as they had been in previous quarter. Due to the increase in our equity investment of Supply Chain Integrity from 40% to 60% and its result and consolidation in our financial statement include in our taxes are $553,000 related to write-off of deferred tax assets.

On August 2007, we have received $1.2 million payments related to our litigation settlement with Clare Inc., with 85,000,000 being applied as recovery of prior period product development costs and balance of $416,000 applied as an increase to interest income. Our net cash provided by operating activities for the quarter was $8 million. The company’s cash and short-term investment balance on September 30, 2008 was $66.6 million, which positions as well to rather the storm and global credit markets and continue our diversification initiatives to the LoJack business.

During the third quarter of 2008, the company did not repurchase any shares. During the nine months ended September ended 30, 2008, the company repurchased 1.3 million share at an average prices of approximately $10.83 per share. As of September 30, 2008 the company had no outstanding repurchase authorities under 10b5-1 trading plans and approximately 1.0 million shares available for other purchases. Our third quarter auto dealer bulk installation represented 18% of total dealer installations. This was down 2% sequentially from the second quarter of this year and essentially consistent with the third quarter of 2007.

Our capital expenditures in quarter were $900,000. Our depreciation and amortization in the quarter was $2 million. We expect our fully diluted shares outstanding to be approximately $17.3 million for the year and we continue to expect our 2008 tax rate to be approximately 23% to 25%. At this point I would like to share some perspectives on our core operations and related market dynamics during the quarter. The tightening of credit has negatively impacted domestic auto lending and related new vehicle sales. All lending peers experienced the decline in approvals; moreover loans that were approved by the lenders were only approved for 80% or 90% of the vehicle value versus over a 100% before the financial crisis.

Consumers have been required to bring more cash to the deal for down payments and this dynamic has become a barrier for some. Compounding the tight credit is a rolling consumer confidence spending from declining home value increasing cost of living and reduced retirement savings. If your consumers are coming into the showrooms and those making purchases are more delivered in their spending as they have less disposable income.

These dynamics had made for a challenging selling situation in the F&I office where aftermarket products like LoJack are sold. All of the regional domestic markets and all of the major auto makers have been adversely affected by the credit crisis. As we have said before the issues are systematic and not specific to LoJack though our business has clearly been impacted. With sales expectations of less than 13.5 million new vehicles for 2008 dealers are looking for ways to generate profit on the vehicle that they do sell.

Our business to continue to track to those manufacturers who are increasing market share such as Toyota and Honda and dealers especially the national larger dealer groups continue to view LoJack as a product that contributes to their profitability. Our well known brand, proven technology and association with police make the LoJack a product that consumers see valuing.

Dealers continue to present LoJack and are committed to our product. The challenge is that their customers are limited in what they can spend. Our commercial business continues to suffer in the third quarter with a 30% decline in volume. Construction projects have slowed and as a result equipment owners are not purchasing new equipment or making other capital expenditures. Our motorcycle business for the quarter was essentially flat on a unit comparison basis reflecting similar dynamics to those in the auto channel though rest of the year.

Before moving to our international business I would like to address one more issue. There has been a good deal of news coverage about dealers declaring bankruptcy due to the economic strains on their businesses. To-date we have not been materially impacted by the closure of any dealerships related to the credit crisis. However, we remain aware of the challenges facing dealers in regular conversations with dealer principles and management.

Additionally we are tightly managing our accounts receivable. Our international business performed very well in the third quarter and has met our expectations for strong unit growth. As Rich noted, several of our larger licensees in Latin America and Africa have increased their unit volume and Latin America and Africa, which represented the majority of our volume that business driven by insurance mandates, which are less volatile than auto dealer sales in a difficult economic situation, but we do expect that their business may soften as a result of the credit crunch.

Our business in Europe is more dependent on new vehicle sales and is experiencing challenge similar to the U.S. In Italy, our progress continues to be measured due to the impact of the economic downturn. Though, auto sales have dropped 12% for the quarter and the business claim is challenging, we have much opportunity before us based on our relatively short time selling in the market. We continue to sign new dealers, sign new customers onto service contracts and plans and build relationships with manufacturers and insurance companies.

Additionally, I’m pleased to note that we have recently hired a local General Manager for the business. He comes to us with sold experience in the automotive marketplace having served in several management positions with the Pirelli Group the multinational tire and auto parts manufacturer and MOMO, an Italian manufacturer product for the motor sports industry and general auto market.

We have had several questions relating to a law in Brazil, mandating installation at the factory of anti-theft equipment that allows vehicle tracking. Though, this laws expected to be a benefit for our licensees business, there is still much uncertainty around enforcement of the law until further progress is made to clarify the level of enforcement either our licensees, LoJack is changing expectations.

In September our former licensees in China, Kington Holdings formally filed a counterclaim against our subsidiary LoJack Equipment Ireland Limited in our ongoing proceedings with the American Arbitration Association. Their formal counterclaim is consistent with their regional demand in November 2007, which we have previously communicated. In October, the arbitrator awarded LoJack Ireland, a preliminary injunction which direction restricts the formal licensees from competing with us for a period of one year using the radio frequency granted by the Chinese government for operation of the LoJack System in China and disclosing or using any of our proprietary information.

The former China licensees has also filed a claim in Massachusetts in Superior Court against LoJack Corporation alleging interference with contractual relations and seeking to hold LoJack Corporation liable for any findings in the arbitration proceedings against LoJack Ireland. It also seeks injunction relief preventing us from entering into a new license agreement with a third-party in China.

We continue to consider the former licensees allegations and claims to be completely without merit. Before closing, I want to note that we will continue to bring our operational cost structure inline with expected auto market demand. As a result, we expect to recognize a charge of $1 million in the fourth quarter of this year. We believe that these changes will provide an annualized benefit of approximately $5 million beginning in 2009.

The effect of the one-time charges this quarter, masks our true operating performance for the third quarter. As a result of tight management of our business, we have remained financially strong and we are successfully mitigating the issues in our markets.

We are proactively taking steps to position the company for long-term growth as global markets emerge from these recessionary times.

With that Rich, Brian and I are open to your questions.

Question-and-Answer Session

Operator

(Operator instructions) And we will take our first question comes from Mr. Paul Coster of JP Morgan; please go ahead.

Paul Coster – JP Morgan

Thank you, good morning gentlemen. Can I start just by drilling down on the International business a little bit? I note that the unit volumes are up about 40%, but revenue was up 47% year-on-year. So what is the driver of the higher ASP?

Richard Riley

It’s the mix of business with a various licensees.

Paul Coster – JP Morgan

Was there any FX effect at all?

Richard Riley

Nominal. One of our transactions is in U.S. dollars.

Brian Boyce

Most all of our transactions, Paul, are in US dollars

Paul Coster – JP Morgan

Is Italy profitable on the standalone basis yet and if not, is there a sort of go no go decision or is it beyond that point?

Richard Riley

We continue to invest in Italy it is not profitable on a standalone basis. We believe the break-even period is probably in 2010 as opposed to 2009, which we have suggested in the past. We continue to feel positive about the investment that we have made, but clearly what happened in the U.S. from our auto market prospective is now stilling over into Europe.

Paul Coster – JP Morgan

Okay. A couple of many questions to Ron, the CapEx with 900 K this quarter, moving forward to you kind of said ’09 ready? Do you anticipate it being kind of flat or changing at all?

Richard Riley

Nothing significant.

Paul Coster – JP Morgan

Okay and then on the bulk install, I just missed the percentage of domestic deployments that were bulk installs?

Rickard Riley

18%.

Paul Coster – JP Morgan

18% got it and I think that’s from me. Thank you.

Ronald Waters

Well thanks

Operator

Our next question comes from the line of David Gold from Sidoti; please go ahead.

David Gold – Sidoti

Hi, good morning.

Richard Riley

Good morning, David.

Ronald Waters

Good morning

David Gold – Sidoti

Can you speak a little bit about volume pricing and sort of how it works on the write-down? So in other words presumably, with dealer taking lower volume, what sort of happens again if you getting much pushback, I’m assuming pricing sort of goes the other way, pricing goes back up I guess.

Richard Riley

Are you taking domestically or internationally?

David Gold – Sidoti

Just domestically.

Richard Riley

Domestically, there is not really volume variable pricing as we have in the international markets, if anything our average revenue per units probably up slightly because we have lower bulk installs.

David Gold – Sidoti

Yes, but I mean guess the question sort of goes to that. On the bulk installs, so I mean maybe I should faced it from properly, but essentially, one would think trend that you are seeing in it’s sort of away from bulk install at this juncture as dealers are trying to preserve capital and so, I guess what I am trying to get out of is, I’m trying to understand, if you able to go back to sort of the prior pricing, if dealers are pushing back much given that now they have a better glimpse as to, what it sort of truly costs to you?

Richard Riley

The dealers always kind of pushback in periods like this and having a number of other issues in some other areas. So, they are always continues in negotiate with the prices. I wouldn’t say there is a lot of moment there, what I would say is, that has we move back from bulk installations to regular installation, we work to the real pricing and so, as Ron as indicated it has been a bit of lift, it is not significant, but bit of a lift in our average revenue per unit.

David Gold – Sidoti

Gotcha. It’s helpful, Rich, thanks and then on the cost cuts, can you speak about where you making those?

Ronald Waters

The plans are still in place being prepared. As I said $5 million charge and we have $5 million savings target.

Richard Riley

Who will made a number of cuts as you gone through a years as well. So, many of those cuts have been through the operations of the organization. We brought somebody inhere couple years ago, we will continues to make that operations far more efficient and far more productive and so, we have managed to take some costs last year and we continue to do same this year through the deployment of the new techniques out in the field and the leverage of some outside installation capabilities. I think as we go forward, as we made some changes or some attrition in the company was not replace some of the position and so its really effected most all of the disciplines at some point on this year.

David Gold – Sidoti

I see and then on sales and marketing, how fluid is that I guess as we are starting to think about 2009, essentially your business holds continues to pullback on that or do we sort of maintain it?

Ronald Waters

I would suggest to you that, we had forecasted an increase for the current year will probably be flattish to slightly up for the full-year we pullback a little bit, not so much on the brand building activity as from a cable perspective. You have seen our cable program, maybe somewhat in the internet side on a go forward basis we’d like to maintain it. Our diversification efforts are to extent the brand. So we think, maintaining that marketing spend will help us not only from a purchasing intent on the auto side, but build the brand.

David Gold – Sidoti

Got it and then just one last clarification, if can. The Clare settlement, can you go over those numbers again?

Richard Riley

Sure. There were…

Ronald Waters

$8,000 and reduced product development cost in 2007 and reduced interest income and other operating income and expense. So, a few in total.

David Gold – Sidoti

So 1.2 and so essentially that’s a $1.2 call it one-time credit that’s in the quarter?

Richard Riley

That was in 2007 that was just on a comparative basis.

David Gold – Sidoti

Okay, got it.

Richard Riley

For the current 2007.

David Gold – Sidoti

Got it

Ronald Waters

We are trying to make it the pro forma comparative.

David Gold – Sidoti

I see, I see. Okay got it. Thank you very much.

Ronald Waters

Thank you.

Operator

Our next question today comes from Jeff Rath of Canaccord Adams. Please go ahead.

Jeff Rath – Canaccord Adams

Thanks guys. A couple of question, I guess to start more as it relates to some of the new markets that were discussed in sort of the FCC documents and you mentioned this morning. I wanted to drilldown a little bit more, if you would care the comment on how you’re incumbent to RF technology can be utilized in the cargo tracking market relative to existing technologies? I guess I’m really looking for a little bit of visibility, does that incorporating your current relationships and technology? Does that allow you to enter that market with a basically a superior offering? And second related question is, when do you expect to give us more visibility as to your growth or your initiatives as it relates to cargo, cognitive disorders and hazardous materials? Thanks.

Richard Riley

So, Jeff let me try to answer those questions in a order which you asked them. The first is that the FCC rule and order provides the ability to track other than simply stolen vehicles through the frequency that we maintain, which is 173. Historically, we’ve had theoretically the ability, but our technical ability but not the capability or the allowance by the FCC to be able to track those things.

Just provides us for the ability to track cargo, hazardous materials, people at risk and people of interest to law enforcement using that same frequency. The benefit that it provides is that it allows us to use proprietary technology that we have, the infrastructure that we have and to a large extent the law enforcement forces that we had out there throughout the country to introduce some new products and services out there.

There is a period that we need to make some modifications to the some of the technologies. It doesn’t use exclusively 173 uses primarily 173, but it uses some other technology as well and so, I would say that, we are probably a year away from our first introductions something which uses that same frequency.

Jeff Rath – Canaccord Adams

Gotcha, okay. So, approximately by a year away. Okay, great, as it relates to SC-Integrity now being consolidated I wondered if you can provide a little bit of backdrop around existing or pending legislation in the U.S. that it might impact that addressable market for us. My understanding was there are some mandates coming down or that have been proposed?

Richard Riley

I would say we are not building a business plan on the back of any expected mandates or requirements out there. There is not any that we are aware of that they would have significant impact from this business. We built the business because we expect there is underlying demand for the product or for the service then I think as we have said before, the problems associated with lost in strong cargo is, it stretches into the billions of dollars. There is really not an effective economic solution for that to the extent we can deliver our product which solves that we think the business case alone is enough to compel the carriers or the main shippers to utilize the technology and the service.

Jeff Rath – Canaccord Adams

Great, and then just a last question as it relates to your international sales. You obviously saw very strong I guess revenue and unit shipment growth in the third quarter, what is unique about the third quarter that cause it sounds like what you are saying is we had some more tapped growth in the first quarter and second quarter and you would always look for that full year growth to be quite strong. Now, we have seen a very strong third quarter and you are suggesting maybe some moderation in the back half, so is there something unique in the third quarter that causes across the board demand spike like that?

Richard Riley

Yes, Jeff I think we have talked about it in the past, the international business depends to be or use a technical term more lumpy than our domestic business and what happens is our license fees as they get a specific contract for the major OEM or auto manufacturer or a specific relationship with an insurance company will buy up a large block of units to install them on kind of a onetime basis. It provide with an opportunity to have an going subscriber relationship and so we spend a fair amount of the time every year, throughout the year going through what the demands are or expectations are of our international businesses.

I think the sell-through in the first quarter or two quarters of this year was slow as it typically is, as our licensees buy up in the fourth quarter year to take advantage of pricing and I think what we’ve seen is the unit volume that we anticipated for the full-year coming through to a large extent in...

Ronald Waters

I think, the first part of this year (inaudible) programs that were in place at the end of the fourth quarter of last year with our licensees. What’s happening in the third quarter maybe give somewhat more favorable than anticipated, but clearly inline with our stated position of units will be up double-digits for the full-year. I think as we look ahead the other important item now is that what we see happening in the U.S. and what we see happening Europe from an auto market perspective.

We had some concern in some of the areas in the world that are significant from a licensee perspective. It will be tempered somewhat by the fact that is more insurance mandate from those markets.

Jeff Rath – Canaccord Adams

Gotcha and if I can get one more in their and I will join the back of the queue here. As you look obviously, your selling models deferring in the U.S. as your license fees sell into the international markets beat an insurance sort of targeted sale. As we see this macro environment expand into these international markets Europe or possibly some emerging countries.

How do you expect the insurance buyer to react? Do you think they are looking at as a just defensible investment or do you think that they will also see deterioration on the same order of magnitude of say just domestic auto sales? Thanks.

Ronald Waters

I don’t think it will be at the same magnitude as we see some domestic prospective, from insurance perspective in those markets that are insurance mandate heavily depended, I think it comes down to the financial. Our analysis that the insurance companies making and I guess the one of the variables is the theft rate in those markets and if in a declining economy of the theft rate start to increase. The insurance companies may maintain in fact their investment, their commitments to supporting our license fees in those markets.

Richard Riley

It just to reinforce what Ron said that the economic model outside the United States is very different than the model here in the United States. They are much more closely inline with the pure benefit versus the cost associated with the unit. So, in the 1United States, there is – each individual has to make a decision with respect to what’s the likelihood of their car being stolen and what’s the down size associated with it so, they weigh that model on their own.

Internationally it is largely supported by the insurance companies, who are much more sophisticated in terms of the analysis of the data points to understand better what the likelihood of car theft is? What the cost of them is and it is a very sound business model for them to make those investments. So I don’t as Ron had indicated, I don’t anticipate that changing in the other countries to the same extent it has here in the United States. Historically, what’s happening when the economies have gotten a little tougher in some other countries is the theft rates tends to go up and there is even more of a compelling reason for what it is we do.

And then the second point I want to make is in the developing countries in particular, where the product is important to tends to be high separate, this technology in particular is far more effective in terms of stolen vehicles and developing technologies in any RF or I am sorry any GPS technology or cellular technology is in so. One of the things that we’ve seen is in developing companies there is much more of an emphasis on a unit which prevents a car for being stolen, or recovers the car quickly once it is being stolen and that favors our technology.

Jeff Rath – Canaccord Adams

Thank you very much.

Operator

Our next question comes from the line of Jeff Blaeser of Morgan Joseph. Please go ahead.

Jeff Blaeser – Morgan Joseph

Hi, good morning and thanks for taking my question. Could you touch on the penetration rates domestically, new car certified pre-owned sequentially and year-over-year?

Ronald Waters

I think what we have said recently is our penetration is hovering around 6.5 that’s probably down from a high-end its 7 towards the end of the 2007 for the most part throughout the country we have been able to hold around from a tenant penetration perspective.

Jeff Blaeser – Morgan Joseph

Okay and on the domestic gross margin outside of increased sales, any opportunities to improve the margins via shift and installation or something of that nature? Or is part of the $5 million included within the gross margin aspect?

Ronald Waters

We continued to look at all opportunities to improve margins. As Rich said, there has been a lot effort in the past to take a look at cost in a fixed versus variable basis will continuing to do it to the extent that we can move it more to variable that is a positive. We have had significant positive initiatives on the product cost fronts and we are continuing to look and work with our supplier ways to reduce product cost.

Jeff Blaeser – Morgan Joseph

Okay, great. Thank you very much.

Operator

Our next question comes from the line of Scott Sutherland of Wedbush Morgan Securities. Please go ahead.

Scott Sutherland – Wedbush Morgan Securities

Hi, great. Thank you, good morning. A couple quick questions that on the financial side. What was the stock comp in the quarter and what would the diluted share has been if you have the profit?

Ronald Waters

The stock comp for the quarter was $740,000. The impact for dilution for the quarter was about a $150,000 shares, if we had gone the other that we have done calculation.

Scott Sutherland – Wedbush Morgan Securities

Okay, following up on the international question. I’m just trying to figure, how do we figure out Q4, last your Q4 is strong of the profit Q3? You can benefit in Q3 at the expenses Q4 or do you think that you have visibility and other bulk purchases coming here in Q4 from faction here international?

Richard Riley

I think again we continue to believe that we will have double-digit growth in an annual basis. We do Q4 from favorably, I think the question mark that we have is still over what’s happening on a global basis from credit crunching economic turbulence and whether or not that’s going to have a negative impact on the purchases of our licensees as we I think answered in the prior question is that it will mitigated by that the insurance participation.

Scott Sutherland – Wedbush Morgan Securities

Okay. Looking at domestic revenue, roughly how much was non-auto business and what your process with that going forward. Is this something you think, it’s going to grow within your domestic revenue stream?

Richard Riley

When you say its non-auto business for you that motorcycle and commercial you’re talking about people tracking in cargo.

Scott Sutherland – Wedbush Morgan Securities

I’m trying to look at everything non-auto construction, motorcycle. I know that people tracking cargos by little earlier here, but all of those streams?

Richard Riley

It’s all the pieces associated. As I said here and do in my head auto represents inline share of all this stuff. Ron talked about the commercial business, which was down 30% year-over-year. Annual revenues in the commercial business are somewhere around the $5 million mark. Our motorcycle business has been flat and then all the other piece I would indicated that we’ve gotten some revenue this year that we didn’t have in the past associated with both cargo and people at risk tracking and I would say that offset the respective relative decline in the absolute warrant accounting that runs should have revenue line. I’m not sure that answer to your question, but…

Scott Sutherland – Wedbush Morgan Securities

Maybe another question, I know the auto piece the non-construction motorcycle is running around 90% of the domestic revenue. Is that a little bit less than that?

Ronald Waters

No, I would say it’s less than about the same.

Scott Sutherland – Wedbush Morgan Securities

Okay. Last question I want to ask you is just kind of talk about the overall impact. Do you expect Q4 ’09 on the –?

Ronald Waters

Q4 ‘09?

Richard Riley

Q4 ‘08 I think so.

Scott Sutherland – Wedbush Morgan Securities

Q4 ’08 and then going into ‘09 I mean, because I know it is happening here in the middle of the quarter. Do we expect some falloff this quarter? Is it 1/09, because of this and how much do you think it will mitigate?

Richard Riley

I think that, yes we are – the conversion takes places this quarter the activities has been ongoing so, I don’t see any significant drop-off in Q4 ‘08.

Scott Sutherland – Wedbush Morgan Securities

Okay and any comments during ‘09? Or is it early here?

Ronald Waters

I think it’s early to talk about ’09. I think for the most part of the A to D were trying this.

Scott Sutherland – Wedbush Morgan Securities

Okay, great. Thanks for answering my question.

Operator

(Operator instructions) And at this time, sir, I am showing that there are no further questions.

Richard Riley

Excellent, I wanted to say thanks for joining us on the call this morning. We appreciate your continued interest in LoJack. Ron, Brian and I will be around for the rest of the day, if anyone has any follow-up questions. We recognize that this is a particularly turbulent and challenging time and we want to make sure that we address any and all of you question. Our next scheduled quarterly call will take place in early February. At that time we will provide guidance for 2009 and we will get that date out to you in advance of the call. Thank you very much.

Operator

Thank you for joining us today. This does concludes our teleconference and you may disconnect at any time.

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Source: LoJack Corporation Q3 2008 Earnings Call Transcript
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