LoJack Corporation Q1 2009 Earnings Call Transcript

LoJack Corporation (LOJN)

Q1 2009 Earnings Call

April 30, 2009 9:00 am ET

Executives

Paul McMahon - Senior Director, Corporate Communications

Ron Waters - President and CEO

Rich Riley - Chairman

Tim O’Connor - SVP and CFO

Analysts

Steve Dyer - Craig-Hallum

Ajay Sadarangani - Manning & Napier

Bill Dezellem - Tieton Capital Management

Garry King - Truffle Hound Capital

Presentation

Operator

Good day everyone and welcome to today’s program, the LoJack Corporation first quarter earnings call. At this time, all participants are in a listen-only mode. Later you will have the opportunity to ask questions during the question and answer session. Please note this call maybe recorded. I will be standing by if you should need any assistance.

And it is now my pleasure to turn the call over to Mr. Paul McMahon. Please go ahead, sir.

Paul McMahon

Good morning and thank you for joining our call today. Our moderator is Ron Waters, President and Chief Executive Officer. He will be joined in the call by Rich Riley, Chairman of the Board; 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 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, 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, 2008.

I’ll now turn the call over to Rich Riley.

Rich Riley

Thanks, Paul. Good morning, everyone. Thank you for joining us on the call this morning. I am going to start with an overview of the broader global economic factors affecting our business and I’ll provide some context for the comments of Tim and Ron that will follow.

Tim will then cover the specifics of our financial performance for the quarter; and Ron will provide a more detailed operation review of the business. After our formal comments, we will take your questions.

We find ourselves operating in the most difficult global economic climate, in more than six decades. Economic uncertainty, driven by severe liquidity problems stemming from the crisis in the financial markets, is now global in nature.

After strong performance in international arena partially offset the decline in domestic market in 2008 for LoJack, international market has slowed considerably for us in 2009. Each geographic region, which we do business has been aggressively impacted by the global recession, beginning in late 2008.

Our efforts diversified the business over the last five years had not really helped us in 2009, as the broad-based economic contraction has impacted in ever increasing number of markets and countries. The current conditions are so wide spread, that they’ve had a significant impact on each of the critical markets in which we operate, including the auto, construction, motorcycle and cargo markets worldwide.

We’ve recognized that these are indeed extraordinary times that will require careful management of the business, tough decisions to sustain our competitive position, the preservation of liquidity and continued investments to diversify the business for the future. We are fortunate to have an experienced management team, a group of dedicated and talented employees and the focus to achieve our long-term goals in the face of these painful, but temporary economic challenges.

While we are focused on managing the current challenges on our existing markets, and in capitalizing the opportunities in our new businesses, it’s important to you know that we are also aggressively managing our operational cost structure. We have taken action in each of the last two quarters, to resize the organization, to reflect the widespread declines in the business activity. Ron will cover this in more detail during his comments.

While we will continue to monitor and aggressively manage our spending, we will also continue to invest in the strategic programs necessary to diversify the business for the future. The current challenges in the auto market clearly reinforce the need for us to leverage our strong brand, develop new products, and enter new markets.

We will weather these unprecedented economic conditions by preserving liquidity, closing a strong balance sheet and positioning LoJack for the long-term.

I’ll now turn it over to Tim, for more detailed review of our financial results for the quarter.

Tim O’Connor

Thank you, Rich, and good morning, everyone. First quarter consolidated revenue declined 40% from prior year levels to $27.8 million. Domestic revenue in the quarter declined 32% from the prior year, to $21 million, while revenue in our international business in the quarter declined 62% from prior year to $4 million.

Boomerang Tracking had revenue of $2.8 million in the first quarter, compared to $4.9 million in the first quarter of 2008. The devaluation of the Canadian dollar accounted for approximately $700,000 of the Boomerang declined.

Unit sales in our domestic and international business for the first quarter declined 55% year-over-year. Domestic unit volume for the quarter declined 45% over the prior year, while international unit volume in the quarter declined 66%, over the prior year.

For the first quarter, our consolidated gross margin dollars declined 43% from prior year levels to $13.6 million. Our gross margin as a percentage of revenue was 48.9%, compared to 51.6% for the same period in 2008.

The workforce reduction in our operational organization implemented in the fourth quarter of 2008 was based on an overall projected decline in the auto sales for the calendar year 2009. However, the actual rate of decline in the first quarter auto sales exceeded our projections, which in turn negatively impacted our gross margins.

In response we have once again reduced the size of our operations workforce to address the more precipitous decline. Savings related to the second workforce reduction will be reflected over the remainder of 2009.

Excluding the impact of severance related costs, our gross margin as a percentage of revenue in the first quarter was 50.3%. For the quarter, our domestic gross margin dollars declined 35% and gross margin as a percentage of revenue declined to 49.7%, compared to 51.6% for the first quarter of 2008.

Excluding the impact of severance related cost in the quarter, domestic margin was 51.4%. Lower product costs and the favorable impact of our quarter four 2008, operations workforce reduction, helped to offset the impact of the significant volume declines in the domestic auto business.

International gross margin dollars for the quarter were less than half that of prior year, and gross margin as a percentage of revenue was 48%, compared to 54.2% one year ago. The impact of this significant drop in unit volume could not be fully offset by fixed operational cost reductions in the quarter.

Boomerang gross margin dollars for the quarter were $1.3 million, which represents a 44% decrease over the first quarter of last year. The devaluation of the Canadian dollar accounts for 13% of this decline. Gross margin as a percentage of revenue for Boomerang was 44.5%, compared to 46.2% in the first quarter of 2008.

Excluding the impact of severance related costs, Boomerang’s gross margin was even with quarter one 2008. Here too, the benefits realized from our quarter four 2008 workforce reduction helped to offset volume declines experienced during the quarter one 2009.

The operating costs loss for the first quarter was $6.2 million, compared to operating income of $1 million for the same quarter in 2008. Excluding the impact of severance related costs, operating expenses for the quarter declined 14% versus quarter one 2008. This savings reflects a significant reduction in people, compensation and benefits plans across the organization.

Operating expenses for the quarter also reflects approximately $600,000 of legal expenses, related to our arbitration with our former licensee in China, along with other legal matters. It is important to note, our quarter one operating expenses also reflect costs related to our supply chain integrity and locator businesses, which were not included in our quarter one 2008 results. These two businesses represent a four percentage point increase in operating expenses versus quarter one 2008.

The net loss for the quarter was $6.4 million or $0.38 per share, down from net income of $1.1 million or $0.05 per share in the same period of prior year. The net loss for the quarter reflects a pre-tax charge relating to the workforce reduction of approximately $650,000, including severance, other employee-related costs, and lease termination costs. The loss also reflects a $400,000 charge related to the write-down in the value of our investment and our licensee in France, Tracker.

Our cash flow for the quarter was a deficit of $1.5 million and our cash balance on March 31, 2009 was $56.4 million, compared to $57.9 million on December 31, 2008. We reduced our accounts receivable allowance by more than $7 million compared to the prior quarter, driven by collections from our international licensees. Our domestic accounts receivables remained essentially even with the prior quarter, and we have not experienced any significant write-offs.

Compared to the prior quarter, inventory levels have increased ahead of the launch of our improved technology, along with the shortfall in shipments for the quarter. We also liquidated our auction rate securities during the quarter and realized the benefit of $4 million.

Our capital expenditures in the quarter were $1.7 million in line with historical levels. Our depreciation and amortization in the quarter was $1.9 million. During the first quarter of 2009, we did not repurchase any shares. As of December 31, 2008, we had outstanding repurchase authority to repurchase approximately 1.7 million shares.

I’ll now turn the call over to Ron.

Ron Waters

Thanks, Tim and good morning, everyone. Though we are disappointed with our financial performance this quarter, we do recognize that we are operating in unprecedented times. The IMF’s latest forecast for 2009 global economic activity is a projected decline of 1.3%, by far the deepest recession since World War II.

Credit continues to be tight, unemployment is increasing and consumer confidence is at record lows. As a result, consumer spending has been impacted and the domestic auto industry is facing unprecedented challenges, including the sweeping and historic changes resulting from the government’s intervention. And in recent months, the challenges facing the auto industry in the U.S. have spread globally.

We are aggressively managing our business with a careful balance of aligning our costs to expected revenue potential, while continuing to make investments in our strategic programs that will drive long-term growth. These strategic programs include technology and product development, our cargo security initiative, and LoJack SafetyNet, our solution for people at risk.

2008 represented the worst annual performance for the domestic auto industry in 16 years, 13.2 million vehicles. The performance in the first quarter of 2009 was worse, reflecting a 38% drop in volume and a seasonally adjusted annual rate of 9.5 million new vehicles, far below original industry expectations of 11.5 million new vehicle sales for the year.

This unprecedented decline in vehicle sales is the result of increasingly tight credit and eroding consumer confidence. The challenges in the domestic auto channel that I have shared with you in prior calls have not changed. Fewer consumers are buying vehicles and those that are buying have not been extended the same level of credit that they may have been in prior years.

These same dynamics are impacting our motorcycle sales as well. For the first quarter, our domestic revenue declined 32% based on a 45% reduction in unit volume. These results reflect our increase in average revenue per unit as fewer dealers reach certain volume variable pricing thresholds and our percentage of business from the bulk install program dropped to 13% from 16% in the prior quarter and 22% in the first quarter of 2008.

On a positive note, we continue to hear from dealers that LoJack is a product that consumers see value in and one that contributes to dealer profitability. Our business continues to track with the manufacturers who are increasing market share, namely Toyota and Honda.

We have generally done well with our large national accounts and have maintained solid relationships with the key decision makers. Additionally, I’m pleased to note that in the first quarter, we expanded our coverage in to the Tulsa and Oklahoma City areas and Reno, Nevada, and have experienced favorable auto dealer support.

Our national penetration rate is now little over 6%. Historically, California has disproportionately high level of auto sales from the imports. In 2008, imported vehicles represented 68% of auto sales versus 53% for the nation.

As we’ve said before, LoJack sweet spot is the imports; Toyota, Honda and Nissan. As a result, our penetration in California has dropped and this has put pressure on our national penetration rate. While the California penetration has dropped somewhat our other regions in the east and south remain steady.

We are contending with some dealers selling lower price yet non-competitive products, such as tire & wheel protection or appearance packages, but we are not experiencing any widespread encouragement of any technology competitor.

As a result of the continued declines in our domestic business; at the end of March, we took action to reduce our domestic operations’ organization, to more clearly reflect the level of business. This reduction is envisioned to the workforce reduction that we made in the fourth quarter of 2009.

In addition, we further reduced costs through a variety of organization wide actions that include eliminating the merit salary increased for executive management in 2009, reducing merit salary increases for all other employees, suspending the company match to employee contributions in 401(k) plan for 2009 and eliminating the employee stock purchase plan as of May 31, 2009. These reductions were effective April 1 of this year.

The actions we have taken in the last two quarters to reduce operations in the U.S. and at Boomerang have resulted in a 19% reduction in head count. It is important to note, that these head count reductions and the cost reductions I just reviewed, will save approximately $15 million for 2009.

We will continue to tightly and aggressively manage our operating expenses and effectively maintain our liquidity. As Tim noted, we ended the quarter with $56.4 million in cash on our balance sheet and intend to preserve our liquidity.

Our efforts in the cargo security market with supply chain integrity and with our new LoJack SafetyNet solution to track and rescue people at risk who wander remain in the early stages, with measured progress. Both markets present LoJack with sizeable opportunities, but they will take some time to develop, given the unprecedented economic times in which we operate.

Our international business declined, as the global economic situation worsened. Our business in Europe, which is dependent on new vehicle sales, continues to be impacted by similar challenges to those of domestic auto market. Our larger licensees in Latin America and South America, which are more dependent on insurance mandates and marketing relationships have been more conservative in their buying, as a result of the uncertainties with their local economies rather than the state of their business.

Also some of our licensees are working through existing inventory that was purchased from us in late 2008, based on optimistic expectations for early 2009. As a result of these dynamics, our volume from the licensees in the first quarter declined abruptly and rapidly.

However, during April, our international order activity has increased. Our business in Italy showed solid growth, with unit volume doubling, albeit not enough to counter our level of investment. Our business at Boomerang continues to reflect tight credit in the auto channels, as well as a shift in the market away from high-end vehicles, where Boomerang has historically had a high penetration.

As a result of the business declines at Boomerang, we’ve again reduced the size of the organization, to ensure that is in line with the expected level of business in Canada.

Our programs to address the mid-sized vehicles are showing some initial promise. For example, our team has educated dealers on the best Boomerang product for mid-priced cars, provided sales training and new sales aid and rolls out incentive programs to encourage dealer personnel to target the mid-level vehicles.

As we noted in prior announcements and in on prior calls; in November of 2007, our subsidiary LoJack Equipment Ireland terminated the license agreement with our licensee in China, because we had determined that they had not fulfilled certain obligations under the agreement. After the termination, we began the process of arbitration through the American Arbitration Association to enforce our post-termination rights under the agreement.

The former licensee then filed a counter claim against LoJack Equipment Ireland, claiming at wrongfully terminated the contract and seeking monitory damages. The arbitration process is a multi-phase I. Phase I was to determine, whether the contract was properly terminated and Phase II is to determine damages if any.

The arbitrated delivered the decision on Phase I of the arbitration on March 17 and determined that LoJack Equipment Ireland improperly terminated the contract. However, he also denied the former licensees’ claim for trouble damages.

The hearing for Phase II is scheduled to take place in September of this year. We will continue to vigorously defend this case, because the arbitration is ongoing, there is nothing else that I can comment on it, at this time, but we will keep you updated on the outcome of Phase II.

Based on the significant volatility in the global auto industry and the credit markets, and declining consumer spending globally, we are suspending our practice of providing specific guidance for the full year. The expectations that we communicated on February 18 of this year, when industry analysts were predicting domestic auto sales of 11.5 billion vehicles are no longer consistent with our view of the business for 2009.

However, we do expect to generate a modest profit for the year, deliver solid cash flow, sustain a healthy margin and maintain a strong balance sheet for 2009. We will continue to closely monitor our various businesses both domestically and internationally and take appropriate steps to ensure that our operating costs effectively reflect revenue potential and preserve our liquidity. We will also continue to invest in our strategic programs to diversify our business.

I want to reiterate, we are focused on effectively managing our business, remaining financially strong and then ensuring LoJack has positioned well to leverage opportunities, as the global economy emerges from this recession.

With that, Rich, Tim and I will take your questions.

Question-and-Answer Session

Operator

(Operator Instructions). And it appears we’ll take our first question from the line of Steve Dyer from Craig-Hallum. Please go ahead.

Steve Dyer - Craig-Hallum

I’d like to focus a little bit more on the international. You had indicated that sales internationally have picked up thus far in April, I mean, should I take that to mean that the better part of that inventory that seems like it was built in Q4 has been worked through and now we are back to a little bit more normalized ordering patterns?

Ron Waters

Steve, I’d say it’s a couple of things. First of all, as you know, because you’ve tracked the business, the international business has been lumpy. I think there were several licensees I mentioned that did have some excess inventory, I think that there were several licensees as well that are concerned or have been concerned about their local economy.

So they pay us in dollars, some of them are obviously recurring revenues, so they receive their money over a period of time. So, I think there’s been some conservativeness in their buying patterns, in addition to a situation where there may have been some excess inventory.

We have some new licensees that are going to come online as we go through the year. I think that will have a positive impact, we’ve opened Peru. So, I think it’s a good sign. I think the conservativeness may track through the second quarter. But I think maybe the back half of the year, some of that conservativeness will lessen, as we get more visibility on some of those foreign economies.

Steve Dyer - Craig-Hallum

Do your international licensees typically make it a habit to carry inventory or is it more just in time. I mean, my thought was that it was a little bit more just in time than it seems like it is?

Ron Waters

I think they carry some inventory because it’s being shipped from our manufacturer which is overseas. I think there’s some buying at the end of the year through volume-variable pricing. But I really do believe that, for this year in particular, it’s much more a function of the economic uncertainty. And I look to Argentina and the concern about currency. I look to Venezuela and the concern about Chávez and whether or not currency will be able to flow out of that country. So I think there is a little bit more economic than there is levels of inventory in a way.

Steve Dyer - Craig-Hallum

Okay. I guess what strikes me is odd is it seems like Q4, when you have a very, very strong international quarter, from a global sort of a panic standpoint, seemed like it was a lot more significant than Q1 and it seems like maybe you didn’t see that, maybe it kind of hit the rest of the world a quarter late?

Ron Waters

I think it did hit later. Clearly we have constant meetings with our major licensees. And I would suggest to you that last October when we were meeting them, with many of them, they were starting to see some things that they hadn’t foreseen up until that point in time, they had maintained commitments for the quarter, but as I said, have become somewhat more conservative in this first quarter. And I think the economic uncertainty, whether its currency or what have you, I think has picked up as we got closer to the end of the year and into the early part of the year.

Steve Dyer - Craig-Hallum

How good I guess do you feel like your day-to-day or your reads with your licensees are, we seem to get kind of caught flat-footed. You mentioned that sales are lumpy, and I think the message coming from you guys on Q4 was that there’s higher crime rates in emerging economies. And not necessarily setting the expectation that that number would be the norm.

But certainly it seems like we get caught flat-footed here about every other quarter, based on variable volume pricing or too much inventory, something like that. I mean, how tight do you feel like your relationship to those licensees is, in terms of knowing what they have and what their sales patterns look like?

Ron Waters

I’m not certain I would describe it as flat-footed. I think we have a very good relationship with our licensees. We work together. We look at volumes on an annual basis. And, as we’ve said before, there will be some lumpiness as things move in directions in the country. I think that, as I said, I am not certain that the business in the country, if you pick a country like Argentina, it’s not like the U.S., where new car sales drop and there is an impact on units.

It is an insurance related market, and theft has increased, but they can be conservative about new programs, if they are going to get themselves new marketing programs, if they are going to get themselves involved in. So, I think we have a pretty good handle, but continue to be lumpiness. I think if you look at the international patterns over the last several years, it’s been fairly positive on an annual basis.

Steve Dyer - Craig-Hallum

Yes, I mean, I guess part of my questioning is that you gave guidance on February 18 and it was all, which the quarter was a little bit more than half over and all of the commentary was very positively internationally at a time when you, likely, hadn’t shipped much, if any, revenue internationally. So, I’ll move on. I guess my other question, Tim, wondering if you could give me a couple of metrics, cash flow from operations and CapEx in the quarter?

Tim O’Connor

Sure. CapEx in the quarter was $1.9 million. I’m sorry, $1.7 million.

Steve Dyer - Craig-Hallum

Okay.

Tim O’Connor

And cash flow from operating activities was a negative $4.4 million.

Steve Dyer - Craig-Hallum

Okay. And then one more, stock comp in the quarter?

Tim O’Connor

$1 million.

Steve Dyer - Craig-Hallum

Okay. I’ll hop back in the queue. Thanks.

Tim O’Connor

Sorry, Steve, I said 1.7, it’s $1.17 million on capital. I apologize.

Operator

And our next question comes from the line of Ajay Sadarangani with Manning & Napier. Please go ahead.

Ajay Sadarangani - Manning & Napier

Just wanted to follow-up on a previous line of questioning, I guess. You know, in your last guidance, think you talked how international revenues were going to be good, things like that. But then all of a sudden we see these results today. I guess what changed early in the last month and a half?

Ron Waters

Well, I think, first of all, the guidance was annual. It wasn’t quarterly. I think for us, two things have changed. I think, as we said in the call, from the domestic auto perspective, new car sales are dramatically down, much more than we anticipated.

As we said, our previous guidance was on 11.5 million new cars being sold or thereabouts for the year and now we’re down in the 9 million to 9.5 million unit levels. So, that clearly has an impact on our business and there’s still lack of clarity as to what will happen with the domestic market for the rest of the year.

I think April, from what we hear, is going to be sequentially flat with March but still down year-on-year. But there are some analysts that are out there saying, hey it might get, new car sales may get up to 11 million.

On the international side, again, the business has historically been lumpy. I think the difference has been that there is more uncertainty from an economic perspective in the countries where we do business. And that relates to what, you know, currency, the ability to get currency out of the market, they pay us in dollars. So, I think there is a little bit more conservativeness from an economic perspective, and as I said on the call, orders have picked up in April and, again, if you look back over the last three years, I think our international business has been pretty positive.

Tim O’Connor

Hey, Ajay just to add on to that. One of the comments that, I think, Ron mentioned before, is we’ve been quite successful probably over the last five to six years in terms of predicting the annual volume with respect to international business, on a fairly reliable basis. And so we’ve not been very far off, and in fact I don’t think we’ve ever overstated what would be our expectations. So there are fluctuations from quarter-to-quarter, and I think we expect the same thing this year.

Ajay Sadarangani - Manning & Napier

And then, when would you expect your differential of domestic unit shipments versus domestic auto sales to close, I guess?

Ron Waters

Are you talking about the volume in domestic versus the...

Ajay Sadarangani - Manning & Napier

Volume in auto sales, yes?

Ron Waters

So, the 38% or thereabouts decline in the auto sales, the marketplace versus our 45% decline? Is that what you’re referring to?

Ajay Sadarangani - Manning & Napier

Yes.

Ron Waters

I think when the market turns around, I think we’ll be positioned well. I think we are positioned well with the imports, and I think the imports have suffered along with everyone else, but I think are positioned well to come back.

As I said in the call, I think that our relationship with the national accounts is good and as new car sales come back, I think we’ll be positioned well.

Rich Riley

I think implicit in your call or in your question might be, why is the rate change for us different than it is on the overall market. And I would say, there’s a couple of dynamics, which are going on there. One of which is, we have pretty good penetration, as Ron has indicated in the imports and that’s been helpful to us.

The other is we had pretty strong penetration in luxury cars, which have been particularly hard hit during the last year or so. And we also have particularly high penetration in Southern California, which has been particularly high hit. So, we track reasonably, closely to what happens on a national basis. But depending on what’s happening within the segments, within the auto industry, it could impact us to a couple of percentage point one way or the other.

Ron Waters

As I said and I think Richard has said as well, I think the western region has been a strong region for us, and if that region starts to comeback, as California starts to comeback. That will be very positive for us.

Ajay Sadarangani - Manning & Napier

And just one final question, if I may. Do you get the sense that maybe this is the bottom in terms of unit shipments and in terms of the (inaudible) trends that you’re seeing?

Ron Waters

I wish I could say that. I think every time we think it’s the bottom, it seems to fall out again. I guess it’s good, as I said that we think the early evidence on April is that it’s sequentially in line with the prior month and clearly there’s some government programs that either have been passed or contemplated that might impact new car sales.

Rich Riley

To build on that I think, to Ron’s point I think this industry went for 10 years essentially selling somewhere between 16.5 and 17 million cars. And I think last year was a big change for everybody. And it seems like it got worse every single month.

There are a couple promising signs, which is a difficult phrase, quite honestly when you’re at 9.5 million cars in January and 9.1 million cars in February, you’re hard-pressed to see anything in there which is positive, but the number of cars, which get scrapped on an annual basis is somewhere in the neighborhood of 11 and 12 million. So, there’s a very strong feeling that the economy can’t go for a long period of time, where there’s a net reduction of two to three million cars on an annual basis, in connection with this thing.

I think the other thing which will be helpful is, given all the uncertainty with, certainly the big three automakers in the United States, it’s created hesitation on the part of the American public to buy cars, I think from almost anybody. And at some point in time in the not too distant future, that will be resolved and I think when you take the uncertainty out, people will have a better sense from where they are. So, it is hard to imagine that it could stay at the 9.1 to 9.5 million range for a long period of time. And in fact, the President’s taskforce has come out with some pretty strong analysis, which would say that they would expect it to hit up to 10 million by the end of the year and to recover from there over the next coupe of years.

Operator

And our next question will come from the line of Bill Dezellem with Tieton Capital Management. Please go ahead.

Bill Dezellem - Tieton Capital Management

A group of questions, first of all, relative to domestic auto sales but specifically in Southern California, not the total U..S, just Southern California. Would you please detail what you know about the trends over November, December, January, February, March?

Ron Waters

I think the trends have been similar to the overall market. I don’t have the data from the California Auto Association hasn’t come out yet, but our sense is, in the last couple of months, it’s probably worst than the overall market.

Bill Dezellem - Tieton Capital Management

So, even though Southern California went into the recession earlier, they don’t seem to be flattening or rebounding any sooner than the rest of the economy?

Rich Riley

Yes.

Ron Waters

Of all the markets, no.

Bill Dezellem - Tieton Capital Management

And then, we had made the assumption when reading the release this morning that your inventories grew sequentially, simply because sales were less than planned. But you made reference to something that was potentially quite important I thought in your opening remarks that that the inventory growth was, as a result of preparation for your new technology launch.

So, would you discuss, I guess first of all to what degree the inventory growth did have and then was a function of sales being below plan; and then secondarily, talk about that new technology launch and what that means for inventories, but more importantly, what that means for the business and when it would mean something important for the business?

Ron Waters

Well, as we said in the past, we continue to invest in technology. We look to the back half of the year to have an enhancement to the technology. I don’t want to get into too many more details about that until such time that we will launch, but I think it will be in the back half of the year. I’ll let Tim talk to the magnitude of the inventory build on, as a result of the new product.

Tim O’Connor

Yeah. I would use the 50:50 split and the 50% of sales missed was really the build in international. So, about a million dollar of the build was related to international, this and the rest was really, new product and really leveling the factory prior to that launch.

Bill Dezellem - Tieton Capital Management

That’s helpful. And I apologize for so many questions.

Ron Waters

It’s okay.

Bill Dezellem - Tieton Capital Management

I’m going to toss two more out. The next one is, how much inventory do you feel that your international licensees burned, meaning your sales were negatively impacted by quite amount, as a result of your understanding of the inventory that they’ve burned.

And then secondarily, I believe that we read in your SEC fillings that the new technology will allow you for nationwide mobile asset recovery. And this may sound silly, but would you define, what nationwide means, and I guess we are trying to understand rural areas versus metro areas. I know right now there is a difference in and this nationwide truly mean every square inches of the country.

Ron Waters

Well, let’s deal with the first question and that relates to, I guess, consumption in local markets relative to inventory in hand. We don’t get into the details of by individual country. I would say that the answer to that question varies by country and so, I really can’t say anything broad-based.

We have a good feel for what’s going on in each one of the international markets, sort of sense. But don’t want to get into the details by country. As it relates to the new technology and your reference to national coverage, as I said before, we’ve been investing a fair amount of new technology. The back half of the year, we haven’t enhanced our technology that we plan on launching, and we will get into the details of that new technology upon launch.

Rich Riley

Bill, this is Rich. Couple of points on that last question, which is, we’ll get into details of the technology, when ready to roll that out there. But it doesn’t expand the coverage, it doesn’t contemplate to expand the coverage from that, which we are currently offering.

And so, I wonder if your question is related really quite honestly to national coverage for our other product line, which is the people at risk product line. Our core technology remains the same as it has been. We continue to roll out at new territories. We don’t anticipate in the near-term, having nationwide coverage as it relates to that technology. We have introduced the technology for people at risk, which is a variation of our core technology, and that has broader coverage than what we currently offering on the auto side. Is that the piece that you were referring to?

Bill Dezellem - Tieton Capital Management

I believe the SEC filings have referenced nationwide coverage, and that’s all I was trying to do is just definitionally understand it, if you considered to have nationwide coverage or whether there was some level of expansion that was taking place that the new technology will allow. So, you did answer the question.

Rich Riley

Okay.

Operator

(Operator Instructions). And we’ll take our next question from the line of [Garry King with Truffle Hound Capital]. Please go ahead.

Garry King - Truffle Hound Capital

Yeah, I was little confused as to why management stopped buying back shares in the first quarter. And I understand this is a horrible economic environment and you like to maintain a conservative balance sheet, but given that you expect to be profitable this year and the worst year in six decades and have 30 million in net cash.

You had a history of share buybacks, and I was just perplexed during this quarter, when shares are trading at levels not seen a decades the buyback stopped?

Ron Waters

Again, our goal is to maintain liquidity and that has been our focus. And we think at the end of the day cash is king, and so with that in mind, we have not repurchased any shares back. Understand your logic, but clearly from our perspective it is important to maintain liquidity until such time as the uncertainty lifts.

Garry King - Truffle Hound Capital

I mean, I guess this is just a difference of opinion, because it seems like you do have a very strong balance sheet and you really wouldn’t need to spend that much money in order to buy back the same percentage of amount which you bought back in the past years. And by the time the auto market does recover, the shares will be at $10 again.

Ron Waters

We think that’s a good thing and we still believe that maintaining our liquidity is a much more important priority at this point in time.

Operator

And it appears that we have no further questions at this time. So, I will now turn the program back over to our presenters for any closing remarks.

Ron Waters

We want to thank you all for participating on the call and your questions this morning. And we look forward to meeting with you again in some time early August. Thank you.

Operator

And this concludes your teleconference. Thank you for your participation. You may now disconnect and please have a wonderful day.

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