DRI Corporation (NASDAQ:TBUS)
Wall Street Analyst Forum
September 8, 2008 9:50 am ET
David L. Turney - Chairman, President, Chief Executive Officer
The next company we have presenting this morning is DRI Corporation. (Host Instructions) DRI Corporation is a digital communication technology leader in the domestic and international public transportation and transit security market. Our products include TwinVision and Mobitec electronic destination sign systems, Talking Bus voice announcement systems, Digital Recorders Internet-based passenger information and automatic vehicle location/monitoring systems, and VacTell video actionable intelligence systems. Our products help increase mobility, flow, safety and security of people who rely upon transportation infrastructure around the globe.
Using proprietary hardware and software applications our products provide easy-to-understand real-time information that assists users and operators of transit bus and rail vehicles in locating, identifying, boarding, tracking, scheduling and managing those vehicles. Our products also aid transit vehicle operators in their quest to increase ridership and reduce fuel consumption as well as to identify and mitigate security risks on transit vehicles. Positioned not only to serve and address mobility, energy conservation and environmental concerns, our products also serve the growing US Homeland Security market. For more information about the company and its operations worldwide, go to www.digrec.com.
Presenting this morning is David Turney, the Chairman, President and Chief Executive Officer.
David L. Turney
I’m Dave Turney. I’m CEO and Chairman of DRI Corporation. We are TBUS on the NASDAQ. Attorneys tell me we’ve got to show you the forward-looking statements and tell you that everything I’m going to tell you may not come true. I’m sure you’ve seen those before so we’ll not spend a lot of time there.
This company was founded in 83. The IPO was in 94. We are traded on the NASDAQ as TBUS, easy to remember T-BUS. There are about 11.2 million shares outstanding. We have about 190 employees worldwide, roughly split 50/50 inside and outside the US. There are four cornerstones of our business: Mobility, security, energy conservation and the environment. We touch all four cornerstones by way of the fact that we serve the public mass transit market place. I am going to explain that to you as we go on in more depth.
Our core products. Sign system in the upper right-hand corner of the screen is the largest volume revenue-wise in our product portfolio. Dropping directly down on the right side of the screen AVL, vehicle locating systems tracking the location of the vehicle real-time as it moves through the route structure. Diagonally up to the left, vehicle monitoring. That is monitoring the health of the vehicle - engine temperature, brake wear, transmission condition - throughout the day so that we can collect information for the maintenance of the vehicle when it comes back in the evening. Then dropping down to the left, security systems. Video security systems onboard to mitigate security risks. Video security intelligence.
We are a $70 million NASDAQ company in terms of our revenue and for that size of a company we have an incredibly large footprint. The blue boxes are our operating locations. North Carolina Research Triangle Park, primary location for the US. Sweden and Germany, primary locations in Europe. The larger of the two, Sweden. India is a joint venture launched at the third quarter of last year, 51% to our account. Australia is a 100% owned subsidiary. Brazil is joint venture 50/50. Corporate headquarters is in Dallas, Texas. It’s a small organization corporate wise a total of four people. I’m corporate staff adverse.
Take a look a minute at the customer base. Over 60% of our revenue is derived by sales to the transit vehicle builder. The other 40% goes directly to the end user, like the New York City Transit Authority for instance. As you can see from the names up there, EvoBus which is Mercedes’ brand name for purposes of the public transportation buses, Daimler, Volvo, Scania, blue chip names are in our accounts receivable tell you some stability of our customer base.
In addition to serving the public transportation market place, we serve the same vehicles on a private transportation market place. Avis and Hertz for instance. If you are on board the Avis or the Hertz bus traveling from the terminal to the parking lot or back and the announcements are being made automatically, odds are it is our equipment. We dominate that market space. As you come to the curbside to get on the Avis bus, you may notice sometimes you will see a sign about eye level driver’s door says, “Cars Available.” That’s our product. A very important product to the customers. They understand that a lot of their customers come into town without a reservation. That sign lets them alert the customer to “get on board and we’ll have you a car when you get to the parking lot.”
We are uniquely positioned. We are at the same time serving the intelligent transportation systems market and the security market. Now let’s put some wheels on this. What does serving the public transportation mobility market place really mean? Well here’s the upshot of it. Here’s what one bus can do for one street. Which scene would you rather be in?
Now I will tell you right up front what we are not about. We are not about everybody getting out of their car and getting on a bus. What we are about is making it possible through giving you and the operator of the vehicle information making it possible through the course of the day for you to make choices and not always be locked in to just one mode of transportation. One car off the street can make a difference.
Our market drivers. Traffic gridlock and travel time. People are getting tired of sitting in traffic jams. The quest for lower energy consumption and expense. Look at that parenthesis. Just announced last week. Year-over-year through June roadway and street use was down by more than 4.7%. That was after a similar drop of 3% the month preceding. Transit ridership in the meantime is up.
The need to upgrade and update to look modern is another driver of our market.
The need to reduce greenhouse gases. To the extent we eliminate automobile use and put people into public transportation, we improve greenhouse gas emissions. And of course, mitigating security threats. This matter of waste and pollution is significant. In the US alone, and I don’t know what this number is folks. Worldwide it would be staggering. But in the US alone we waste 541 million hours sitting in traffic jams and traffic delays. $10.2 billion. On top of that, looking at the environmental impact, the day-to-day choices we make on our transportation mode, car, bus or whatever, accounts for one-third the greenhouse gas of the average household. If we took one car out of use in the average household, we wouldn’t have a greenhouse gas issue.
But the real driver of our market has yet to really emerge. It’s just starting to surface. And that is more and more cities have under consideration city center auto use restrictions or fees. London’s already there with fees to use your car downtown. Singapore, Stockholm. There are over 20 cities that have it or are considering it. New York City tried last year but didn’t succeed. Expected to surface again in New York City in the not-too-distant future as well as other American cities. To the extent you restrict people’s use of automobiles downtown, they go to public transit. That’s us.
Looking at our products another way. On the left-hand side you see the destination sign system. Front, side and rear of the bus. This sign says “911 call police” for making a point. The electronic information display system giving the destination of the vehicle. On the right, the black box. GPS-based tracking of the vehicle for real-time information. By the way, that product on the right is marketed in the US only. We are rolling it out into the international market in 09. Part of our growth plan. The sign on this bus; that is one of our sign systems. That’s on a [inaudible] motorist bus in India. I’ve got this slide in here for two reasons. One is to show you real-time live what a sign looks like on a bus, but to make a point.
Emerging economies are really a big driver of our business right now. Places like India, there’s a growing middle class that has money and they want a place to go spend it. They want to go spend that money. They don’t have a car to get on the street with. If they could get on a street, they probably couldn’t get anywhere. But they’re sure tired of riding on old buses that are dirty. They want new buses that are modern. This bus is in Delhi, India. It is as modern as any bus that you would find anywhere in the world. Plush this vehicle is. This is an example of what’s happening in emerging economies, South America, India, Russia. This is the sort of thing that is happening. Delhi alone will purchase starting from last fall through the next 36 months 4,000 new buses to replace its 2,500 bus fleet, all with vehicles like this. Believe me, we plan to have a nice piece of that business.
This product here, you see the blue box right there in the center with a number pad on it. Unfortunately it doesn’t have the sound channel or I’d be playing it for you. It’s not enabled on this system here. This is our tracking system. This is the GPS-based next stop system. It makes the announcements of when you are to get off of your bus or when you should get on the bus. But more and more importantly than that, we have the GPS system talking to the bus through the tower, through the computer in the back office, out over the Internet, enabling us to provide these services to the users and operators of the vehicles; dispatch information, vehicle location, schedule adherence, speed up, slow down, managing incidents, giving priority as the bus comes into the traffic light zone - if the bus is behind schedule, we can cause the traffic light to turn green, bus estimated time of arrival out to the bus stop so people will know when their bus is going to be there. Folks we can even send out to your cell phone a signal when your bus is going to be at your bus stop. So these are the future. These things are what we expect to drive ridership increases in the future making it more convenient, more user friendly to use the bus.
This is an example of the sign system at a shelter where we are feeding the information from the bus to the sign system posting when the bus will arrive at that location. Then taking that information onto a map that the dispatch people are watching all the time to see where the bus is, if it is running on schedule or off schedule. Then looking at that same information that you as a consumer would be able to look at from your home computer. That information overlaid on Google maps so you can watch and see where your bus is and queue up for it at the right time. Information.
Then security. Did you know that for the past five to 10 years a large percentage of new buses produced have had on board video recording systems anywhere from two to eight cameras on board primarily for the purpose of recording incidents or claimed incidents for insurance risk mitigation? We entered this market, but for a different reason. We said, “We don’t want to just collect video for video sake. We want to collect video snapshots when incidents are underway that are security related, peg it in terms of where it’s happening at with our GPS coordinates, alert headquarters so they can do something with it. In other words, video actionable intelligence is our business in the security world.
Here are the images that we can see. These images actually are of one of our customers where we’re hosting their video system remotely from our location in North Carolina. These are images happening onboard that bus. Now here’s how a theoretical security incident would play out in this world. Upper left-hand corner. The GPS locating system’s tracking the vehicle and detects that the vehicle has gone off route. A query goes out to the driver; really covert; really, really something that no one would know is happening. If the driver doesn’t give the right response in the right time, it’s assume there could be a security incident in which case the camera is directed to start sending snapshots of what’s happening inside that bus back to headquarters. Likewise the sign system is instructed to start displaying an emergency message so that when the police come out if they are dispatched, they know what vehicle to go to. All this time headquarters has been looking at these snapshots. We don’t need to screen the video. All we need to do is send a few snapshots. The police now are back at headquarters are looking and if they see something that they don’t like, we can actually take control and we can remotely shut the vehicle down RSD. The police are nearby; they’re looking at the vehicle; they can tell that it’s in location; it’s okay to shut it down; and that we can direct that vehicle to be shut down. We do not kill the engine. We take the engine to idle; the transmission is disconnected; you’ve got power steering and brakes but you’re not going anywhere.
Now this is security risk mitigation in the transportation world. It’s unrealistic to say that you’re going to eliminate incidents. In this case, if it’s a perpetrator that’s just a silly person or is trying to rob the bus driver or something like that, incidents which by the way happen on a daily basis somewhere around this world, odds are that individual’s going to get scared and run when the bus stops. If it is, heaven forbid, something we have not yet experienced in this country like a terrorist with a bomb, it’s probably still going to happen. But at least we can cause that bus to have stopped in a location that’s likely to have the least possibility of damage inflicted. Sad world but that’s what we have to deal with.
You don’t have to read all these boxes. I have this slide in here for one purpose. Every one of those arrows represents something we do on board the bus. Rough order of magnitude, every bus rolling on wheels, we have about $25,000 of content that we can have on that bus and in some cases more. And that’s through a number of different services that we provide.
What is the size of this market? Worldwide we are estimating presently about $1.3 billion annually as the size of this market. Considering the geographic regions we’re active in, we’re serving about $450 million of the $1.3 billion market. Security, energy, environmental concerns are expanding the market and just the basic ridership increases that are happening because of fuel cost increases are driving the market upward.
Looking at the market another way. Bear in mind from what I showed you earlier, we’re all over the globe. That largest box, that largest bar, is Europe, Middle East and Africa overwhelmingly the largest number of vehicles in service. 1.4 million vehicles in service. Overwhelmingly the largest market. The center box is Latin America, just short of 600,000 vehicles in service. That little green bar anemic is the US, less than 80,000 vehicles in service. We’re active in all those market segments as a result. Not too surprising we’re 55% international and I will go on to say that given the strength of the dollar and what’s happening with the economies around the world, I’m very happy that we have this geographic diversification. This geographic diversification gives this company a lot of insulation against ups and downs in different segments of the market.
This chart here is the revenue chart starting back from 99 going through our projections out through 2010. I want to make two points. First, your eyes have probably already gone to that flat period in the 2003-2004-2005 era. That was the devastating era in the US transit market place whenever our legislators in Washington failed to pass what’s called The Highway Bill that provides funding to surface mass transit. Only about 20% of all funds going into mass transit in the US come out of Washington but it has a psychologically larger impact and for nearly three years our legislature in Washington was unable to pass new legislation when the old expired. As a result the US market place contracted dramatically. We estimate that our business opportunity in America declined nearly 40% in that time period yet we kept revenue flat.
Because we made a painful choice that even during that down period in the US we would go ahead and build out on the international side. By doing so we held revenue flat and established ourselves firmly in the international market place that drove up our losses. We were already operating below break-even. We were already in a position of where we were almost assured to have losses. The build-out on the international side simply made the losses greater. But the good news is exactly what we believed would happen did happen. It took a year longer than we expected, and that is the domestic market came back and as a result of having built out on the international side, we were able to launch back into robust growth in 2006-2007-2008.
Our guidance for the three year 2008-2009-2010 revenue wise is reaching $100 million run rate by the year 2010 and we are on track for that line. Our growth objectives, how we’re bringing about the growth, is we’re cross-selling now the vehicle tracking and monitoring system into the existing international and domestic customers. I mentioned earlier that the vehicle tracking systems, security systems, monitoring systems, are not sold outside the US yet. We are entering the international market with that in 2009. It’s a part of our growth plan. Bear in mind we’ve got over 500 customers in over 50 countries around the world that are already buying our sign systems. The door is already open. The relationship already exists. Now we go back to them and some of them will be customers for the engineered systems. We are increasing the engineered systems product line through increased R&D and increased marketing efforts.
We’re also increasing our focus on airports. Interesting point. Think about this? Pull your car up in front of an airport terminal. Stop for a little bit. You’re going to be challenged by the police very quickly. A shuttle bus on the other hand can come up in front of the terminal and sit there for quite a while and get away with it. Those buses are a security risk. Increasingly airports are recognizing that so for that reason the shuttle buses at JFK out here in Long Island, LAX, BWI Baltimore are being tracked by our security systems so that if it goes off route, we can figure out why and is it a security threat.
We are expanding still our international market. We entered India last year in the third quarter. By the way we opened the doors with a $2.5 million order. We’re entering Russia in the first quarter of 2009. And we’re increasing our penetration in selected existing markets.
I’m going to kind of digress a little bit now and go to what I call the [ACID] test. This team has a proven track record in both good times and bad. We can manage adversity. And I would submit to you that investment professionals normally do a great job in analyzing the financial information. They do a great job in analyzing the market. But where they often miss the boat is asking one simple question and proving it, and that is: Is this management have the ability to manage through adversity? Because adversity will happen. Folks, we do. Look at what we did during that flat period on the chart a moment ago. Here’s what we did. We took over $4 million of cost reduction expenses out of the company. We reorganized all of our key business units. We put new leadership in most of our key positions. We divested of a non-core asset. And we established profitability. We expanded our serve markets. We went from 30% to over 55% international increasing product lines, adding features and launching the security functionality all during a down market. Guess what? As a result we came out of the first quarter with a loss in 07. Second, third and fourth quarters were profit in 07 over losses in the same period prior. First and second quarter of 08 profit. In fact, second of 08 was an all-time record high in revenue. So you see, those investments that we made during the down period proved that we had the ability to manage through adversity and manage our way to profitability despite what the market was doing to us.
Our guidance for 2008 is revenue in the $68 million to $70 million range. Our guidance long term as I mentioned earlier is $100 million run rate by the year 2010. We are tracking on both of those trend lines. Our earnings guidance. We have said for 2008 $0.14 to $0.17. By the way we’ve got $0.11 through the second quarter. We have updated that to say that we’re confident of the upper end of that range of $0.14 to $0.17. We’ve also noted however that we’re still having to look very closely at the larger contract content as we were in the third and fourth quarter trying to predict with some degree of accuracy what’s likely to happen on expected orders that are there for our fourth quarter. Will they be deliverable and when?
Now the point is, this is a key point in this company. I don’t care if it’s a good quarter or a bad quarter. One quarter does not make a trend in this company. You have to take several quarters together to get a handle on what’s really happening. We have large contract volatility.
I’ll just touch briefly on the balance sheet. By the way this is June 30. The numbers changed on July 1 because we redid all of our banking arrangements as of July 1. But current ratio was $1.3 million and a short term debt about $9.1 million at the date that we cut off in the second quarter. Those of you who looked at our news releases you probably know that we redid our banking relationships effective July 1. Generally all of that is done except for a few minor details of clean-up. What it amounted to in the US we were working with a hedge fund loss. We went to P&C Bank in the US. We went to Brooks Houghton for a sub-debt piece to go along with that covering both US and Europe. We stayed with but enhanced the relationship with [Honosbachen] in Europe for our European banking. So both the domestic and international sides are covered. We’ve put in place adequate working facilities for 08 and into 09, maybe even 10. The result was a better working capital position and a slightly lower interest expense percentage.
So what’s the market having to say about this? Well that’s a 12-month plot. Obviously on your right there is up through last Friday. We’ve been hovering around the 260 range for the last several weeks. We started recovery from the slide of last year and the slide of so many micro caps that was going on at the back end of last year, the downturn October through December 07. We arrested that in February of this year and started building back. We are presently sitting like I said around 260.
What are we doing to further improve profitability and shareholder value? Well EPS is one of our major challenges, goals and objectives as we seek to improve shareholder value. We seek additional revenue growth. We seek IR initiatives increasing. I am out making presentations like this on a regular basis. I have one-on-one meetings this afternoon and tomorrow here in the city, a total of about eight if I remember right. So I’m out getting the word out on this company. We’re seeking new and more institutional investors as well as international investors. I am a little bit stubborn on this point. I figure “Well if we’ve got half of our revenue outside the US, why don’t we have half of our investors outside of the US.” That’s one of my personal goals is more investors from abroad. And incidentally, we do have several investors from abroad already. We’re launching an M&A component of our growth sometime in the next six months, mostly likely in the first or second quarter of next year.
We have a proven IPS market foundation. That’s a market that’s here every day. Buses are running on the street every day. That’s our solid foundation. On top of that we have security, energy and environmental opportunities for our shareholders. We are a technology leader. We obviously have achieved economy of scale breaking into profitability now. We have new products and new serve markets achieved and rolling out. And we’re international in scope. So we are well established with a strong base.
I’ll repeat something I said earlier. Four cornerstones - mobility, security, energy conservation and environmental concerns - all because we’re dealing with the surface mass transit market place. The differentiating strengths that we have: A global footprint; our competition doesn’t have that.
Long-standing business relationships. Unique barriers to entry for the competition. Unique barriers because of those relationships. You take a new product into a transit operating agency and say “Hey, I want to give this set to you for trial and when you go to buy more buses maybe you want to specify.” You may have an audience after six months because they don’t know you. The relationship isn’t there. I could take that product in and tomorrow morning it could be running on the streets of New York City in trial and anticipation of possibly being specified on the next bus. Relationships. A unique barrier for the competition.
Our products present one integrated solution. Our competitors do not. We have an innovative technology through our product line. We have achieved profitability.
And we have a very experienced management team. This management that I am going to show you are the top five people in the company. We operate as what I call the Executive Council. We operate quarterly almost like a mini board of directors assessing what’s happening and where we’re going and refining plans. I have over 21 years of industry experience. I’m President, Chairman and CEO. Steve Slay, the CFO, has about five years of experience with the company. His experience is heavy on the SOX side and that’s one reason that we wanted him in our company was his experience in implementing SOX and 404 in particular. Larry Hagemann, 18 years of experience in this industry with a technical background obviously. He’s our CTO, Chief Technology Officer. In other words, we believe strongly enough in the technologic component of our business strategy that we have a top level full-time person devoted to it. Patents are pending. Rob Taylor, Vice President and Chief Operating Officer - US Operations. Brought him to the company about 16 years ago because of his video security background. Needed more security knowledge in our company. We have it with Rob. Oliver Wels, Vice President and Chief Operating Officer of Mobitec Group; in other words, the international business. Over 20 years of industry experience dealing with our customers abroad.
Why invest in TBUS? Well maybe one good reason is this metric which suggests that we might be a little bit conservatively valued. Our market cap is about 50% of our annual revenue. Secondly, I challenge you. I don’t think you’re going to find any other small cap micro-cap or large cap company on the NASDAQ that with the same product is active in four hot investment arenas: Security, the environment, energy conservation and quality of life through mobility, all through serving transportation.
Folks, that’s my presentation. I’m open to questions.
[Inaudible – no microphone]
David L. Turney
Warren, I’m going to repeat your question so the Internet recording can pick up the question. Warren’s question was if I would comment on our entry of the Russian market would be largely following the same pattern as we did in India and Brazil, which as you know when I showed you was joint venture. Warren, probably not. Every market has to be looked at in terms of how it functions and we have been advised that it would be best to do a totally company-owned facility, subsidiary there and this is what I anticipate at least for the beginning. Now later on after we get up and running, if we found another Russian company that was situated favorably in our market space that we could join hands with in a joint venture or something, we might do so. But from the first day and probably for the first year it will be a clearly 100% company-owned subsidiary, most likely based in St. Petersburg.
You haven’t mentioned China, do you have any interest there?
David L. Turney
The gentleman asked about China. Do we have interest in there? We have a lot of interest in China. And our situation is looking at the unserved market opportunities that we have in hand, for instance Russia, what is the best utilization of our resources. I have had business experience in China before with not too good results because of customers being stolen, let’s put it that way. So with our limited resources we chose to focus our efforts on the Russian market next. Now after we get through with the Russian market, which will probably be a year, we start looking at our next market. China might enter the picture as the next candidate. At least for 09 interested in China. Just don’t want to spread ourselves that thin.
[Inaudible – no microphone]
David L. Turney
The gentleman asked if our systems apply to rail. Yes, sir. We are on rail systems. Miami-Dade uses our equipment. San Francisco Muni rail uses our equipment. Some others. We recently announced a nice order in Sweden on the inner city rail as a matter of fact in that case. I don’t talk a lot about the rail only because for every one rail car there are more than 20 buses. Huge opportunity on the bus side. But the rail market is there; our equipment’s compatible with it; we do serve it.
[Inaudible – no microphone]
David L. Turney
Warren’s question is related to some of our competitors having been taken over by other companies or acquired or whatever in the past couple of years. And the answer is, it’s had no impact on us whatsoever. There have been two competitors went bankrupt because of the slump in the US market. There have been consolidations also partly as a result of that. But it’s had zero impact on us. We don’t overlap that much with Siemens. They tend to go for the New York Cities; we tend to go for the smaller properties. Same way with [Orbital]. We tend to go for the properties they don’t. So it has zero impact at this point.
I think that should be my last question. I thank you for your attention.