Q4 Earnings Preview: Watch out for strategic updates from Digital Ally

Digital Ally (DGLY) has started off 2019 with a positive note. The video surveillance products provider has got a favorable verdict from the ongoing patent disputes last month, with the stock price jumping nearly 40% this year. The company is slated to announce its fourth quarter results on April 1 before the market opens.

Last month, Digital Ally announced that the US Patent Office has rejected TASER’s request of invalidating auto-activation patents of Digital Ally. In addition, TASER can’t file any more patent lawsuits on these patents. Based on the judgment, the firm believes the chances for WatchGuard to dispute against Digital Ally’s patents now is limited.

Investors would be expecting more updates on the patent lawsuits and how it’s going to have an impact in the next fiscal. Commenting on the Patent Office’s verdict, CEO Stanton Ross said, “The finish line is finally near and we look forward to a jury confirming what we have alleged all along”.

Digital Ally’s revenues have been impacted by the ongoing lawsuits from its peers Axon and WatchGuard. For the first three quarters, the company had spent $1.1 million on litigation expenses. As the trial continues in 2019, legal fees is expected to increase in the next fiscal. Shareholders would be expecting the lawsuits to end in fiscal 2019 period which would improve margins.

For the fourth quarter, analysts expect sales to decrease modestly to $2.79 million over last year. On the bottom line front, loss per share is estimated to come down more than 50% to $0.27 over the loss of $0.56 per share in the prior year.

Last quarter, revenue came in at $2.8 million, down 3.5% over the prior year. The dip in revenues was primarily due to supply chain issues and intense competition from its peers who are offering advanced features at discounted prices. Loss per share was $0.59 compared to $0.56 loss reported in the prior year period. However, Q3 loss per share failed to beat analyst estimates of $0.20 per share.

Path to Profitability

In the first nine months of 2018, law enforcement division brought in 63% of revenues. In-car segment and body-worn cameras contributed 78% and 22% respectively. In order to tackle competition, the company plans to launch a new product platform in Q2 2019 for in-car systems, which can be deployed for law enforcement and commercial clients.

Digital Ally also is focusing on improving the recurring revenues to reduce volatility. The company has been seeing an encouraging trend with cloud storage sales jumping 47% to $174,000 in the third quarter.

In order to diversify sales from its traditional customer base, the company is focused on entering new markets such as medical, private & event security and schools. In addition, the recent partnership with NASCAR would be a good start to broaden its service offerings to new avenues. Digital Ally also is exploring a service-based revenue model wherein it plans to lease its hardware along with cloud storage which would come as a monthly subscription. The company believes the new model would be more appealing to its customers as it would reduce upfront costs and maintenance for them. It would also bring in stable revenues to the firm in the near future.

With a renewed focus on its revenue model and entry into new markets, investors would be hoping the company to be profitable during the next fiscal year.

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