Roth Sees Minimal Sales Growth From Digital Ally

Digital Ally, Inc. (NASDAQ: DGLY) reported its 1Q16 results significantly short of expectations. Roth Capital’s William Gibson maintained a Neutral rating for the company, citing expectations of “minimal sales growth” and the uncertainties around Digital Ally’s court battle with TASER International, Inc. (NASDAQ: TASR).

Dismal Performance

Digital Ally reported EPS and revenue of ($0.44) and $4.4 million, versus Roth Capital estimates of ($0.23) and nearly $5.4 million, respectively. Although the company generated gross profit margin expansion, from 38.9 percent in 4Q15 to 42.1 percent in 1Q16, the figure missed the estimate of 56.3 percent.

“Besides less sales to cover fixed costs, there was a hangover from the upgrade of connectors in body camera cable assemblies, including higher scrap costs. The company believes the connector-related problems are behind it and it hopes to achieve 60% gross profit margins later this year,” analyst William Gibson wrote.

Digital Ally is in a legal battle with Taser to protect its intellectual property. Even if Digital Ally is successful and receives the maximum in damages next year, this could “dwarf the company's market capitalization,” Gibson pointed out.

Estimate Changes

The EPS estimate for 2Q16 has been reduced from ($0.20) to ($0.25), reflected lower-than-expected gross profit margin expansion. The EPS estimate for 2016 has been reduced from ($0.63) to ($0.87).