E. F. Johnson emphasizes digital products, VoIP at APCO

Exhibit at APCO
2Q financial results
Investor conference call

The E. F. Johnson Company, Waseca, Minn., didn’t introduce new products at the APCO national conference in Nashville, Tenn., and instead showed products now available that were in beta testing last year.

“Our participation at APCO focuses on our digital product offering, the 5100, 5300 and 2600 series radios, and Netelligent VoIP that integrates Project 25 and Internet-based technological standards,” said Michael E. Jalbert, chairman of Johnson and its parent company, EFJ, Lincoln, Neb.

“We want to demonstrate how we’re offering quality, service, value and choice. We’re trying to give the marketplace two messages.

“One, we are involved in the APCO protocols. We have valued products. They’re already here. They’re not something that’s being promised. Our P25 products are sold on a daily basis, and it is clearly our message that now you do have choice.

“Two, we’re emphasizing internally something that some employees never thought about, and that is the importance of quality in our product line. In some cases, it could be matter of life and death. If you think about it what Johnson is involved with, public safety and public service, it involves life and death. Our company is involved in life saving. We’re people who make products that are potentially life-saving tools. It’s important to remember that, when you’re making a product. A mistake on your part not caught by quality department could affect life-and-death decisions or put them in harm’s way. That’s what homeland security is about—the right tools,” Jalbert said.

Jalbert said that he expects government spending on radio communications products to reach $3 billion to $5 billion as allocated to various budgets affecting homeland security. He said that airports alone would be spending more than $150 million this year on subscriber units and radio communications infrastructure.

In view of Johnson’s emphasis on P25 products, we asked about the future for one of the company’s older product offerings, Multi-Net.

“Multi-Net is APCO 16,” Jalbert said, referring to APCO’s Project 16 standard for public safety trunked radio. “We continue to support the existing installed base. We are in the process of unveiling a migration program for these installed bases. That’s the extent to which we are promoting Multi-Net.”

Jalbert went on to say that Johnson had made a strategic decision that Multi-Net has a good base of customers that need to be upgraded and migrated, “supplanted by P25 or some kind of digital replacement. We hope to promote VoIP Netelligent for that also.”

Turning to Netelligent, Jalbert said that Johnson is “starting to promote the fact that you can have a relatively inexpensive Intranet- or Internet-based public safety system using commercially off-the-shelf products such, as routers and switchers, from companies such as Cisco. With technology in repeaters and base stations, you can migrate to a digital, switchless, cost-effective solution that will be gatewayed into P25 protocols and allow interoperability with your county and state.”

Quarterly results

On July 25, EFJ released its financial results for the quarter ended June 30, 2002. The company earned $200,000 on revenues of $9.5 million, compared with a loss of $300,000 on revenues of $10.6 million for the same quarter last year. The company’s gross profit margin for the second quarter in 2002 improved to 44%, as compared to 38% for the comparable period in 2001.

The company’s statement said that lower year-to-date revenues were primarily caused by lower international sales and lower revenues from de-emphasized commercial and contract manufacturer customers.

“We are very pleased with our gross margin, which has improved bottom-line performance significantly. Our continuing focus on the public safety sector and governmental user segment of the market is bearing fruit as we saw our sales to the domestic core customer base increased by 20% over the same quarter last year,” Jalbert said in a prepared statement.

“Our international sales, however, continue to be weak, as our key markets—Americas and Middle East—are negatively impacted with political, social and economic instability. With the continued introduction and market acceptance of our P25 product family we believe that we are positioning the company to take advantage of potential new domestic opportunities that the national focus on homeland security should provide,” Jalbert said.

Investor conference call

On Aug 1, EFJ conducted an investor conference call to discuss its financial results.

Profitability — Massoud Safavi, EFJ’s chief financial officer, told the participants that both of EFJ’s business segments, Transcrypt International and E. F. Johnson, were profitable in the second quarter. He said that despite 10% higher sales for Transcrypt’s security products and a 20% increase in domestic sales to Johnson’s land mobile radio customers, over all revenues were lower than last year by 10%.

He said that the difference involves weak sales to foreign land mobile radio customers because of political and economic instability in the Middle East and Central and South America. He said that the company’s backlog had increased by 87% or $12.4 million during the second quarter.

Safavi attributed the company’s improved margin to a better product mix, growing profitable markets and reducing manufacturing costs through new product development.

“Our operating expenses were 11% lower than last year,” he said.

Homeland security potential — Jalbert said that EJF is positioned for growth and positioned “as a player in homeland security. We believe we will be better off in 2002 than we were in 2001. Our second quarter results, though not what I expected and wanted, were an improvement.”

He said that although homeland security has big potential, it would be realized only when federal the government allocates funds and the recipients are identified, perhaps sometime in the fourth quarter. In the meantime, he said there is confusion in the marketplace, particularly at the state level.

“EFJ is fortunate to be playing in this arena because we’ve been promoting P25 since 1995, and the market seems poised to go in that direction. We can be a ‘provider of choice,’ which is different from being the biggest provider. We have the technology and value in our products, and we give a choice,” he said.

Name change and restructuring — Jalbert referred to EFJ’s June 17 name change and restructuring, saying that they were undertaken to emphasize that E. F. Johnson is a big part of EFJ and is where the company’s growth lies. He said that a functional structure put in place on July 8 allowed the company to look externally, rather than internally, and make progress with its customers.

“We are in the best position to be outwardly focused, with an emphasis on sales and marketing,” Jalbert said.

Jalbert said that one of the company’s areas of concern involves parts availability. He said that he is confident that the problem can be resolved by the end of the year.

“We anticipate growth in radio sales and want the parts to do it,” he said.

He said that the company’s encryption business is steady and that he expects it to continue that way.

Stock exchange listing — With respect to moving EFJ’s stock from the Over the Counter Bulletin Board listing to an exchange listing, “this is always on our mind,” Jalbert said. “We continue to speak to investors to get the stock price to where it can be considered a possibility to be on the board. That’s about $5 a share, although we might waive this by taking other steps. We continue to talk with NASDAQ and AMEX to see what we can do. We considered reverse stock split, but didn’t consider it prudent. It’s a long-term goal of ours to improve our bottom line and get ourselves listed on an exchange.”

FEMA role in state funding — A conference call participant asked what effect a shortfall in state tax revenues has had on EFJ’s sales at the state and local levels. Jalbert said that the fact that the federal government is playing a big hand now and would be in the future in connection with homeland security and the fact that the federal government wants interoperability put pressure on states to have digital interoperable solutions, but the economic crunch causes them to reconsider allocations.

“Many customers are waiting for the federal government to decide where they will put FEMA funds. That has delayed orders. We think that will be sorted out in fourth quarter,” Jalbert said.

Six-sigma quality goal — Regarding product quality, Jalbert said that an EFJ initiative is “to move the quality up the ladder to six sigma. Transcrypt International’s facility in Lincoln is an ISO 9000 facility because a large portion of its business in international. We’ve been pushing the Johnson group in the same direction.”

Jalbert said that he didn’t think customers saw EFJ as any better or worse than its competitors.

“When you have the clout of Motorola, you can spin the perception of a competitor. We want to bring perceptions to the real world. In South Dakota, we got 60% of their subscriber unit business on the statewide system. We showed quality, value, service and the opportunity to give them a choice,” Jalbert said.

Specific growth initiatives — Jalbert said that the first step toward growth is to become a referred provider for public safety and public service at federal, state and local levels. The second step involves identifying acquisitions, mergers and partnerships to reach to a level of business that would be appreciated by shareholders.

“We have real growth potential. It was fortuitous that two-and-a-half years ago, we saw the potential for federal sales. Our growth in federal sales has been almost 100 percent per years during the past two-and-a-half years. We established a separate federal team with a vice president of business development for federal sales. They’re running those businesses and working with possible partners, such as Dynamic Corp. and Lockheed Martin, to take advantage of opportunities large and small,” Jalbert said.

“This initiative leads to opportunities in state and local sales where interoperability will be pushed to that level and at the Transportation Security Agency, which will be forced to look at airports and borders that need communications equipment that we can supply,” he said

“Take that thought and expand it into the need for radio communications encryption. You can go to an electronics store and buy a $50 scanner to hear what various government agencies talk about. If you take our scrambling equipment and embed certain technologies, there’s a major opportunity for us. We know where we’re going when it comes to growth,” Jalbert said.

Recurring revenue — Safavi said that two types of customers offer recurring revenue.

“First, we sell system solutions to states and localities. These systems today are proprietary technology. When we do get a system in place, subsequent purchases of hardware, upgrades and expansions will be available to us. An example would be Chester County, Penn., which has purchased several upgrades” to its Multi-Net system.

“Second, we sell products directly to customers that own other proprietary radio systems. We’re the only other company that can sell into Motorola SmartNet and SmartZone systems. We’re in someone else’s space in a competitive environment,” Safavi said.

Financial requirements — Safavi said that EFJ’s current balance sheet would limit the company in approaching opportunities for large system sales. He said that partnering with larger players would provide assurance to government purchasers that EFJ could handle a large project.

Jalbert added that EFJ has found potential partners that are more interested now than they might have been prior to Sept. 11 because they are part of large systems integrators with military contracts.

“When you think of our competitor, they’re fully integrated, and we’re not, so we can’t partner and bid with them or even be a subcontractor,” Jalbert said.

Military sales — Jalbert said that EFJ deals with most of the military branches, but for non-tactical communications applications because “we have no product for tactical use. You won’t see our products on soldiers. But you would see them on military bases for general communications.”

He said that the company has discussed manufacturing tactical communications equipment as part of its strategic thinking, but nothing is on the drawing board because the company believes there are so many opportunities in other areas.

In wrapping up the conference call after the question-and-answer session, Jalbert said that there is no difference in EFJ’s work on P25 products and interoperable systems since Sept. 11, but he has noticed that an emphasis on interoperability is filtering down from federal jurisdictions into state and local governments.

“I’m always amused and encouraged when I hear politicians talk about interoperability now—a word they probably never focused on until after Sept. 11. They’re all starting to realize that if a country or various communities can’t speak with one another, especially among first responders, you have a problem.

“That’s why the emphasis on homeland security, the Transportation Security Agency, shorelines and airports. This brings opportunity to companies that have supported interoperability. EFJ and Motorola have been big proponents of P25. We see EFJ’s opportunity not in being the largest provider but in being the provider of choice.

“We’re not alone, of course. There are others promoting interoperable P 25. We think we have a leg up on our competitors because of the time we’ve spent developing products and our relationships with customers in the federal arena.

“Our vision is to be a profitable preferred provider of communications products and solutions to the public safety and public service markets. Some people, even though they would rather deal with the preferred provider, they still want to deal with the largest. If we can show an emphasis on quality, value, service and the opportunity to have choice, we can be there,” Jalbert said.