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LoJack Corporation (NASDAQ:LOJN)

Q4 2008 Earnings Call Transcript

February 18, 2009 9:00 am ET

Executives

Paul McMahon – Director of Corporate Communications

Rich Riley – Executive Chairman

Tim O’Connor – SVP and CFO

Ron Waters – President and CEO

Analysts

Paul Coster – JPMorgan

Sean Brenckman – Craig-Hallum Capital

Bill Dezellem – Tieton Capital

David Deleo [ph] – Canaccord Adams

Operator

Hello and welcome to the LoJack Corporation fourth quarter and year-end results for 2008 conference call. Later you will have the opportunity to ask questions. It is now my pleasure to turn the conference over to Mr. Paul McMahon. Please go ahead, sir.

Paul McMahon

Good morning and thank you for joining us today. Our moderator is Rich Riley, Chairman of the Board. He will be joined in the call by Ron Waters, President and Chief Executive Officer; and Tim O’Connor, Senior Vice President and Chief Financial Officer. 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, involve a number of risks, 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.

Rich 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 the impact of the broader domestic economic factors on our business for the fourth quarter and the full year. Tim O’Connor, who joined us in November, is Senior Vice President and Chief Financial Officer, will then review the details of our financial performance for the quarter. Finally, Ron will provide operational highlights for the year as well as his thoughts and our plans for 2009. Following those comments, we will open up the call for your questions.

Our financial results for the fourth quarter and the full year reflect the impact of the struggling domestic auto industry, partially offset by the strength of our international business. Consolidated revenue for the full year reflected a decline of just under 11% from prior year levels despite a decline in the broader domestic auto market of approximately 18%. Ron and Tim will provide some specifics around our segment performance when they make their comments.

We now know that in the fourth quarter of 2007 the US moved into recession at the early stage of a financial crisis that subsequently resulted in unprecedented worldwide liquidity problems in 2008. Tight credit conditions, economic uncertainty and loss of consumer confidence had a particularly significant impact on the domestic industry causing deteriorated conditions in each succeeding quarter in 2008.

For the full year, the domestic auto industry experienced its worse performance in 16 years. As Ron will discuss shortly, we responded to these trends by rebuilding our sales efforts, restructuring two of our business units, and aggressively managing expenses. While LoJack’s legacy has been in the domestic auto industry for almost 20 years, we embarked on a program of diversification over the last five or six years that has seen us extend the powerful LoJack brand and introduce products and recovery services for construction equipment, laptops, motorcycles, cargo, and now people at risk.

Based on the strength of our core auto business, our international expansion and the new initiatives that I just mentioned, we generated healthy increases in consolidated revenue in each of those years. As noted, in 2008 this trend changed as the widespread economic problems had a significant negative impact on each of our domestic businesses.

In particular, the problems in the domestic auto, motorcycles and construction industries have been well documented and our financial performance during 2008 reflected those broader trends. We take some measure of satisfaction in the fact that our sales penetration in each of these three key markets remained at historical levels. We conclude from this that our performance during the year does not reflect loss of market share or the negative impact of competing technologies.

As I mentioned, the lone bright spot for the year within our international business, which again generated double-digit increases in units and revenue for the full year, Ron will provide a more detailed review of our specific performance in each business segment during his comments.

It is important to note that the initiatives for cargo and people at risk are still in the early stages. In fact, only last week we announced a more aggressive rollout of LoJack SafetyNet, our solution for tracking and rescuing people at risk, particularly those suffering from Alzheimer’s or autism. All indications have been quite positive and there appears to be strong interest in addressing the already large and growing problem associated with people at risk who wander and become lost.

This initiative is particularly important as it represents one of our four domestic businesses to support a subscription based model that will generate a recurring revenue stream. While new initiatives were not yet large enough to offset the problems experienced in the domestic auto market, we remain committed to the strategy of diversification. The deep problems in the global auto industry, which are expected to continue throughout 2009, will enforce the importance of these diversification efforts.

Faced with the challenge of 2008, we tightly managed all expenses in order to continue investing in our new business efforts. As planned at the beginning of the year, we invested approximately $2 million in the cargo initiative, $3.5 million in building a business in Italy, $2 million in Boomerang, and $7.2 million in next generation technology projects. In addition, we invested a little over $1 million to acquire the assets of locator systems to facilitate our entry into the market for tracking people at risk.

With the overall economic conditions impacting almost every domestic business, the resulting fall in the capital markets also had a significant impact on the current value of a number of our investments. Specifically, our investment in the licensee in France and our investment in Absolute Software, which markets LoJack for laptops, were both negatively impacted by falling stock prices. As a result of the decline in the capital markets, we made adjustments to the carrying value of both investments, which amount to approximately $3.6 million in total.

While 2008 was a very difficult year, we made considerable progress in improving the organization, in streamlining operations, and in building some new businesses. We exited the year with a cash balance of almost $58 million, a strong balance sheet and a powerful brand in the LoJack name. We are positioned well to weather the difficulties in the auto industry, which began in late 2007 and are now expected to continue throughout 2009.

Before I close, I do want to highlight the importance of the FCC rule and order, which was granted in August of 2008 and responds to the specific petition filed by LoJack in 2005. The FCC rule and order, among other things, allows LoJack to use legacy nationwide frequency, which was previously limited to stolen vehicle recovery for the tracking and recovery of people at risk, people of interest to law enforcement, cargo and hazmat. As a result of this ruling, LoJack can now work to leverage the technical infrastructure and extend our deep integration with law enforcement beyond stolen vehicles to include those other diverse applications on the same nationwide frequency.

The FCC rule and order complements our efforts to diversify the LoJack business, including the introduction of LoJack SafetyNet and our increased equity investment in Supply Chain Integrity. It is our belief that the continued development of our proven core Radio Frequency technology along with the integration of complementary technologies such as GPS and cellular, will enable us to remain at the forefront of the markets in which operate and open up new opportunities in the future. As we assess new technologies, we do so with our unique relationship with police and the expanding use of our network in mind.

As Ron will detail, it is our intention to continue making significant investments in technology in 2009. We will continue to tightly manage our business while maintaining a strong balance sheet as we weather the most difficult financial times in a generation. We expect our continued efforts to put our core auto market while diversifying into new markets globally will put LoJack in a strong position as the global economy emerges from the recession.

With that, I will now turn it over to Tim.

Tim O’Connor

Thank you, Rich. And good morning, everyone. Fourth quarter consolidated revenue declined 13% from prior year levels to $48.2 million. International revenue in the quarter increased 24% from the prior year to $22.4 million, while revenue in the domestic business in the quarter declined 35% from the prior year to $20.9 million. Boomerang Tracking had revenue of $3.7 million in the fourth quarter compared to $5.3 million in the fourth quarter of 2007.

Excluding Boomerang, consolidated unit sales for the fourth quarter increased 6% year-over-year. The international unit volume in the quarter increased by 28% over the prior year, while domestic unit volume for the quarter decreased 38% over the prior year. For the fourth quarter, our consolidated gross margin dollars declined 17% from prior year levels to $24.3 million, and our gross margin as a percentage of revenue was 50% compared to 53% for the same period in 2007.

For the quarter, our domestic gross margin dollars decreased 45% and gross margin as a percentage of revenue decreased 46% compared to 54% for the fourth quarter of 2007. The impact of the significant declines in the domestic dealer volumes could not be fully offset by semi-fixed operational cost reductions in the quarter. In addition, the decreased Absolute Software share price since December 31, 2007 resulted in a negative revenue impact in the quarter of approximately $400,000. This compares to approximately $800,000 of positive revenue impact in the fourth quarter of 2007. Combined, the year-over-year comparison is a negative impact of $1.2 million for revenue and gross margin.

International gross margin dollars for the quarter increased 33% from prior year levels, and gross margin as a percentage of revenue was 56% compared to 52% one year ago. The mix by licensee and product contributed to the margin increase. Boomerang gross margin dollars for the quarter were $1.5 million, which represents a 35% decrease over the fourth quarter of last year. Gross margin as a percentage of revenue for Boomerang was 41% compared to 44% in the fourth quarter of 2007. The decrease was primarily related to the analog to digital conversion.

Operating income for the fourth quarter declined 13% to $3.1 million. Net income for the quarter was approximately $200,000 or $0.01 per fully diluted share, down from net income of $2.3 million or $0.12 per fully diluted share in the same period of prior year. Net income of the quarter was negatively impacted by a number of non-operating items, including the write-down of our investments in tracker and Absolute Software. This was partially offset by an unmatched write-down of Boomerang intangibles in the fourth quarter of 2007. Excluding the impact of these non-operating items, net income was $2.2 million or $0.12 per fully diluted share, down from net income of $4.0 or $0.21 per fully diluted share in the same period of the prior year.

Our operating cash flow for the quarter was a deficit of $4.9 million, driven by a higher mix of international customers that generally see more favorable credit terms than domestic. The company’s cash balance on December 31, 2008 was $57.9 million compared to $56.6 million on December 31, 2007. During the fourth quarter of 2008, the company did not repurchase any shares. For the year ended December 31, 2008, the company repurchased 1.3 million shares at an average price of approximately $10.83 per share. As of December 31, 2008, the company had no outstanding repurchase authorities under 10b5 trading plans and approximately 1 million shares available for other purchases.

Our capital expenditures in the quarter were $2.6 million. Our depreciation and amortization in the quarter was $2 million. Our fully diluted shares outstanding for the year were approximately 17.3 million. And our 2008 effective tax rate was approximately 18%, excluding some one-time discrete items.

I’ll now turn over the call to Ron.

Ron Waters

Thanks, Tim. I’ll now provide some perspective of both our domestic and international operations for the quarter and the year. Additionally, I will also provide guidance for 2009. In our core auto business, eroding consumer confidence has been exacerbated by tight credit. Domestic auto sales dropped 18% in 2008 to approximately 13.2 million units compared to almost a decade of vehicles sales in the 16 million to 17 million unit range.

The decline in auto units worsened each quarter throughout the year, with the fourth quarter experiencing the lowest quarterly new vehicle volume since 1981. Fewer consumers purchased vehicles, and those that did buy were not extended the same level of credit from lenders that they may have been in past years.

LoJack and other aftermarket products were doubly impacted by fewer buyers, and of those buyers, fewer with the cash to purchase aftermarket products. Industry experts are predicting sales of around 11.5 million units for 2009 with the first half of the year being particularly soft. We have restructured our domestic operations to reflect the size of the business, and we will continue to closely monitor our expenses and ensure that they are at appropriate levels.

The good news is that despite the severe decline in auto sales, which works in each quarter during the year, we maintained our penetration rate of 6.5%. Our business continues to track to those manufacturers who are increasing market shares, 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 LoJack a product that consumers see value in. In the third quarter, I indicated that we had not been materially impacted by the closure of any domestic dealerships related to the credit crisis. That situation had not changed in the fourth quarter. However, we remain aware of the challenges facing dealers, our regular conversation with dealer principles and management. Additionally, we are tightly managing our accounts receivable.

Our commercial business continued to suffer in the fourth quarter with a 45% decline in volume. Construction equipment owners are not purchasing new equipment or making other capital expenditures. Our motorcycle business declined 46% in the fourth quarter, now reflecting similar dynamics to those in the auto channel. Both construction equipment and motorcycle theft remain serious issues. So we expect that as the economy turns and credit loosens, these niche businesses will rebound.

Our efforts in the cargo space with supply chain integrity continued to make progress. As companies manage their expenses the solution like many other investments is often deferred. We still see much interest in the solution, which is good news. We assume that as companies again resume investing in their infrastructure that the supply chain solution will be positioned well as providing a needed solution to the problem of cargo theft.

Last week we introduced LoJack SafetyNet, which answers a critical market need for solutions that track and rescue people at risk of wandering, including those with Alzheimer’s, autism, Down’s syndrome, and dementia. We are in the process of creating awareness in demand for solution with consumers and working with Project Lifesaver International to expand the network of law enforcement and public safety agencies that conduct the search in rescue operations. With the incidence of those with Alzheimer’s disease, dementia and autism and other cognitive conditions increasing, we believe there is a good opportunity for LoJack.

There are 5.2 million people in the US with Alzheimer’s today with the expectations of about 16 million by 2050. Wandering is the most life threatening behavior affecting 60% of those with Alzheimer’s, and 45% of the time, the cases of wandering have tragic outcomes if they are not found in 24 hours. Wandering is also a major issue for children with autism, which is the fastest growing developmental disability in the US.

Despite the widening economic crisis globally, our international business performed very well in the fourth quarter and has met our expectations for double-digit unit growth for the year. We are particularly proud of this performance because this is compared to a very strong performance in the fourth quarter of 2007. The performance of our international business in 2008 represents the sixth consecutive year of strong year-over-year growth. The growth was driven by several of our larger licensees in Latin America and Africa. However, we do expect that their businesses may soften in 2009 as the global economic situation worsens. Our guidance for 2008 reflects this.

Our business in Europe is more dependent on new vehicle sales and is experiencing challenges similar to the US. Auto sales in Europe were down 15% in 2008. In Italy, our progress continues to be slow and has not met our expectations. Although auto sales have declined and the business climate is challenging, we have much more opportunity before us based on our relatively short time selling in the market.

On a positive note, in the fourth quarter we almost doubled our unit volume compared to the same time last year, but the base is still very small. We expect that our new general manager and increasingly focused outreach to both auto dealers and the insurance industry will begin to increase our market penetration in 2009. Last quarter I updated you on a new law in Brazil mandating installation at the factory of anti-theft equipment that allows vehicle tracking. Though this law is expected to be a benefit for our licensee business, there is still much uncertainty concerning enforcement of the law. In the fourth quarter, there was no effect in the business of our licensee.

Our business at Boomerang has been disappointing. A mandated transition from analog to digital technology impacted our customer retention and a shift in the market away from high-end vehicles where Boomerang historically had a high penetration impacted new unit sales. Together these dynamics resulted in our reevaluating the business and taking a non-cash charge of $37.7 million this year. We have restructured and reduced the size of our operation in Canada to reflect a new level of business. We are also actively out in the market with new mid-market programs to capture business in this important segment.

Before closing, I want to note that several events in 2008, which Tim reviewed in his comments, masked our true operating performance for the year. Despite one of the worst economic climate in many years, we are able to invest in our business and deliver a moderate operating profit. As a result of the tight management of our business, we remain financially strong and we are successfully mitigating the issues in our markets.

We have proactively taken steps to restructure our operations and reduce cost to ensure that we are spending in a level appropriate for the size of our business. We will continue to balance spending on our core business while investing in our strategic programs for long-term growth. In 2009, we expect to invest approximately $4 million related to our solution for people at risk, SafetyNet, approximately $2 million related to our cargo initiative, and approximately $9 million in product development expenses.

Given the ball to economic situation, we have found that providing guidance is a difficult task. But we strive to provide some insights into our business. Based on the best industry data we have available to us today, we expect that for 2009 we will deliver revenue of between $180 million and $186 million, net income of $6 million and $7.5 million, and earnings per fully diluted share of $0.37 and $0.42. Additionally, we expect gross margin as a percentage of revenue to be approximately 53%. As the broader economic situation and industry dynamics change, we will update our guidance accordingly.

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

Question-and-Answer Session

Operator

(Operator instructions) We will take our first question from Paul Coster of JPMorgan. Your line is open.

Paul Coster – JPMorgan

Thank you, and good morning. Just first of all, on the most recent comments, you talked of $2 million investment in SafetyNet, $2 million in cargo solutions and $9 million in product development, how does that break out across – are you talking about a mixture of CapEx and R&D there or is that all R&D, perhaps you could just clarity that first?

Ron Waters

It was actually $4 million on Project Lifesaver. That’s a mixture of R&D, increased investment in law enforcement to drive increased penetration with agencies and increased marketing. The $2 million is a – primarily expense, combination of sales and marketing and some product development. And the $9 million is all product development expense.

Paul Coster – JPMorgan

Okay, thank you. Looking back from things, it is kind of clear in retrospect that LoJack was something of a lead indicator of the economic environment with – I think you are infected by the slowdown in Southern California and Florida first. Is there any sign that those markets are stabilizing?

Ron Waters

It still continues to be a very dynamic environment. I think it’s hard to say it stabilized.

Paul Coster – JPMorgan

Okay. You talk to bulk gross margins of 53% in ’09, which was encouraging given the slide in the fourth quarter. What gives you that confidence? And could you comment on bulk in stores and how that part of your business is evolving versus the sort of post install?

Ron Waters

Well, I think if you just look at the bulk install, it continues to decline. It was probably in the 16% range for the fourth quarter. I think it had a – as the mix has moved away from bulk, and as you know, it was up 20-plus not too long ago, I think it’s had a favorable impact – a slightly favorable impact on ARPU as we go more to individual installations. I think at the gross margin level, the fourth quarter impact, the negative margin relative to the prior year was more that the market continued to decline quickly. And as we announced, we restructured, and the positive impact of 53% next year is more a factor of us getting our fixed and variable costs more in line with where we think demand us.

Paul Coster – JPMorgan

Great. Got it. The accounts receivables were a little bit high and not alarmingly so, but can you just comment on that? And also perhaps, Tim, what do you think the tax rate would be in ’09?

Ron Waters

I’ll let Tim talk about the tax rate. I think if you look at receivables, there are two components. There is a domestic piece and there is an international piece. On the domestic side, I think the DSO is nothing negative that’s happened there. And on the international side, as Tim mentioned, we do have slightly longer terms with certain of our international licensees to more marry up with the cash flow based on their models, and so that’s had an impact. That has caused the majority of the increase. On tax, Tim?

Tim O’Connor

Yes, sure. Hi, Paul. The effective tax rate when we pull out a bunch of one-time discrete items this year was about 18.5% in 2008 – in 2009. And a lot of that was driven by the amount of growth we had in international and the mix of international versus the domestic business. As that comes back more into historical light, I would expect the tax rate is in the low to mid-20s, 22% to 25% range on an effective basis.

Paul Coster – JPMorgan

Got it. Thanks very much. Appreciate it. Bye.

Tim O’Connor

Thank you, Paul.

Operator

And our next question comes from Sean Brenckman of Craig-Hallum Capital. Your line is open.

Sean Brenckman – Craig-Hallum Capital

Hi, guys. Sean Brenckman filling in for Steve Dyer. I noticed the receivables increased in the quarter. Can you speak to the quality of those receivables?

Ron Waters

As I said few minutes ago, I think the increase is primarily related to the international side and certain of our larger licensees. And we have long-standing relationship with those licensees. Obviously we continue to monitor the economic conditions in those markets, but we’ve never had a problem in the past. On the domestic side, it is – we have not been negatively impacted to date, but clearly we watch it very proactively. DSO has not changed. And the other thing I would say on the international side is we have some insurance in place as well to further protect us.

Sean Brenckman – Craig-Hallum Capital

Okay, thanks. And then a couple of housekeeping items. Stock compensation in the quarter and also CapEx?

Ron Waters

For the quarter, stock compensation was 660. I’m sorry, the other question was CapEx, Sean?

Sean Brenckman – Craig-Hallum Capital

Correct.

Ron Waters

$2.6 million in the quarter.

Sean Brenckman – Craig-Hallum Capital

Thanks. That’s all.

Operator

(Operator instructions) Our next question comes from Bill Dezellem from Tieton Capital. Your line is open.

Bill Dezellem – Tieton Capital

Hi, thank you. A couple of questions. First of all, the fourth quarter expenses in the P&L that were associated with the restructuring in the US, did you highlight it? Those weren’t broken out separately. What could those end up being?

Ron Waters

We had stated in the third quarter release they would be about $1 million and they came in somewhat less than that.

Bill Dezellem – Tieton Capital

But in the fourth quarter there was somewhat less than $5 million that flowed through the P&L?

Ron Waters

No, no – in the fourth quarter of 2008, we had somewhat less than $1 million of restructuring expense included in those expenses. The $5 million was the savings for 2009.

Bill Dezellem – Tieton Capital

My apologies. All right. Thank you. And the 2007 fourth quarter, you had some, if we recall correctly, very strong international volume purchase agreement purchases that took place. What did you see this year relative to last year?

Ron Waters

Well, I think our licensees continue as they get closer to those EVP levels that they will continue to buy. I would suggest that there is a little bit more conservativeness that took place in the current year.

Bill Dezellem – Tieton Capital

And so the part of the reason for asking the question, if we roll the clock to the first quarter, the first quarter of 2008, there was quite a step back from the fourth quarter of 2007 as a result of what you now know was the licensees having made some pretty significant purchases that they then did not need to make purchases in the first quarter. Share with us what your current perspective is, if you would please, about the first quarter relative to the licensees buying patterns.

Ron Waters

I think as we’ve said in the past that our licensee business is lumpy. And it varies by quarter. I think you’ve got two things that are happening in 2009. The first is the general economic conditions that are so – we are so acutely aware of the domestic side that it’s starting to impact the international side. So there would be some conservativeness as they buy throughout 2009. And I think many of them have met certain targets at the end of the year. So I would expect, in the first quarter, it to be softer, hard to predict how it’s going to compare to 2008.

Bill Dezellem – Tieton Capital

Then to make sure we understand some of the dynamics in the international market. Your revenues in the quarter were up, I believe the release says, 24%. And that’s on a 28% volume increase, which would imply that the ASP is down slightly from last year. But yet your gross margin was up nicely. And so that must imply that you have done some very solid cost reduction efforts there. Is that an accurate statement? And if so, would you please discuss what part it is that you’ve done to help the gross margin in light of a lower selling price?

Tim O’Connor

Bill, Tim O’Connor, I’ll take that one. In the fourth – you're correct in that overall the price does come down year-on-year and that’s really driven by our volume variable pricing, or volume a particular licensee buys the lower priced again. As it relates to the margin change, there is about 250 basis point impact. In 2007 we rebated about $900,000 for the year to one of our licensees because they hit a higher volume variable pricing level than we had been charging them all year long. So that’s a full year effect that took place in the fourth quarter of 2007. So that’s about 250 basis point change there.

Bill Dezellem – Tieton Capital

And then if you’d allow me one philosophical question on that front, do you feel as though the volume purchase agreement and the lowering of the price for the higher volumes that that actually incentivizes the licensee to purchase additional volume over a long period, not any one quarter, but over a long period given that they only are licensing your product? And if it does not spur additional activity, is there some logic to revisiting how you priced in the international markets, or is that even a possibility?

Ron Waters

Answering it philosophically, I think if you look at the three large licensees – largest licensees that we have, you’ve seen continued growth over the long run. They have contributed to that number I had in my comments that we’ve had six years of increasingly positive revenue on the international side. So I think if I look at those from an example perspective, I think it has helped them. And I think they work towards it and they have developed their markets. I think we constantly look at our pricing mechanisms to see whether or not there is something more favorable. And we have dialogues with our licensees all the time about is there a way to better drive their business. So I would say we have a spirit of cooperation. It seems to have worked, but it’s – if there is something that comes up in the future based on discussions with the licensee, we will consider it.

Rich Riley

I think building on Ron's comments, we have become much more aggressive over the last three-year period of time. And we’ve clearly seen a significant increase in growth from those licensees who have access to the lowest prices. And so I think the lower price enables them to get more aggressive in terms of their markets and that success because it’s a recurring revenue model, emboldens them to do it on a continuing basis. So clearly over the last three years, there has been a significant change.

Bill Dezellem – Tieton Capital

Thanks to all of you for the time.

Ron Waters

Thank you.

Operator

(Operator instructions) Looks like we will take our next question from David Deleo [ph] of Canaccord Adams. Your line is open.

David Deleo – Canaccord Adams

Hi, guys, thanks for taking my call. Just kind of want to stick here on the international front, just a few questions. Good growth coming out of international on a consolidated basis. Do you guys kind of break that out? I know you talk about Latin America and Africa specifically driving that growth. Do you kind of break out what the growth percentage was for each of those and what percentage of total international revenue those are?

Rich Riley

No, we don’t historically.

David Deleo – Canaccord Adams

You don’t. Okay. And then you had also mentioned in the press release that growth kind of moderating internationally going forward. Are we still talking double digits for 2009, double-digit growth in international? Or is that going to come in a little bit lower than international?

Ron Waters

We don't get into the specifics from a guidance perspective as to volume broken between domestic and international. I go back to the comments, we see challenging market conditions in the international arena and I would see our licensees becoming somewhat more conservative in the coming year because of what’s going on in their markets. They pay us in dollars, so they have dollar exposure. Some of them have free-fitment models where they are up fronting the capital to customers. And similar to what’s gone on in the US from a cash is king sort of situation, I think we’ll see some more conservativeness in the coming year.

David Deleo – Canaccord Adams

Okay, thanks. That’s helpful. Just quickly – I know you had mentioned Brazil mandate and there is still uncertainty around kind of interpreting that well. What is it kind of specifically that’s kind of hanging out there that it is something people are kind of getting? Is the law just kind of vague at this point? Is it going to be filtered down a bit? What should we expect timeframe-wise out of Brazil?

Ron Waters

I think two things. One, if you go back and use Mexico as an example, what was stated initially, ultimately, I don't think (inaudible) aggressive as ultimately it has taken place in the marketplace. I think the big issue for us as we look at Brazil is that yes, there are mandated units in all of the cars, but it’s not mandated that the customers turn on those units. So there is a decision that needs to be made by the customers. The other issue really, if Brazil is a high-theft market, then you have in essence a GPS box being put in those cars and being put in those cars in the same location. So in a high insurance market, is that really going – high theft market – are the insurance companies and the customers solely going to be dependent or look to the GPS box as the means for stolen vehicle recovery.

David Deleo – Canaccord Adams

Okay, thanks for that. And then just turning to your 2009 guidance, are new business initiatives included in those top line and bottom line numbers there?

Ron Waters

Yes.

David Deleo – Canaccord Adams

Okay. And does that also include the absolute warrants? What you could potentially project that being, I guess?

Ron Waters

It does include that, David.

David Deleo – Canaccord Adams

Okay. And then just lastly, any guidance on shares outstanding for the year 2009?

Ron Waters

I would say it’s between 17.0 million and 17.5 million shares. I’d still use that range.

David Deleo – Canaccord Adams

Okay. That’s it for me. Thanks a lot, guys.

Ron Waters

Thanks.

Operator

(Operator instructions) And gentlemen, it appears that we have no further questions at this time.

Ron Waters

Thank you all for participating this morning and look forward to our next call.

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