Roth Downgrades Digital Ally Amid Disappointing Quarter

• Shares of Digital Ally, Inc. DGLY have declined 66.4 percent over the past six months, from $18.30 on May 13.
• Roth Capital’s William Gibson has downgraded the rating on the company to Neutral, while lowering the price target to $7.
• Gibson mentioned that contrary to expectations, the company has not turned profitable, with disappointing revenue, profit margins and further production issues during the quarter.

Analyst William Gibson believes, however, that although “the fundamental deterioration in the estimated growth rate is largely priced into the stock,” it would be better for investors to wait till the patent dispute was settled.

For 3Q15, Digital Ally reported loss per share of $0.45 on a 10 percent sequential decline in revenue. Management also cautioned that sales growth was expected to remain under pressure, given the ongoing patent dispute, for which TASER International, Inc. TASR has instituted a re-examination by the U.S. Patent and Trademark Office.
TASER has sought a re-examination of one of Digital Ally’s patents, which “allows auto-activation of body cameras and in-car video systems, a feature preferred by law enforcement agencies and incorporated in the (latter) company's VuLink product.”

Prospective customers have delayed orders, reportedly due to them being warned by TASER of possible patent infringement. The government agency is still to issue its final ruling regarding the validity of the patent.

However, according to the Roth Capital report, even in the worst case scenario, “Digital Ally should be able to sell all its products, but so will others.” Although the company is hoping for a ruling in early 2016, Gibson believes that the negative impact on Digital Ally’s sales would continue till the issue was resolved.

“Besides the patent battle, the company blamed the 2015 revenue shortfall versus its $25 million guidance on international sales, virtually non-existent due to U.S. dollar strength, but reportedly $4 million of the guidance,” Gibson added.

The 4Q15, 2016 and 2017 EPS and revenue estimates have been significantly lowered.