LoJack's CEO Discusses Q2 2011 Results - Earnings Call Transcript

| About: LoJack Corporation (LOJN)

LoJack Corp. (NASDAQ:LOJN)

Q2 2011 Earnings Call

August 2, 2011 9:00 AM ET

Executives

Jeremy Warnick – Corporate Communications Manager

Richard Riley – Chairman and CEO

John Barrett – Interim Chief Financial Officer

Analysts

Maria – JPMorgan

Chris Owen – Tieton Capital

Bill Dezellem – Tieton Capital Management

Ali Hilali – Ingalls

John Curti – Singular Research

Operator

Good day, ladies and gentlemen. And welcome to LoJack’s Second Quarter 2011 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to Jeremy Warnick. You may begin.

Jeremy Warnick

Good morning. And thank you for joining the call today. Our moderator is Richard Riley, Chairman and Chief Executive Officer. He’ll be joined on the call today by John Barrett, Interim 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 facts are forward-looking statements. These forward-looking statements are based on a number of assumptions and involve a number of risks and uncertainties and accordingly actual results could differ materially.

For further information regarding the forward-looking statements and factors that may cause such differences, please see the warning regarding forward-looking statements in our Form-10-K for the year ended December 31, 2010.

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

Richard Riley

Thank you, Jeremy. Good morning, everyone. Thanks for joining us on the call this morning. I’ll begin the call today with a brief overview of our business results for the second quarter along with a few observations on the recent trends impacting our domestic and international businesses, in order to provide some background for our later comments.

I’ll then turn the call over to John Barrett, our Interim CFO, who will take us through a more detailed financial review of our performance for the quarter. Finally, after I provide our perspective on the LoJack business for the second half of the year, we will open the call for your questions.

We’re once again pleased with our year-over-year growth in net income in the second quarter of 2011, particularly as it represents the fourth consecutive quarter of improving profitability. This improvement helped to generate a strong cash balance of almost $54 million as we enter the third quarter.

Net income for the second quarter of 2011 was $200,000, up from a net loss of $18.2 million in the same quarter of the prior year.

I do want to remind everyone that the net loss of $18.2 million in the second quarter of the prior year included a non-cash charge of $15.1 million for the establishment of a valuation allowance against U.S. deferred taxes. If we adjust for this item on a pro forma basis the loss in the second quarter of 2010 would have been approximately $3.1 million.

We continue to demonstrate the strong cost controls and financial discipline that have been our core focus since the end of the second quarter of 2010.

Operating expenses in the second quarter of 2011 declined approximately $4 million from prior year levels at significant savings and almost every expense category more than offset a year-over-year increase in legal expenses of $1.2 million. This discipline over the last four quarters has helped improve our net cash position by almost $21 million over the last 12 months.

Our strong overall financial discipline and resulting savings enabled us to make incremental investments on our business in Italy and in a series of sales and promotional programs designed to address recent trends in the domestic auto business.

While we are pleased with our bottom line performance, we were disappointed with our topline revenue results. Consolidated revenue for the second quarter was down 10% on the same quarter to prior year, as we experienced a year-over-year decline in both our domestic and international businesses.

Revenue for the second quarter in North American segment was down 8% from prior year levels, despite a broader U.S retail auto market experiencing 11% improvement over the prior year. While the overall retail auto market experienced solid year-over-year growth in a quarter. It is important to note that the sales performance by auto manufacturer varied widely as a supply from the Japan had most significant impact on manufacturer such as Lexus, Toyota and Honda.

Resulting inventory shortages in the second quarter of 2011 caused by the tsunami in Japan or far more serious then originally forecasted in the first quarter and had a dramatic impact on a number of the manufacturers in the second quarter.

We were negatively impacted by the significant shift in brand mix during the second quarter, as well as by the continued shift in model mix as consumers purchased smaller cars in response to higher gas prices.

Additionally, the shortage of vehicle inventories to dealers that do temporary reduction in a number of dealers willing to participate in our both installation program during the second quarter.

While we developed a number of sales and deal promotional programs to specifically address this current type of dynamics. The new programs did not gain traction quick enough to have a positive impact in the second quarter. We anticipate that will begin to see the positive effect of these programs in the second half of the year.

I do want to point out positive notes and that is related to our commercial business in U.S. The step decline in residential and commercial building over the last two years in U.S. had negative impact on our commercial business during that same period. We saw some improvement in our commercial business in a first quarter of 2011 and I’m pleased to report that we saw continue sign of the turnaround in the second quarter.

Our commercial business was up 95% over prior year levels for the second quarter and is now up 67% over the prior year-to-date basis.

Turning to our international business, revenue for the second quarter was down 11.6% from the prior year. Results were driven by reduce shipments to a number of our licensees to increase competition of select markets, seasonal buying fluctuations and a periodic change in licensee business models and response to insurance companies demands.

We now expect total revenue from our international business for the full year to be lower than we originally budgeted below the actual sales levels of 2010.

Revenue for our business in Italy for the second quarter reflect an increase of 34% over prior year levels and is up 44% over prior year levels on year-to-date basis. We continue to build the business in Italy through existing distribution channel by adding new dealerships and insurance brokers and by continued increase in installations and market subscribers. We add more than 2,700 subscribers during the quarter and now have more than 16,000 ongoing subscribers in Italy.

With that, I’ll now turn the call over to John.

John Barrett

Thank you, Rich. Good morning, everyone. As I review our second quarter financial results, all comparisons will be against the second quarter of 2010 unless otherwise noted. Consolidated revenue for the quarter decline 10% to $33.5 million from the second quarter in the prior year. Within our North America segment, U.S. revenue for the quarter declined 8%, on a 10% unit volume decline in a 2% increase in average revenue per unit.

Revenue in our international segment for the quarter decreased 12% to $9.1 million from the prior year. This decrease primarily related to a 15% decline in product revenue from our international licensee business driven by a 14% decline in unit volume and a 1% decrease in pricing.

The licensee decline was partly offset by our operations in Italy, which recorded an increase in revenue of 34% bringing the subscriber base to approximately 16,600.

Revenue related to our all other segments decreased $500,000. The decrease was primarily the result of a reduction in SafetyNet product shipments to project Lifesaver, which was partly offset by a 17% increase in revenue from a SCI cargo business.

Our consolidated gross profit for the quarter decreased 12% to $17.1 million due to the lower sales volume. Gross profit as a percentage of revenue was 51%, down from 52% in the same quarter of the prior year.

For our North America segment, gross profit as a percentage of revenue in the current quarter was 50% versus 51% in the second quarter of last year.

Gross profit as a percentage of revenue for our international segment in the current quarter was 53% versus 54% in the prior year driven by product mix and pricing, which was partly offset by the expanding subscriber base in Italy.

Operating expenses of $17 million in the current quarter, represents a 19% decline from the $21 million recorded in the prior year. The lower comparable spending reflects the benefit of the cost reductions implemented during 2010, the severance charge taken in the second quarter of 2010, as well as other cost saving initiatives.

Legal expenses in the current quarter increased approximately $1.2 million, compared to the second quarter of 2010 as the company continues to spend against various ongoing litigations.

Operating income for the second quarter was approximately $100,000, compared to an operating loss of $1.5 million for the same quarter in the prior year.

Adjusted EBITDA of $2.5 million in the current quarter, improved from $1.9 million in the second quarter of the prior year.

Net profit in the current quarter was $200,000 or $0.01 per share, compared to a net loss of $18.2 million or $1.05 per share in the second quarter of 2010.

Net income reflects a $400,000 tax expense largely attributable to our international operations. The net loss for the second quarter of 2010 included a non-cash charge of $15.1 million for the establishment of the valuation allowance against the company’s U.S. deferred tax assets.

The company has positive operating cash flow of $3.8 million in the current quarter, helped by strong collections and an increase in accounts payable.

Capital spending of $300,000 and $1.8 million pay down of borrowings in the quarter brought our net cash flow to approximately $1.6 million.

Our cash and cash equivalents balance on June 30, 2011, increased $20.7 million to $53.7 million, compared to $33 million at the end of the second quarter of 2010.

As of June 30, 2011, we had approximately $9.9 million of debt outstanding against our credit agreement and are in compliance with all financial covenants.

Stock-based compensation in the quarter was approximately $700,000 and we did not repurchase any shares in the second quarter.

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

Richard Riley

Thanks, John. I have mentioned during my earlier comments, we were pleased with the ongoing improvement of profitability during the second quarter this year. The steps we took beginning in the second half of 2010 and the results of financial discipline continue to drive improvements in operating margins and bottom line profitability.

The savings generated as a result of the financial discipline have been significant over the last year and additionally have enable us to invest in new sales programs and targeted promotions to address the current auto market dynamics in the U.S.

It is important however to note that we are not satisfied with bottom line profit growth alone. We recognize the need to deliver sustained revenue growth.

While the domestic auto industry continues to demonstrate modest overall improvement, the business environment for dealerships is very different today than it was before the downturn that began in the last quarter of 2007.

With total annual sales in U.S. markets still almost 25% below the decades on average that preceded it and a significant change in the underlying performance of the different auto manufacturers, the industry is still making some fundamental adjustments to catch-up.

Reduced margins on new car sales have created a need for dealerships to find new sources of income. In order to do this, they are more focused on their service departments and their F&I departments.

LoJack with its strong relationships in the F&I department continues to have much to offer dealers with its strong brand, deep relationship with law enforcement, excellent profit margins and a product with strong credibility in F&I environment that is coming under closer scrutiny for some of these products and practices.

Our new sales programs and dealer promotions were developed to address the new market dynamics I’ve highlighted by driving deeper penetration into existing dealers. As part of the new initiatives and recognition of our 25th Anniversary, we have launched the comprehensive series of promotional campaigns to increase dealer demand and consumer awareness over the remainder of the year.

As I mentioned, these programs have taken longer to ramp up than anticipated, but we’re now beginning to gain traction with the early adopting dealers and we expect an increasingly positive contribution from these programs in the second half.

Turning to our international business, we anticipate that trends we experienced in the first half will continue through the remainder of the year. In Italy, this means we expect continue adding new subscribers at the same rate we’ve demonstrated over the last 18 months.

I would like to close with the discussion surrounding our current internal expectations for the full year. While the broader U.S. auto market is expected to deliver double-digit topline growth for the full year in 2011, there continues to be a significant change in the underlying mix in the market, which is negatively impacting the sale of LoJack units.

But the after effect of the natural disaster in Japan now expected to limit the supply of certain branded vehicles late into the second half of the year and continued high gas prices impacting consumer vehicle purchasing habits, we expect to see a continuation of the brand and model shifts throughout the year.

While it’s still too early to predict all the likely trends and how they might impact the sale of LoJack units, we will continue rolling our sales programs to specifically address these changes over the balance of the year.

As a result, the second quarter reflect, the business for the international licensees also slowed. As I mentioned, it now appears that number of our licensees will faster their initial expectations for 2011 and we’ll be below their total volume levels from 2010.

With these factors in mind, we’ve adjusted our internal revenue and EBITDA targets down. Our 2011 internal forecast now reflects revenue of between $140 million and $145 million and adjusted EBITDA to be between $12 million and $14 million.

With that, we’ll be happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is from Paul Coster of JPMorgan. Your line is open.

Maria – JPMorgan

Good morning, gentlemen. This is actually [Maria] on behalf of Paul. A couple of quick questions here. First of all, you mentioned that the legal expense increased by $1.2 million, I believe year-on-year. So what was the total for the quarter in legal expenses and what is it expected to be per quarter going forward?

John Barrett

This is John Barrett. We don’t usually give out the exact amount we spent on any line item. The incremental was $1.2 million, last quarter the increased was $800,000 for a total down to $2 million. We expect the run rate to stay within that range, on a go forward basis for remainder of the year maybe a little bit later. But that’s how we look at it.

Maria – JPMorgan

Okay. Thank you. And then, I believe in the past, you’ve provided information on a bulk installed as a percent of domestic sales, what was that in this quarter?

Richard Riley

Let me put through to get that, it’s a little bit lower than it has been so that’s my starting point.

John Barrett

It’s 26% in the second quarter, which is down from the previous quarter.

Maria – JPMorgan

Okay. And then, could you give us a quick update on the status of the lawsuit in Brazil?

Richard Riley

Yeah. I think as you guys are aware, we don’t comment on any litigation. We filed a K with respect to that and I would say there is – it’s been no material changes to [respect to aspect] of that litigation.

Maria – JPMorgan

Okay. Thanks. And then, what is the latest, with to respect to the CFO search?

Richard Riley

We’re stick to that process, we’re very actively involve, we have a number of good candidates that we’re talking to, so we’re happy with the process and the progress we made so far.

Maria – JPMorgan

Any time line with respect over to?

Richard Riley

Will work away to that, I will suspect over to the next month or so we’ll have an announcement to make.

Maria – JPMorgan

Okay. Thanks. And then, you expected the market share internationally. You mention that the competitive environment was the big more challenging this quarter. Do you expect that to processed and what the reason for new interim or was it just generally competition getting more difficult?

Richard Riley

I think its, number of licensees are involved and I think those markets changed on an ongoing basis to be very prudent. So from time-to-time new competitors enter the market to become more aggressive in terms of what you’re doing, it takes a lot of sort of way through to the licensees lot of search. I think it just general increasing competition.

Maria – JPMorgan

Okay. Okay. Thank you very much. Those were all my questions.

Richard Riley

Thank you.

Operator

Thank you. Our next question is from [Chris Owen with Tieton Capital]. Your line is open.

Chris Owen – Tieton Capital

Hi. Good morning.

Richard Riley

Good morning, Chris.

Chris Owen – Tieton Capital

I wondering if you could just comment on that you called out that foreign versus domestic and just in the quarter and obviously Japan contributed to that. Can you talk about this has been a tread for a couple years and kind of what you done historically about this and what the new sales, has a new sales initiatives specifically address this?

Richard Riley

I think, if I had to try to state your question, we talk about the split between the historical in both the domestic and international sales. But it seem like your question was more about the programs we have specially addressed to the domestic marketplace.

Chris Owen – Tieton Capital

Right, right.

Richard Riley

So, let me a take short at that, which is, you have some sort of relationship many of our dealers over a long of period time and we have a number of relationship with some of the larger national brands and some of the bigger brands out there as well.

Those have been strong customers and strong supporters of LoJack over a long period of time. They tend to think about the sale of F&I products from a transactional perspective, which is to say they look at the revenue they generate of each individual transaction for each one of the individual products they sell to the F&I department.

Most of our initiatives have been driven towards developing a deeper relationship with those dealerships and those national accounts. To help them understand, the total profitability they’ll generate from larger penetration into their existing customer base.

Chris Owen – Tieton Capital

But am I correct in assuming that part of the problem is Ford and GM has taken share the expense of the Japanese and I’m just wondering how you specifically get deeper in that channel?

Richard Riley

So, you’re right, so we have relationships with all of the, we sell to almost all miles in the United States right. But there is some that one heavily penetrated and then others historically and as those changes occur we tried to address that by getting more aggressive with respect to the dealers where we don’t have a deep relationship.

And so, clearly been a change in OEM success over the last period of time. I look at it, I think Chrysler is probably at the most on a year-to-date basis. GM is probably up next to them and then Ford probably third. We spend more time in those dealerships. We have relationships with those dealers but from our perspective it is more aggressive promotions or more aggressive offers which was specifically targeted to those models that are out there.

Chris Owen – Tieton Capital

Okay. And are those sales initiatives you announced last quarter do they address this aspect of the challenge?

Richard Riley

It do and I think last quarter we talked about the fact that the early indications were good and positive, I think a number of those dealers adopted some of those programs and embraced some of those programs. We have a requirement where they sign up to those programs.

What hasn’t happened – what didn’t happen in the second quarter was a lot of activity that flowed from that. We’re beginning to see some of that in those customers at this stage and we won’t anticipate that we’ll have a bigger impact in the second half of the year.

Chris Owen – Tieton Capital

So, you would expect to see some impact in 3Q?

Richard Riley

We would be probably layered in the back end of the third quarter in the beginning of the fourth quarter.

Chris Owen – Tieton Capital

Okay.

Richard Riley

It takes a while for some of these dealerships to ramp up and so as we sought our way through, we like everybody to start today and for whatever reasons some of them will start August 1st, some of them will start September 1st, just based on what they have going on at the dealerships.

Chris Owen – Tieton Capital

Right. And then just to change gears to the capital allocation question, given the levels of the stock, your cash balance and your prior comments about sort of warming up to a repurchase. Can you explain why you didn’t repurchase and how are you looking it going forward?

Richard Riley

So, this is an interesting question and one we anticipated that we’ve had a number of conversations with some folks subsequent to our last earnings call has been lots of people have expressed their view. So, let me try to just summarize a couple key points associated with it.

One, we understand that there are number of investors out there, who have a strong desire for us to buyback our shares. Subsequent to last call we also find out that there are some shareholders out there who are not as excited by the prospects of this buying back shares because they worry about the fact that it might cause our stock to be thinly traded and create a problem for them.

We’ve also heard from some people who would like for us to consider the possibility of a dividend either in the form of an ongoing dividend or a significant one-time dividend. In fact, I think that some people mentioned that on the last call that we’re on.

We listen to all those points of views and as I mentioned, I think the last time we together we talk about on a regular basis with our Board.

And let me, let me laid it out probably better today than I did the last time when we were together. We look at the deployment of our cash along the continuum and that continuum goes from the conservative, which is to use the cash to support kind of our daily operating needs all the way out to the payment a large one-time stock dividend I think it was suggested by somebody outside. And as every business does or as I think most businesses agree, you tend to take a look at that and prioritize it from the perspective of the management driving the company.

And my perspective is that continuum goes from the conservative, which is using the cash to support the daily needs of the business to then investing the cash to drive the organization forward to organic growth.

The next was would be, I think along that continuum would be use it for strategic acquisitions. From my perspective next would be stock buyback, the next category would be the establishment of an ongoing dividend and I think last from my perspective would be the payment of a large one-time dividend.

So that’s the continuum upon which we view this process and as I said, we take a look at it with a view of the current and longer-term business prospects of the business. We take a look at it in terms of the opportunity. As I think you’re aware we have some bank in restrictions with respect to what is we’re doing and there is regulatory requirements which impact us.

Chris Owen – Tieton Capital

Okay. Would it be fair to say though that your daily needs and the needs of the organic growth are well below your current cash balance and therefore you’re either considering acquisitions or some form of buybacks?

Richard Riley

It would be safe to say that our cash position is substantially higher than our daily needs to run the business. And that we are evaluating those other alternatives that I put on that piece of paper. We have a Board authorization to buyback up to about a 1.6 million or 1.7 million shares. And so, I think at this point in time that’s all fair to say.

Chris Owen – Tieton Capital

Okay. Thank you very much.

Richard Riley

Okay.

Operator

Thank you. (Operator Instructions) Our next question is from Bill Dezellem of Tieton Capital Management. Your line is open.

Bill Dezellem – Tieton Capital Management

Hi. Thank you. I’d like to go just follow-on with the prior questioner. And relative to, I guess, two additional components that you did not mention. Rich, I’m wondering the degree to which they enter into your thought process.

And the first one is that your revenues did come in less than your expectations into what degree is that increase your level of caution, at jumping with less spending your cash.

And then secondarily, the deferred revenue that you have on the balance sheet to what degree do you look at your cash as cash on the balance sheet minus the deferred revenue as you’re thinking about what is the excess cash?

John Barrett

Well, it’s John. Good question, Bill, and we’ll look at that in contact as I said, I’ve listed five or six days and I said, I have looked at deal with current longer term business prospects are. I think clearly when the business is from the topline not going as strong as we would like, we’ll become a more conservative with respect to that.

The other side, however, I would say that we are making some significant investments in terms of new sale program as there new promotions out there, rights, so the balance for us is trying to be responsible in the period of time when industry is not to great uncertainty. I think like many people we would like but the uncertainty that have gone away in 2008 and in 2009 and in 2010. I think this year is a different year. I think everybody looks that as being a positive year but there is a lot going on below the surface for everybody out there.

And so, there were couple of people who is doing it very well and there is a number of people who have historically done well – done well for the last 10, 15, 20 years were not doing quite as well. And so, yeah, that comes into context for us in terms of our decision-making and makes us perhaps a little bit of more conservative

Having said that, we’re deploying – we’re investing some money in a responsible way in developing new sales programs and making some changes that in how we purchase the orders that’s out there.

Bill Dezellem – Tieton Capital Management

And would you please describe the specific sales programs that you’re anticipating to benefit the second half and then I must admit that I got ahead of myself, because I thought that those programs were going to begin to benefit the second quarter and then so, were they in fact delayed a bit or is, again, what I guess, the stock-based?

Richard Riley

No. I think. Yeah. We talked about in the second – and the first quarter, we rolled out these programs, we pilot these programs probably in the last quarter of last year with another dealership. Began to roll, if those at the dealerships in the first quarter of the year.

Those were well received by dealerships, when I say well-received, they’re well received and I said, look at this is very exciting from our perspective, we want to participate in that, we want to play a part in that process. And as part of that they’re required to sign up, right, there was a program or plan in place for them to sign up.

And so, when we talked last quarter we talked about the fact that the deal indication is with there were lot of people have thought it was really very exciting. We didn’t immediately follow. It was a whole lot of transactions associated with that which is at the end of the day converts into revenue and profitability.

That’s been a longer process than we would have liked. Some of those reasons we indicate a little bit earlier which is it takes a while for some dealerships to get to up speed on some of these areas. Part of it was, we looked at certain dealers and we’ve learned as we’ve gone through the process, in terms of through the better prospects are in a going forward basis.

And so, the initial indication was very positive, we didn’t come with a lot of transactions. We’re beginning to see some of those transactions that we expected from the early adopters.

Bill Dezellem – Tieton Capital Management

And would you please describe and whatever level of detail you can, what the specific programs are that do appear to be gaining traction?

Richard Riley

So, yeah, a lot of number of different levels and let me just talk about it from a dealer perspective at this moment is the most visible to everybody else. Our dealers as I indicated before, we pushed our dealers and we’ve talked to them, in terms of violation by LoJack from it’s historically. And why that was important to us and why it should be important to them.

They tend to think about business a little bit differently than we think and we intend to think of our business at LoJack. And so, we allowed our discussions to go down in a path, where they’ve talked about things in terms of transaction.

And so, when I talked about the sale of our products in terms of the transactional impact it has on the business. They tend to focus immediately, what the ultimate selling prices of the product and what the margin is a make on that.

We thought that that prevented them from seeing the full opportunity of selling a low debt products, which is for them to understand what the total revenue and profitability of the organization and dealership would benefit from that the increased level of penetration.

And so, for increased level of penetration there are certain pricing benefits to the dealerships out there. The expectations will be again to move away from talking about things on a transaction basis, talking about what it means to the dealership.

And what I mean by that is, they intend to talk about the sales costs and the sales of pricing either price is generating $500 or $1000 per call or per copy. Right, that’s kind of short sited focus in that, it focuses them on what they pay us for the unit and whether they sell the unit for us and they tend to tries out of full price.

The new sale programs were in place, are established to show them the total absolute dollars that the dealership could benefit from on monthly basis, if they increase the penetration by lowing some of the prices to the consumers on the back end.

And we start to talking about, having $400 per car, $400 per copy we talk a better in terms of effective if they embrace with program and they have some reasonable expectation in terms of what the selling prices to the consumers in some reasonable expectations in terms of what penetration rates are going to be, that’s going to generate 40, 50, 60 or $100,000, $200,000 a month for the dealership and it begins to make – begins to have a significant impact, I think in turns the mindset because that’s on that level and does on a per copy basis.

So our program plays there, there is some assessment associated with three base to a incremental volume and penetration rates, there is some incentives for the F&I people within the dealerships based on the number of units they sell, there as I think we indicated there are some specific programs out there which are targeted to some of the manufactures who suffered most in terms of inventory, so there is some special transact there for Lexus and Toyota and Honda where there are fewer cars are less has been, the more has been certain case to sell of some of those things we’ve developed some programs which we think we do -- we think we do some of the rest for them in incurs them to install.

And then we go aggressively towards some of the Ford, Chrysler and GM dealerships that are out there. We also have a consumer awareness program, so based on 25th Anniversary there is a sweet space which is just out there provide a grand price of $25,000 in cash or in fact we’re paying of car for one of the consumers that provides 25 or 33 free LoJack’s to some consumers and so it’s intent to improve consumer awareness as well.

There’s also -- we do some things in connection with this to really help invigorate the law enforcement support. There is strong support but every once in a while we’ll make an offer specifically for law enforcement agencies out there and Telson, I think supports the LoJack in their individual communities. So, looking at a lot of number of different mediums.

Bill Dezellem – Tieton Capital Management

And Rich given that the dealers were thinking about profitability on a per car basis and you were really asking them to think about profitability at the dealership level on a monthly, quarterly or annual basis, did you find or are you finding that it took a fair amount of time for them to switch their mindset or be willing to look at a different mindset, especially one that a vendor who is trying to make money off of them presented to them or were they pretty receptive immediately to a switched mindset?

Richard Riley

No. I think there are some fundamental shifts they required. Everybody has in place certain incentives and certain programs like stimulate activity. And so it’s always hard to change those kinds of things. So, a couple of things have happened.

We’ve had strong relationships to drive the dealerships going from the F&I people who sell the product to F&I manager up to the general manager and ultimately to the owners of the stores. Probably the stronger relationships with the F&I level, I think what we try to do is to enhance their relationships we have with the general managers and the owners of the stores. So that’s a big change for us.

And then most importantly for general manager or an owner to embrace certain concept, in some cases it goes against the fundamental measurements they’ve had in place for long period of time with the F&I people. So they have been, there is some timing which is required in terms of those changes.

Bill Dezellem – Tieton Capital Management

And so is that part of what explains the fact that this process is not instantaneous, so it’s just a number of fundamental shifts that need to take place for this to be successful?

Richard Riley

I think so. Yeah. I think it’s just like everything, but I mean one things to go more quickly then they ultimately do, right. We walk and now we expect everybody jump up and down because LoJack is there and in fact they are happy to see us, but it requires certain changes in terms of how they approach their business which go really at the core.

They tend to report on dealerships based on a per copy number and so many of the measurements they have in placed are based on that. So it’s just -- there is clearly excitement enthusiasm associated with it but it takes a period of time for some of the dealerships to raise it.

Bill Dezellem – Tieton Capital Management

That’s really helpful. And I’m actually going to push just a little bit further on this. And to what degree do you. I guess, what’s your level of confidence, even though it’s taking a little bit of time that ultimately the dealers are embracing this new thought process that you’re presenting to them?

Richard Riley

So I appreciate the fact that you all expect the thing to push this off. And I can push back on some of these things. There is -- my level of confidence comes from the fact that as we sit down we talk to these dealers who are staying around to make more money in number of areas that many of the dealerships we’ve had a long time relationship really understand what is we are trying to do, are excited by and think that it has a positive impact on them not us, right.

And so that’s what really drives us at the end of the day, these impacts I believe it’s going to have on their development business rather than our own business -- than our business. So they like us, but if it makes money for them they’re going to do it.

So that’s the first part. The second part is, as I mentioned already there is some fundamental changes going on in the industry out there which is forcing viewers to look at the business very differently they have historically. And so they use to make a ton of money of the cars and they weren’t so concerned about service and F&I and now that they make less of cars they are searching around for places to get revenue.

There’s two places for that, there is a service part of the business and there is the F&I part of the business. The F&I part of the business is really driving significant amount of the profitability in the dealerships at this point in time.

At the same time, that’s going to change this as well and so it’s under more scrutiny than used to be. One of the big areas of profitability for dealership in the F&I department was on the spread and interest rates between what bank charge them and what they will ultimately charge the consumer.

Some government regulators have stepped in, they put a cap with respect to that and so what used to be a big profit opportunity for them is not quite where it used to be. Some of the price have come under scrutiny in some states, with respect to whether real agenda products or whether they should be charged at the level of which they charge that.

The benefit of the LoJack product is it fits squarely to the F&I part of the business. It generates huge profitability for the dealership, it is a hard or real product, it’s not a piece of paper, it’s not a promise to do something, it’s a hard product you can touch it, you can feel it. It has the support of law enforcement agencies throughout the country, it has a strong brand name. There is not a charge back associated with it somebody stops the financing to these product.

So there is a lot compelling reasons why it should be one of the foremost authorities in the F&I department. At a time, when dealerships are looking for more profit out of the F&I department and so, when we sit down we talk to them and when you see the light go on and rise where it makes more sense to them, to take a different approach. That’s where I get my sense of confidence.

But it has been a little disappointing in terms of how quickly that initial gleam in their eye has turned to orders, because at the end of the day, we’ll measure on orders what we’re trying to lever these orders were committed to growing the business.

And so we just, we had a meeting with our sales organization last Monday or Tuesday. We bought some of the folks to drive this process and talked about making some -- what the success were what some of the challenges were from some of the dealerships and we’re learning stuff on an ongoing basis there.

Bill Dezellem – Tieton Capital Management

That’s helpful. And entirely different question and I’ll get off the line. Cargo would you please provide an update there?

Richard Riley

Yeah. I mean, just it’s an overall -- it is growing, it’s growing in double digits. It’s still not a big enough number for it to get really anybody’s attention. It’s moving towards breakeven this year as we’ve indicated before it’s not going to hurt us anywhere near where it has in the past.

We’re pleased with the progress. We like to see it catch fire but as the economy goes, we kind of fit and starts. We’re happy with the double-digit growth we seem to experiencing there. So there is not a whole lot new to report there.

Bill Dezellem – Tieton Capital Management

Thank you.

Richard Riley

Thanks, Bill.

Operator

Thank you. Our next question is from Ali Hilali of Ingalls. Your line is open.

Ali Hilali – Ingalls

Hi, guys.

Richard Riley

Good afternoon.

Ali Hilali – Ingalls

I have -- hi, how are you?

Richard Riley

Okay.

Ali Hilali – Ingalls

Yeah. Thank you very much for -- yeah, you have always been very consistent about explaining in terms of the capital structure, what the priorities are and how you think about it. My question is, I would like sort of, an explanation of why for example you have the things in the order you do. I mean it’s nice that you have been consistent about the order itself.

But so for example why would you suggests that you prefer to do a stock repurchase over one-time special dividend or why would you rather do an acquisition over stock repurchase. Can you, sort of, walk me through how you -- what is your thinking is there a metric, is there some sort of objective reason why one is better than another?

Richard Riley

Yeah. Ally it’s, I mean, you know you have been in this business for a period of time. That everybody has deep emotional feeling with respect to how one deploys capital and so we have to call the last time and I’m not sure that you were the most aggressive in terms of what you thought we should do it because somebody else on the phone was far more aggressive in terms of what we should be doing. They were the mind that we should declare a $50 million cash dividend, I think the last quarter and just distributed to everybody. And so this is an area where everybody has an…

Ali Hilali – Ingalls

By the way just to let you know, I can be as aggressive as you need me?

Richard Riley

One thing -- yeah, one thing that I want to do in case of my summary at the beginning to say, look we hear you guys and we really do, I know you think we’re sitting here we’re ignoring you. But the reason why we say that, I want to know that we hear you, okay. So, that’s the first point.

The second point is everybody has a strong emotional perspective with respect to how one deploys their capital so as it is. Some people actually even reduce it to a series of economic equations as to why they think one goes over the other.

And I guess what you heard here is a reflection of what this senior management team and this Board has debated over a period of time, right. And I can promise you within the Board and within every Board, there is always a fair amount of debate with respect to how to deploy these capitals and it depends on whether it’s a new hi-tech company or whether it’s kind of an old company who is in a mature industry. And so all I can say is that I’m happy with the consistency we display here. We talk about it on a fairly regular basis with the Board, we just had a Board meeting that a long ago.

We have a couple of new Board members, those Board members always bring in a new perspective with respect to what it is that we do. I think from our perspective, this represents the bios and the discussions we have internally with our Board.

I think -- I took on the couple of these things probably there wouldn’t be a whole lot of debate certainly the first step or the most conservative to my perspective, if you use the cash to deploy in a current business given the current use we have and as I think somebody wisely pointed out we certainly have more cash and we have been meeting needs for in cash with our business.

We still are making some investments we make -- we continue to make investments, generally we continue to make investments in terms of the new sales programs we have in place. And we talked about the fact that we’d like to spend more in advertising. We don’t think that’s a responsible position yet. But clearly from our perspective, the most conservative is using the stuff to support in needs of the business.

As I go out, I think there is a better benefit to the existing shareholders from the buyback – from the stock buyback, then there is a from a dividend. Right, because I think once you get down on path of an ongoing dividend it limits your flexibility on a going forward basis, right.

People say, look if an acquisitions comes up or a potential opportunity comes up you can suspend the ongoing dividend and the fact of that matter is, while one said that when it actually happens in practice as it always creates a bit of problem, so, starting down a path of providing ongoing dividends, when we think, if there is other alternatives which are available to us which are more attractive is for me less attractive than a stock buyback.

And again, I noticed some people out there who are of the mind that are one-time dividend is good thing. And I think given where the business is, given where it change in the industry from my perspective it’s only my perspective and the Board’s perspective, the payment of the large one-time dividend is somewhat shortsighted in light of all the change that’s going on in the industry right now.

And so I’m going -- we can discuss, we can debate and I appreciate the other side and we talk about it from that perspective. And we have people who push along, I’ll end of that continuum quite honestly we sit on the Board and so everybody has a little bit of different thoughts with respect to it. So that industry likes that bias of the people that we have here in the Board that we have.

Ali Hilali – Ingalls

Well, I guess then -- I’m concerned we’ve been having this conversation for a number of years I think that at this point. And we went through the whole cycle I think at this point.

First of all, there should be no in my opinion and this was just my opinion. There should be no emotional involvement in capital allocation, certainly not when you have executive team on the Board sitting around deciding what should -- this was in my opinion there should be some very clear ideas about how you go about deciding what your surplus capital is and then deciding what’s to do with that surplus capital.

The second thing is I’m concerned because I feel like shareholders should be represented on your Board because I think it’s more important at some level that we are the owners of the company after all and well, I here the fact that you’re listening to us at the end of the day, I think I’m reaching the point where I prefer rather than when while I do appreciate you do listen to us then perhaps you need to take a step further and then people have to start actually acting based on what we are the owners of this company, few of the company should be doing.

And I think that particularly when there is no question in your mind even that there is substantial surplus capital and if you’re going to generate EBITDA $12 to $14 million, it’s not as if you are generating cash to fund any potential investments advertising it remarketing it sound like you don’t generate free cash flow to do that in any case. So these are my concerns and I appreciate your counter and I hope you have been, but I guess, I’m -- I’d like to see a little bit of your action?

Richard Riley

So, on your first question, I want to comment on couple of things. One I can show you that at the end of the day when we were done having conversation with the Board is hiding our emotion associated with that, right. So everybody has different side of experience they bring to the table when we discuss how we deploy capital.

And so there is little underway of emotion associated, hope I explained a little underway emotion associated, for me is really financial, right. And so what I think is the right and the best deployment of the capital is what I supporting those conversations.

I would -- and I’m -- am I hear you. I understand that you are frustrated that our continuing doesn’t need perhaps the foot years are. I would assure you that others will call us, they are others who will challenge us that are on these cost and cost expenses with respect to a different position anyways. And so, I would suggest that while understand your position you don’t how at the same position as all the shareholders exist out there.

And so, we have the benefit of hearing from everyone. I didn’t so, I respectively understand your position. I understand where it comes from, just as I understand and respect the position as some of our other shareholders, some of our other large shareholders at this point in time.

Some of were concerned about a dividend, some of our concerned about the changes going on in the industry, some of were concerned about the short-term nature or some of the other investments who are in the stock.

And so, all I want to do for you is explain that continuum, explain where we are and I guess, highlight the fact that there are number of different shareholders who will take a different perspective, which expect how we should deploy capital.

Ali Hilali – Ingalls

So, then may be one of the things we could do is, likely to consider, then why don’t we put something on the ballet. And say, right, here are the three options look for, excess amount of money you guys feel is truly, et cetera, et cetera, et cetera, $10 million, $20 million, $30 million whatever you think is surplus, right so, did the shareholders, this is a management isn’t supporting one of the other is, it kind of, fields compel that to support one thing I ever say so.

And so, please what as followers keep the cash in the company for ongoing needs, do a one-time dividend, do a perpetual recurring standard dividend or one-time share buyback. So, let’s see because I’ve concerned here because maybe one is concern and that this realize the one that definitely.

And so, I certainty wouldn’t perhaps want to do something that all of the other shareholders feel that the company should retain its cash and therefore it’s retaining its cash, I just the only one who’s complaining that no I want a dividend, I want some return on my investment, perhaps that’s creative but that perhaps maybe we should put it on the back, I want to see how that goes. That people don’t make up their minds maybe that would help alleviate the concern that we are doing every single there is and the interest of all shareholder.

Richard Riley

Yeah. Actually, we get this (inaudible) what we want to turn about threshold and I really concerns to have it powers up concern going on. This is about one area that we have a lot of things back on our shareholder and we try to be open and sacred those shareholders to go through the process and we try to balance with that any case everybody’s expectation are desire to demand just as we through of it.

Ali Hilali – Ingalls

Okay. Thank you.

Richard Riley

All right. Thanks Ali.

Operator

Thank you. (Operator Instructions)

Richard Riley

I assume that is all the question that we have? Do we have?

Operator

Yeah. We have one question from John Curti of Singular Research. Your line is open.

John Curti – Singular Research

Good morning.

Richard Riley

Good morning.

John Curti – Singular Research

Would like to know how the transition to the LoJack Technology is going on in Canada and the wind down of the over technology and the change, I guess the business model there?

Richard Riley

Work is going on there, I think as we reported in the past, we have some problem with technology in Canada, which was the frequency based technology, 7.2 we’re making change from some other divisional in the infrastructure from Europe and Canada.

And so for the process of last year was to move from that side of the technology to the LoJack [wiper] technology and infrastructure up in Canada and the report to we have a frequency upped in March and August this point in time, we report the infrastructure up there, we move the people were on the frequency, off frequency on the frequency is either at this point time. We got regulatory approvals associate with that we begin to sell units in to that market place it’s in the second quarter end of second quarter.

Couple of benefits which are come as a result of that which is the insurance companies who look at us and along with our other competitors I think we encourage by the fact that’s a different comparison technology then with 10’s (inaudible) Canada, beginning to get some endorsement from some of the insurance company up there which were exciting.

Secondly is there is a sense one of there that the law enforcement agencies would not ever put the tracking equipment in their causing and track those along goes and we had this part of a number of different law enforcement agencies up their in fact. I think, just as we, we had another one sign up just outside a (inaudible) encourage by the fact of law enforcement agencies where beginning adopted I think they see the benefit of it relative to the other technology that exist up there.

So we’re please with that process so far, its competitive environment, I think one of things that happen is some of the competitors launch deeper discounts join the introduction about technology up there. So kind of being an impact on the selling price, but we are please with the infrastructure, we’re please with having to frequency, we’re please with the exceptions of the law enforcement agencies and the insurance company is up there and now we’re please with our early progress.

John Curti – Singular Research

Are you also getting a broader demographic of vehicle into the system is before…

Richard Riley

It is very early but we believe the getting a broader demographic, I mean, in fact, the old demographic was driven by the insurance company mandated its got excited a long time ago many which is strong by the way side, so there was a the time I want to say when every quarter $40,000 was mandated to have a boomerang or boomerang type of device on their.

And so the bios were for the high end vehicles as opposed to the low end vehicles. And I think, as those mandate kind of slide away and the insurance companies look at all the cars I think there is an opportunity for us to develop kind of a middle market approach there as well.

John Curti – Singular Research

Are you no longer now running kind of either dual systems or dual sets of costs have you kind of made it completely made over the switch over?

Richard Riley

No, we still maintain some people, who are on the out system and we’ll continue to do so that’s cost our margin on a going forward basis.

John Curti – Singular Research

Okay.

Richard Riley

And they are variable is probably better way of saying it.

John Curti – Singular Research

With respect to the international licensees you mentioned that a number of them were coming in below plan, anybody basically on plan or above plan that is any consequence in terms of size?

Richard Riley

I’m sorry, was the question about our domestic business only, about all of our businesses?

John Curti – Singular Research

The international licensees, I’m sorry?

Richard Riley

Yeah. We don’t tend to comment on who is doing what. Clearly it’s safe to say that in any given quarter that our -- some licensees they are doing very well and some licensees are off of what their forecasts were when we saw at the beginning of the year. And so we continue to have some people who are doing well.

John Curti – Singular Research

And then with respect to Italy up 34% continued addition of customers was that, was the quarters results basically on plan there above plan and are you still headed towards getting fairly close to breakeven either late this year on a quarterly basis or sometime in 2012?

Richard Riley

So let me answer these questions in different sequence. So the answer to your last question, which is getting close to breakeven and what we expect to do so by the last quarter of 2011 the answer is yeah. The first question you asked, is whether our performance in the second quarter, was in, of course, with our budget for the quarter and we don’t typically talk about where we are in a quarter-to-quarter basis.

But let me say differently, I think it’s going to answer your question, which is, as you look at our year-over-year revenue growth to the second quarter is slower from where it was in the first quarter and so we expect then our time taking into that, we are not concerned by their raw.

And so there are two piece to which drive our revenue, one is to sale of units and the sale of units goes to the distribution channels so what sell those into dealerships, we sell them into insurance companies, we are selling to insurance brokers, sometime we selling to OEM and there was subsequently we installed in consumers. So the second part of revenues staying for us is, one, they are installed into consumers query to buy us to buy somebody else, we get non going monthly revenues paying for them.

And the second quarter the unit sales were down, a little bit from where we like seen them, but the installations for us, I mentioned the 2700 subscribers signed on in the second quarter was positive year-over-year positive, sequentially from the last quarter, so that’s a good thing, by does to the people who are going to monthly basis.

And as we look at what happen in the second quarter in terms of new unit sales, part of that is as you bring on new distribution channels, other building inventory, other buying inventory start the process and so we didn’t sign as many enlarged new distribution channels in the second quarter as we did in the first quarter or the fourth quarter last year, or as we would hope to do -- anticipate during in the third quarter or fourth quarter this year.

So, we remain confident about that business as I indicated in terms of what is going to perform this year, where we continue to be encouraged by the number of subscribers rating on 16,000 subscribers is pretty exiting given effect that we start beginning the year last year with 3000 subscribers.

John Curti – Singular Research

All right. Thank you very much.

Richard Riley

Okay.

Operator

Thank you. There are no further questions at this time.

Richard Riley

All right. We want to thank everybody for spending some time with us today. Rich, John and I will be around and available for follow-up calls waiting on this morning. And we appreciate your interest in LoJack and look forward to catching up with you at the end of the third quarter. Thank you very much.

Operator

Ladies and gentlemen this concludes today’s conference. You may now disconnect. Good day.

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