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Executives

Randy Ortiz – President & Chief Executive Officer

Don Peck – Executive Vice President & Chief Financial Officer

Hal Dewsnap – Senior Vice President & General Manager US Sales

Emad Isaac – Senior Vice President & Chief Technology Officer

Scott Solomon – Sharon Merrill Associates

Analysts

Chris Owen – Plaisance Fund

Bill Dezellem – Tieton Capital Management

LoJack Corporation (LOJN) Q4 2012 Earnings Call February 27, 2013 8:30 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the LoJack Q4 2012 Financial Results Conference Call. (Operator instructions.) As a reminder this conference is being recorded. I would now like to turn the conference over to Scott Solomon. Sir, you may begin.

Scott Solomon

Thank you, Shannon, and good morning everyone and thank you for joining today’s call. This call will be archived on LoJack’s website, www.lojack.com.

The call is hosted by Randy Ortiz, LoJack’s Chief Executive Officer and President, and Donald Peck, Chief Financial Officer. Also joining us are two of the company’s newest executives, Hal Dewsnap, Senior Vice President and General Manager of US Sales; and Emad Isaac, Senior Vice President and Chief Technology Officer.

Turning to the agenda for today’s call, Randy will review LoJack’s operations and recent achievements, Don will review the financial results and the company’s full year 2013 guidance. Randy will discuss LoJack’s growth initiatives and then we’ll open the call to your questions.

During the call, management will make reference to adjusted EBITDA, non-GAAP net loss, non-GAAP net income, non-GAAP net loss per share and non-GAAP net income per diluted share. These metrics are non-GAAP financial measures which the company believes helps investors to gain a meaningful understanding of changes in LoJack’s core operating results and can also help investors who wish to make comparisons between LoJack and other companies on both a GAAP and a non-GAAP basis.

For more information on the GAAP/non-GAAP financial measures please see the table for reconciliation of GAAP results to non-GAAP measures included in this morning’s earnings release. The table has more details of the GAAP financial measures that are most directly comparable to non-GAAP financial measures and the related reconciliations between these financial measures.

Also, and 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 that involve risks and uncertainties. Accordingly, actual results could differ materially. For further information regarding the forward-looking statements and factors that may cause such differences please see the warning regarding forward-looking statements in the company’s Annual Report on Form 10(k) and other filings LoJack makes with the Securities and Exchange Commission.

With that I’ll turn the call over to Randy Ortiz.

Randy Ortiz

Okay, thank you Scott, and good morning everybody and thank you for joining us. I’m going to devote a fair amount of time this morning to where LoJack is heading strategically and how we plan to get there, but before I do let me briefly recap our 2012 financial results.

Full year revenue totaled $132.5 million which was in line with our guidance of $132.0 million to $134.0 million. Adjusted EBITDA came in at $6.9 million at the high end of our projection of $5.0 million to $7.0 million. Our international business remained uncertain with the absence of volume from Argentina.

A highlight of the quarter and for the year for that matter was the unit volume growth of our US dealer business. As expected, the business improved from 2011 due in large measure to our refocused sales strategy and a robust domestic auto market. Today, LoJack is directly engaged with more than 76% of the nation’s top 125 dealer groups that are in our coverage area.

During the past year Don and I have begun to lay out the company’s strategy to expand the LoJack brand beyond stolen vehicle recovery. LoJack’s brand attributes of safety, security and protection we believe allow for expansion into the telematics segments of fleet, the dealer and OEM segment, and the insurance segment.

After several years of declining volume, our first mission was to stabilize our core stolen vehicle recovery business particularly in the US market and then begin to grow that business again. Rest assured, we do not want to merely keep pace with the growth of the US retail automotive market – we want to exceed it. Exceeding the growth of the resurgent US auto industry is not only a proof point that our core stolen vehicle recovery business still has significant upside but it is also a powerful foundation on which to build our telematics business.

As we’ve discussed previously, growing our US dealer business meant reestablishing sales and marketing relationships with the nation’s top volume dealer groups, and developing products and services that allow LoJack and our dealer partners to enrich the LoJack experience for consumers. Additionally, as we grow our core stolen vehicle recovery business we intend to expand the business through alliances with other technology leaders in the automotive aftermarket.

A perfect example is the relationship we announced last months with TomTom. This alliance once again expands our brand promise of safety, security and protection beyond stolen vehicle recovery enabling us to generate new telematics profit opportunities encompassed by the ever growing connected car market.

Our accomplishments since the end of September demonstrate the progress we’ve made on these fronts. LoJack’s US dealer business grew 21% in Q4 2012, nearly double that of the US retail automotive market which was up just 11% over the same period. On a full year basis, our top volume targeted dealers were up 16% which also outpaced the auto industry growth of 14%.

Our growth is a direct result of the stronger relationships forged with top volume dealers such as California-based Galpin Ford which has been the world’s largest volume Ford dealership for more than two decades. In December we announced an agreement to install our stolen vehicle recovery system on Galpin’s entire fleet of Ford vehicles, the largest agreement of its kind we’ve ever established with a single dealer.

But installing our stolen vehicle recovery system on the dealer’s inventory of vehicles is just one aspect of the pre-install program. In addition we’re enhancing the product with value-added services such as new and improved training and cobranded educational materials to convey the benefits of the LoJack system to consumers. These steps are part of a targeted effort to assist dealers in growing their volume which in turn establishes LoJack as a highly valued business partner.

And because new cars are frequently stolen right off the lot – and in fact, LoJack just supported a National Auto Dealer Association webinar on this very topic – our pre-install program creates peace of mind for our dealer partners in addition to providing premier stolen vehicle recovery protection for their consumers. Now it’s early days but the value of our pre-install program is resonating with dealers. During 2012, the number of dealers on our pre-install program increased over 60%, almost half of that increase occurring in Q4.

Additionally I think it’s important to point out that the pre-install program is the foundation for a broader and deeper relationships with our dealer partners and ultimately with the consumer. It’s a means to an end, not the end itself. Therefore, in the near term our domestic pre-install program places greater emphasis on dealer penetration and sell-through than revenue per unit among dealers using an incentive program that begins upstream on the showroom floor with the sales consultant, not downstream in the finance and insurance office. Starting with the sales consultant, LoJack is immediately part of the conversation with the consumer about the value-added benefits of protecting their vehicle.

Our new point of sale approach is designed to support a repeatable sales process that consistently delivers incremental profits for the dealership and ultimately drives demand for new LoJack products and services. From an operating perspective, a higher pre-install rate also reduces ordering variability, making it easier for us to forecast our business. In addition we get significantly more leverage within an average pre-install account where direct contribution margin is much greater than a standard account.

Understanding the philosophy behind our pre-install program provides the context for the strategic alliance we announced last month with TomTom, the world’s leading supplier of products and services for the location navigation market. We plan to market, install and service a range of products and services developed by TomTom including WebFleet, TomTom’s popular fleet and order management application.

WebFleet will be distributed in North America by LoJack as LoJack Fleet Management or LoJack Asset Management when bundled with our stolen vehicle recovery products. Our offering will provide business owners with the ability to enhance fuel efficiency with GPS technology, optimize routing with real time traffic data, and use WebFleet to provide a variety of driver behavior metrics. TomTom’s hardware, software, backend data and software as a service will also eventually be integrated with our stolen vehicle recovery network technology.

In addition to going directly to commercial fleet customers and small and medium fleet customers, it’s our plan to expand this product offering by selling it in conjunction with our dealer partners. Additional solutions for automotive dealerships and consumers are planned for the second half of the year.

The TomTom relationship marks a significant milestone for LoJack. It enables us to leverage our strong brand, our far-reaching market presence and our unique law enforcement relationships in new and exciting ways. As a company, I believe that we’ll achieve sustained profitable growth by not simply selling more black boxes tied to a 17-digit VIN but rather by collaborating strategically with other best-in-class technology companies to create the aftermarket solutions our customers want and value.

Our alliance with TomTom directly complements our core stolen vehicle recovery system with additional capabilities that begin to broaden our reach into vehicle telematics technology and more specifically to a range of key segments – as I said before the fleet segment, the dealer and OEM segments, and of course the insurance segment.

Along with the domestic business achievements I’ve highlighted, during the past several months we’ve also continued to significantly grow our commercial business. Our commercial business posted a record performance this last year with a 44% unit increase for the quarter and a 52% year-over-year increase reflecting strong demand for our stolen vehicle recovery solution for equipment and commercial vehicles.

Once again, this business has been a real bright spot for LoJack and is a business that will also benefit from the TomTom alliance, as we expand our relationship with commercial customers by providing telematics offerings that complement our stolen vehicle recovery product.

Turning to the international segment for our LoJack business, our revenue was down 43% for Q3 and 32% for the year as ongoing trade restrictions in Argentina continue to adversely affect our business with the licensee in the country of Argentina. Uncertainty in the international business dampened our revenue by over $12 million year-over-year. Meanwhile we are encouraged by the momentum of our subsidiary in Italy where revenue grew 7% from Q4 2011 and 9% year-over-year on a subscription base that’s nearing 30,000 subscribers. All of this of course as you know was against the backdrop of severe economic headwinds in Italy.

Now, before I turn it over to Don I’d like to mention another very important enhancement to the LoJack organization specifically as it relates to our investment in the future as represented by executive talent that significantly broadens and strengthens our capabilities.

In January we welcomed Hal Dewsnap as Senior Vice President and General Manager of US Sales. Hal is a talented auto executive whose thirty years of domestic and international sales experience at Ford Motor Company are assets that we believe will play a critical role in advancing our US business. Hal played an instrumental role in crafting Ford’s California market strategy which helped grow Ford’s market share in the strategically important market after two decades of decline.

Earlier this month we also named Emad Isaac, the former Chief Technology Officer at Rand McNally and Morey Corporation as LoJack’s new Chief Technology Officer. Emad is an expert in vehicle telematics. During two decades of product development experience, Emad defined systems architecture and requirements for key telematics technologies including GM’s OnStar system, BMW’s Assist, and Mercedes Benz systems. Obviously we’re excited to have such an accomplished technology professional to drive innovation at LoJack.

Also in 2012 we appointed Doug Flood as Vice President of the company’s new Corporate Development Department. Doug’s background includes senior positions at Technology Growth Partners and Mercury Computer Systems, and recently he was instrumental in forging our partnership with TomTom. Now, let me turn the call over to our CFO Don Peck for a financial review. Don?

Don Peck

Thank you, Randy, and good morning, everyone. As I review our Q4 financial results today all quarterly comparisons will be to Q4 2012 unless otherwise noted. I will also review our full year results for 2012 compared to 2011.

First, as expected, our consolidated revenues for Q4 totaled $33.8 million, down 20% from $42.5 million last year primarily related to expected weakness in our international business due to the trade restrictions that Randy mentioned in Argentina. Indeed, revenues for the full year of 2012 were $132.5 million in line with our guidance of $132.0 million to $134.0 million.

Breaking that down, US revenues decreased 9% in Q4 2012. However, please keep in mind that the revenues in Q4 last year included $2.6 million of nonrecurring revenue from the initial transfer of liabilities related to our 2010 extended warranty contracts. Our second and final transaction, transferring the liabilities related to our 2011 extended warranty contracts occurred in Q1 2012 generating $3.1 million of nonrecurring revenue in that quarter. We did not have a similar transaction in Q4 2012 nor do we expect any in 2013.

Removing the effect of this Q4 2011 nonrecurring revenue to the quarter-over-quarter comparison, our US revenues grew 3% in Q4 2012. US dealer product revenues increased 7% on a 21% increase in dealer unit volume. As Randy mentioned, our 21% increase in US dealer unit volume outpaced the industry growth of 11%.

Our domestic pre-install business has continued to gain traction as evidenced by our successful pre-installation at Galpin Ford which we announced in December. In Q4 last year pre-installed units comprised 32% of our US unit sales, while in Q4 this year that percentage was up to 43% of installed units. This positive trend also led to our average revenue per unit to decrease 12% between periods. As would be expected, our pre-install product is sold at a lower price to dealers than those units installed off-premises one at a time therefore generating less revenue dollars than our standard install or certified dealer install units.

However, while a higher percentage of pre-installs lowers our blended average revenue per unit, our gross margin on these pre-install units is essentially similar to our standard delivery model as we effectively share the economics of the more efficient installation method with our pre-install customers. At the same time, as Randy mentioned, our pre-install programs allow us a much more meaningful platform from which to contribute to a dealer’s overall profit per vehicle and to drive a more robust relationship with dealers and dealer groups.

We remain pleased with the progress of our commercial business which posted a 44% increase in unit volume during the quarter and a 44% increase in revenue. Revenue from ancillary products, such as extended warranty, early warning products and paper products were down 7% over Q4 2011. Revenues from extended warranty contracts and paper products sold during these periods were generally consistent. Revenues recognized on our early warning products was down about $360,000 or 13%.

We recognize revenue from the service component of our early warning product over five years. The deferred revenue flowing onto our income statement from our early warning products has decreased between Q4 last year and Q4 this year as fewer years with higher unit volumes from before the 2008 market downturn are included in the amortization period and are being replaced with lower unit volume from recent years. The impact of this fall off in deferred revenue being recognized was partially offset by higher early warning unit sales between Q4 last year and this year, which were actually up 5%.

Turning to our international business, international licensee revenue declined $6.5 million or 43% in Q4 to $8.7 million from $15.2 million in Q4 last year. The key component of this decline relates to our business in Argentina, where we had $7.7 million of sales in Q4 2011 and no sales in the same period in 2012 due to the import restrictions.

We have shipped no units to Argentina since January of 2012. Offsetting this decline were increased sales to South Africa as we forecasted during our Q3 earnings call. We have continued to work closely with our Argentine licensee in his efforts to address those import restrictions. We have made good progress and we expect to start shipping to Argentina in the next few months or so to meet the continuing demand for our products there. We will continue to monitor this situation closely and address issues as they arise.

We continued with the delivery of units to our Brazilian licensee during the quarter. While this is an encouraging sign, our efforts to settle the legal dispute with this licensee thus far have been unsuccessful. The case is scheduled for arbitration in mid-March of this year. Revenue from our Italian operations increased 7% quarter-over-quarter despite the economic difficulties there. Our subscriber base has climbed to about 28,000 subscribers from 26,000 subscribers at the end of Q3.

Revenue related to our all other segment increased by $394,000. Our SCI cargo business increased 37% to $1.164 million while our Safety Net business increased 128% to $142,000. In total, our revenues for Q4 2012 were $33.8 million, up from $32.7 million in Q3 this year and down from $42.5 million in Q4 last year.

Consolidated gross profit as a percentage of revenue for Q4 2012 was 52.8%, up from 51.8% in Q4 last year when you adjust last year for the one-time extended warranty liability transfer revenue which contributed 230 basis points to gross margin in Q4 last year. That is well ahead of our corporate goal of 50% despite the fact that in 2012 gross margin was negatively impacted by the reduction in international sales which generally have a higher gross margin contribution.

Our operating expenses were $16.8 million in Q4 2012, a decrease of 3.3% from the $17.3 million in the same period of 2011. Lower office expenses and depreciation expenses were partially offset by a write down in our goodwill in our Safety Net business. Since that business has not taken off as we initially envisioned, we have decided to reduce to zero the value of goodwill in our books associated with Safety Net. That resulted in a $472,000 non-cash charge in Q4 2012. We plan to continue to pursue the Safety Net business but for the time being we plan to curb our geographical expansion efforts and focus on the markets we currently serve.

Outside legal expenses were down $288,000 from the same period in 2011 and totaled $544,000 for the quarter reflecting a lowering of our outside legal expenses related to the California wage and hour litigations.

As I mentioned on last quarter’s call, while we expect that there will be continued activity and expenses as the settlement agreement of the California class action proceeds to final court approval, we do not believe that our legal expenses related to that case will be as extensive as they were earlier in 2012 and last year. In contrast, the hearing date for the liability phase of the Brazilian licensee arbitration is set for next month. As a result, we do expect to have significant outside legal expenses in Q1 this year related to that case as the matter moves toward resolution.

Adjusted EBITDA totaled $3.2 million in Q4 compared to $7.7 million in Q4 last year, primarily due to the lower international revenue in the 2012 period. Our lower operating expenses in Q4 2012 enabled us to achieve the high end of our adjusted EBITDA guidance range for the full year as we achieved adjusted EBITDA of $6.9 million in 2012 on a guidance range of $5.0 million to $7.0 million.

Stock-based compensation in Q4 this year was $462,000. Depreciation and amortization was $1.2 million during the quarter. In other income and expense, during Q4 this year we had a $167,000 positive valuation adjustment in our investment in Absolute Software common stock due to an increase in the market price of their stock compared to a $445,000 positive valuation adjustment in the same period last year. Our foreign exchange gain or loss in the quarter went from a gain of $77,000 last year to a gain of $13,000 this year. This exchange gain results from the impact of currency fluctuations on our inter-company balances, mostly Euros and Canadian Dollars.

Income tax expense for Q4 2012 was actually negative as we reversed a portion of our provision for taxes taken earlier in the year for our Irish subsidiary. Net income in the current quarter was approximately $1.5 million or $0.08 per share compared to net income of $4.6 million or $0.26 per share in Q4 last year. The company had positive cash flow of $3 million in the current quarter.

Our cash flow from operations was $3.5 million as our $1.5 million of net income included approximately $0.5 million of non-cash stock-based compensation and $1.2 million of depreciation, and we had a $472,000 impairment of Safety Net goodwill as discussed earlier which was a non-cash charge. Balancing these changes had a net minimal impact on our operating cash flow.

We had capital spending of $1 million during the quarter as we made additional investments in technology licenses and in computer and tracking equipment. Our Canadian debt increased by $552,000. We also purchased just over 41,000 shares of LoJack stock on the open market during the quarter at an average price of $2.64 for a total investment of $109,000. 1,240,487 shares remain in our Board-approved repurchase authorization.

Our cash and cash equivalents balance on December 31, 2012, was $48.6 million compared to $49.6 million at the end of 2011. Of our year-end cash balance, $26 million of it or more than half is held in US banks held by our US parent company while the remainder is deposited overseas by our international subsidiaries. Of the cash held by our foreign subsidiaries, 91% is held in US dollar denominated accounts.

As of December 31, 2012 we had approximately $13.8 million of debt outstanding against our Canadian credit agreement with borrowing availability of another $5.6 million on our revolving line of credit. We are in compliance with all financial covenants.

Now looking forward to 2013, on our base stolen vehicle recovery business, we expect that growth in the US retail automotive market will continue to strengthen our domestic revenues. We expect that our pre-install program positions us well for our domestic units sold to meet or exceed US automotive retail growth during the year. We expect international revenues will remain volatile, particularly in light of Argentina’s trade restrictions, but we do expect to be in a position to export our product to our Argentinian licensee beginning in the next few months or so. Our outlook on shipments to our Brazilian licensee remains cloudy and we do not expect further clarity until upcoming Arbitration is resolved.

As Randy mentioned we’re also excited about the upcoming launch of our strategic alliance with TomTom to provide fleet management solutions through our commercial and domestic dealer sales force. Our projected revenues from our new product offerings will be using a software as a service or subscription model which means that we will recognize revenue and direct expenses over the term of the subscription period while we recognize indirect expenses as they are incurred.

Consequently, based on the anticipated ramp we expect that GAAP revenues from our fleet management subscriptions will lag behind bookings and that our fleet management business will be accretive to earnings on a GAAP basis beginning in Q4 2013.

Based on all of that, for the full year 2013 we believe that our consolidated revenues will increase approximately 10% over 2012 and we expect that our adjusted EBITDA will be 3% to 7% of revenues for the full year. With that I will turn it back over to Randy.

Randy Ortiz

Okay, thank you Don. This morning I’ve shared with you some of the significant progress we’ve made during 2012 to stabilize and begin growing our business again. IN summary, we made excellent progress against our plan to develop LoJack as a preeminent global brand providing aftermarket safety, security, protection products and services for the connected car.

Now I want to share some of the key elements of the LoJack plan. Certainly as you’ve observed we’re focused on accelerating the development of products and services customers want and value and we’re going to accomplish this goal by continuing to develop products organically here at LoJack; but of course we will continue to collaborate with other technology leaders, and TomTom’s the first example of that.

We intend to restructure our distribution channel. I think we’ve made good progress in the US market by focusing our sales and marketing efforts on the largest dealer groups and on the international front we’ll continue to look at market consolidation opportunities and new products and services to provide our existing group of licensees.

We want to improve our functional and technical excellence. We are becoming a data driven company that has a deeper understanding of the data and facts that drive the auto industry which obviously is core to our business. Additionally there’s a renewed focus on creating an environment of process discipline and compliance. We have also significantly enhanced our leadership team by bringing in the skilled and experienced leaders with the expertise to implement our strategic vision.

Another tenet of our LoJack plan is to make sure we properly allocate capital to fund our plan and improve our balance sheet. As Don pointed out, we continue to efficiently manage our cash position and are investing in a business model that is focused on growing LoJack’s enterprise value. Last but certainly not least we are committed to delivering results by meeting and exceeding our corporate revenue and EBITDA targets and improving employee satisfaction and of course retaining our top talent.

We expect 2013 to be a transformative year for LoJack during which we invest in the people, products, processes, and systems infrastructure to begin building a leadership position in the connected car business. With that we’ll open it up for questions, thank you.

Question-and-Answer Session

Operator

Thank you. (Operator instructions.) Our first question comes from the line of Chris Owen with Plaisance Fund. You may begin.

Chris Owen – Plaisance Fund

Good morning Randy and Don, how are you? Could you just elaborate a little bit on your TomTom opportunity, maybe talk about what kind of revenue or however you can frame up the metrics you can see from that business in a few years? Can you talk about the new products you might expect there and then also the potential for an expansion of that relationship to help you in some way in the European geography?

Randy Ortiz

Good question, Chris. Well, for starters I think the best way to frame up the opportunity is always to look at the overarching business opportunity, and as we’ve discussed before the commercial vehicle markets that are underserved by telematics is enormous. We believe there’s somewhere in the neighborhood of 60 million commercial vehicles in operation around the world, and obviously our relationship initially with TomTom addresses only North America and we believe that opportunity in North America is somewhere in the neighborhood of 18 million to 20 million pieces.

But I think what’s important is it’s severely under-penetrated when it comes to anybody providing telematics services, and we’re talking about single digit penetration. So the upside we believe is significant. I think importantly it’s a perfect role for LoJack to be able to complement our stolen vehicle recovery business, because certainly as you look at our brand attributes of safety, security, and protection, we want to be involved in three very specific segments; and the first one we’ve chosen with TomTom is fleet because any fleet manager out there that’s looking to run a more efficient fleet will want a telematics device to know how the vehicle is being driven, when it’s being driven, where it’s being driven.

So not only with spiking fuel prices is the efficiency of how the fleet runs important, but certainly the driver behavior metrics that can be gleaned from a telematics device are important to fleet operators as well. So we think it’s an enormous opportunity and having that information backstopped with a stolen vehicle recovery device like LoJack to protect the asset we think is the right complimentary approach and we think it fits very nicely into our commercial business and of course our core dealer business as well. So we’ve got the brand, we’ve got the distribution and a complimentary offering so we think the, like we said the segment enormous and there’s an opportunity for us to play in it pretty significantly.

Chris Owen – Plaisance Fund

And in terms of the new products in the second half, can you elaborate a bit on what we might expect there?

Randy Ortiz

Well, I guess from my perspective as we look at the fleet side of the business and we talk about driver behavior information, it doesn’t take a big leap to say well, if managing a small business fleet or even a medium- or larger-sized fleet is important then on the consumer side the dealer channel, managing your family fleet is important as well. So we think this telematics approach can be core to building a safe driving platform; that’s what we intend to focus on with our dealers in the second half of the year – something that’s more consumer-focused as opposed to fleet-focused. But make no mistake about it – our first entre into this business is on the fleet side with a proven partner like TomTom.

Chris Owen – Plaisance Fund

Great, and then you had sort of alluded to emphasizing the recurring aspects of your business model; and obviously TomTom and the SaaS revenue will enhance that. Presumably the pre-install revenue is also an element of that, and can you just talk about how you can increase your current 40%-something penetration there and how you have transformed that business to ensure that it’s not a one-off exercise but rather a recurring relationship?

Randy Ortiz

Right, so let me start by saying we view the pre-install business as I said before as foundational to our future business. So as we have, and I’ll use the Galpin example – as we’ve developed the pre-install business there certainly we are a very important economic driver to that dealership’s bottom line and we are a very important partner now that gives us entre into further discussions on a variety of different products and services over and above just the initial stolen vehicle recovery device.

Without that relationship and without the economic benefits that relationship is providing it’s hard to believe that we would have meaningful discussions with operators of that size unless we were in there with the pre-install foundation. So I guess the route that we’re going to go down is to obviously go out there and build on our pre-install foundation, work in conjunction with TomTom and our dealers to access the fleet business that’s out there and available through a variety of large dealer groups; but then in turn come back to focusing on additional consumer offerings that we can layer on top of the pre-install stolen vehicle recovery foundation that’s already in the dealership.

And you talk about changing the model, that’s what I referenced in my remarks, is that we are looking for the approach that Galpin employs, which is basically a pre-install model that allows the sales consultant to sell the value proposition of the stolen vehicle recovery device upstream, not waiting until the consumer gets up into the F&I office where potentially the F&I manager just could be looking to maximize the gross margin opportunity which they likely would as opposed to socializing the value upfront when the entire vehicle’s being discussed.

We think it may be a nuance but it’s definitely a better approach, and we’re seeing significantly higher attach rates or sell through when that approach is deployed because certainly you want the sales consultant who is selling the entire vehicle value proposition engaged in the process of selling LoJack products and services.

Chris Owen – Plaisance Fund

And if you look a year from now, if the current pre-install penetration is 43% domestically, what would you expect it to be in a year?

Randy Ortiz

I’d say it’d probably be in that range, maybe a bit more if we continue to push it but I would say it’d be in that range. And just to be clear, too, that doesn’t mean that we walk away from those dealers out there – and generally speaking those would likely be smaller-volume dealers, the ones that sell LoJacks one at a time. We are developing a sales team that is focusing on some of those specific accounts, but make no mistake about it – the primary plan is with the large dealer groups, is to build out the pre-install model. So it’s our expectation that that volume will continue to grow.

So I guess it’s not a leap to think that it could move towards half of our business, and what we’re mindful of is making sure that we have no margin erosion. And Don alluded to that before – we want to make sure that this is an efficient model and that the efficiency comes when we apply our fixed expense over a large number of units; and make sure like I said we’re diligent and monitor those margins in all our pre-install business, and also make sure that we maximize the opportunity to sell ancillary products through the pre-install process as well not just put the base product on the vehicle and leave it at that.

Chris Owen – Plaisance Fund

Right. And then I guess finally can you just characterize the to-date Galpin performance and also your margin experience there since that seems to be your sort of cutting-edge contract?

Randy Ortiz

Margin is outstanding; sell through rate, while the dealer wouldn’t want us to share specifics of his business I’d say it’s phenomenally high. I mean we are over the moon happy with the attachment rate at Galpin and the dealer is equally happy with the economic benefit being provided by LoJack. So it is a win-win so far with Galpin. They couldn’t be more pleased with LoJack and us with them.

Chris Owen – Plaisance Fund

Great, thank you very much.

Operator

Thank you. Our next question is from Bill Dezellem of Tieton Capital Management. You may begin.

Bill Dezellem – Tieton Capital Management

Good morning. Emad, would you please take a moment to discuss your view of what you have done in the past in the telematics world and how that relates to LoJack; and additionally, where you view taking LoJack over the course of the next… Well, maybe you should define the period of time but in my mind I was thinking one to three years?

Emad Isaac

Well thanks, Bill. You should know that I’ve only been here a few weeks at this moment in time so I can probably talk a bit about my background and experience in the telematics space. Clearly you heard Randy talk about my experience with the OnStar system, BMW Assist, Mercedes Benz, but also in the field of UBI, usage-based insurance companies for vehicles, commercial vehicle fleet management and all the other technologies associated with that. So I’d say my experience within the space and in this realm has been deep.

I’ve been around since the beginning of this technology so I’m familiar with, I guess the best way to put it is where all the bodies are buried in terms of understanding the space in the market and the technologies. So I’m excited to be here and clearly this fits in well with our background, and looking forward to where we want to go with the company.

Randy Ortiz

I’d just say, Bill, in fairness to Emad he has only been here a couple of weeks. But certainly as we went out and did our due diligence on the recruiting front we didn’t go out and do that without our strategy being well in place and wanted to find the right skilled leader that could come in and make this strategy a reality, make our strategic vision become a reality. So we think that with Emad’s deep telematics background and obviously his work in some of the key segments that we’re going to be targeting he’s a perfect fit.

Don Peck

Although he’s only been here a few weeks he’s already having an input which is great to see.

Bill Dezellem – Tieton Capital Management

I’m actually going to continue down this path for just a moment with Emad. Because LoJack is such a small organization today it begs the question of why you joined, and I suppose I could even be as harsh as to say why bother? But would you expand on that please?

Emad Isaac

Well, it’s an interesting perspective. I’ll tell you my perspective on that is why wouldn’t I want to be there? I think the growth of the company, where this is being positioned how Randy has described, the leadership changes, the things that are being put into place; the potential of the market, the current focus of the company and with the relationships they have, the brand, the brand name is huge in this space. The relationships we have with dealership networks, the relationships we have with law enforcement – effectively this company is sitting on the cusp of something great and it’s moving forward with a lot of force, with a lot of energy.

So I’m looking at it as I want to be here, there’s no other place I’d rather be. You know, you get a few moments or a few chances in life to be able to say “I was there” when something wonderful happens. What this company does and the service it provides to the public and what it really offers is tremendous and there’s a point of pride with that. So I will tell you that I’m looking at this as nowhere else I’d rather be.

Randy Ortiz

Hey Bill, I would just point out why bother, I think Emad nailed it – great brand, unmatched distribution specifically in the US market, integration with law enforcement that’s been built over 28 years. That’s why bother.

Bill Dezellem – Tieton Capital Management

That is helpful. Let me shift if I may to the dealers and it may be early, because if we heard correctly you’ve really had a significant jump in the number of dealers that are using the pre-install program just in Q4. So I’m concerned that my question is not going to provide the same insights and I’m hoping that it will, but what is the sell through at the dealers or the penetration rate at the dealers that are using the pre-install program – meaning for every hundred cars that are pre-installed, how many of those are going out the door with a LoJack that was sold, and not at any one dealer but all your pre-install customers?

Randy Ortiz

So one of the things we don’t do, Bill, is disclose those specific numbers but I will give you some guidance. The bottom line is I think we’ve shared this before – if somebody doesn’t have at least 40% sell through we’re not interested in having them as a pre-install dealer because it’s probably not working for them, it’s not working for us. But I would just tell you this, the ones that we are going to maintain will be on the spectrum from somewhere in the 40% range all the way up to 95%.

Bill Dezellem – Tieton Capital Management

40% to 90%?

Randy Ortiz

95% I said.

Bill Dezellem – Tieton Capital Management

95%. And the difference between a 40% dealer and a 95% dealer, what are you finding there?

Randy Ortiz

I would say one of the primary differences is what I alluded to, is those dealers who are willing to properly train their sales consultants, compensate their sales consultants, educate the consumer in advance about the value proposition of LoJack as opposed to waiting until they get into the F&I office and trying to at that point in time maximize gross margin on a variety of different offerings from service contracts to wheel and tire protection.

Bill Dezellem – Tieton Capital Management

That’s helpful. And then one additional question for now. The press release I believe mentioned that you are going to be doing something in the sales and marketing partnerships with the top dealers. What is it that you’re referring to there?

Randy Ortiz

So what we’re referring to there in that point is obviously getting involved in additional training initiatives that would include iPad applications, smartphone applications for consumers, making sure that we have the right point of purchase marketing materials and collateral at the dealership but also to once again work in conjunction with the dealers on upstream consumer outreach – to really market to consumers before they show up at the dealership.

So it’s all about attempting to have a relationship with consumers which is a real shift for LoJack, because in the past we sold a black box that they don’t see, feel or touch, may never use and this is about, this is a paradigm shift that really says “Let us, Mr. or Ms. Dealer, really market with you upstream to the consumer. Let us help train your sales force. Let us help educate you on the value proposition of LoJack and the products and services we intend to market now and in the future and do that in conjunction with your consumers” so we can start to establish a relationship with consumers as well, not just the dealers. So we think that’s very important to our future.

Bill Dezellem – Tieton Capital Management

Thank you, and I said that was going to be my last question but can I do one more please?

Randy Ortiz

Certainly, Bill.

Bill Dezellem – Tieton Capital Management

Emad, I would like to circle back to something that either you or Randy had said relative to your background, and that’s working with insurance companies. Would you expand on that and how that might relate to LoJack please?

Emad Isaac

Well, the insurance markets obviously are players in the automotive space, and in terms of you heard Randy say “the family fleet.” So there’s a significant play in terms of that market and in terms of that industry as it were. So from my experience prior to being here, obviously, the specific products I really can’t get into – as you can appreciate some things are under confidence here, but suffice it to say that at this point in time the market fits in well with what we had discussed in terms of the family fleet.

Randy Ortiz

I guess when you start thinking about usage-based insurance, Bill, that’s once again a business that I think is just starting to emerge – how you drive, where you drive, when you drive. We think the brand attributes of safety, security, and protection and the fact that LoJack has this unique integration with law enforcement is a good fit in the insurance discussion.

Bill Dezellem – Tieton Capital Management

We have been under the impression that US insurance companies have been hesitant or maybe even uninterested in the concept of adding additional actual information and giving some of their policyholders a break for better driving.

Emad Isaac

Well nobody’s told Progressive that, Bill. They’ve been pretty aggressive with their Snapshot campaign.

Bill Dezellem – Tieton Capital Management

Alright, well there’s things we need to learn. Thank you.

Emad Isaac

Thank you. It was a good question and as I said, it’s a burgeoning opportunity and it’s one that we think fits nicely with our brand.

Randy Ortiz

Thank you, Bill.

Bill Dezellem – Tieton Capital Management

Thank you both.

Operator

Thank you. I’m showing no additional questions at this time. I would now like to turn the conference back over to Randy Ortiz for closing remarks.

Randy Ortiz

Okay, well thank you everybody. Thank you for your participation this morning. As we said in our remarks, Don and I, we feel strongly this is a transformational year for LoJack. This is about positioning our brand for growth and we think that the relationship with TomTom is just the beginning as we look to invest in the enterprise growth of LoJack. So thanks again for your interest and we’ll talk to you soon.

Operator

Ladies and gentlemen, this concludes today’s conference. Thank you for your participation and have a wonderful day.

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