late reaction to lotus announcement?, page-25

re: we’re just moving forward/ up 11% Now 36.5c.

Below is a transcript of an interview with Allen, the CEO.

Datadot Technology Limited - Corporate Insights Release
The following is a transcript of an interview conducted by an Aegis analyst. For more on DDT
see our blue book series at http://www.aer.com.au or go to the Datadot Technology website at
http://www.datadotdna.com.
The FY 05 earnings result was below prospectus expectations principally due to the loss of
one key Australian customer and a significant start up sale to the Russian market in the prior
FY 04 period. To what degree does the lower than expected result reflect DDT’s inherent
business model risk, specifically largely non-recurring and lumpy revenues in the context of a
predominantly fixed cost base?
Datadot CEO - Ian Allen
The reason for the result being lower than expectation was due to a number of significant
sales contract negotiations which were expected to be finalised prior to June 2005. We were
not able to finalise before the end of that year, for example, a sale with the Lexus HID - their
headlight anti-theft program in the USA. [The deal with Lexus] concluded in August 2005, but
should have been quite a few months earlier.
We are reducing our reliance on single clients through expansion of our client base from our
flagship product which is DataDotDNA and also through diversification of our product suite
with the launch of our new DataTraceDNA with the Australian government and CSIRO.
So on the expansion side of things:
1. In the vehicle sector we have already announced new OE accounts since July 1 with
Lexus Australia. The Lexus USA Headlight Program has now come on. We have Audi
Australia and Lotus. In addition we have got the JM&A which is probably America’s
largest motor vehicle dealer group, and they have now started ordering and will develop
this over the next year in US after market for our Dot product on after-market cars.
2. We are expanding the applications of our DataDot DNA to the non-vehicle sector and
we will be making an announcement this week with one of the banks in Australia to
mark leased assets which is a significant move out of the areas of the traditional
channels that we’ve been in.
3. In addition we have continued to expand the new geographic markets such as India.
We’ve had the Indian representatives down working with us for over eight days.
Malaysia and Mexico, as well as continuing to anticipate further orders from Russia –
I’m off to Russia very soon in the next week or so, from our new Russian distributor up
there.
Consumer Discretionary Sector
Datadot Technology Limited
15 September 2005
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4. Of course the other diversification, the big thing in diversification is our roll out of our
new bulk product which we are calling DataTraceDNA, which is a joint venture with the
CSIRO.
So the takeaway is you are both expanding and diversifying your revenue streams, and this
should mitigate earnings risks moving forward.
Datadot CEO - Ian Allen
Correct.
From an industry perspective, how would you describe the demand outlook for asset
identification technologies and what are the key demand drivers?
Datadot CEO - Ian Allen
Well it’s absolutely very optimistic. The demand drivers for DataDotDNA are coming from
manufacturers, insurers, police, the owners themselves and now governments. For example,
1. The theft statistics, our National Motor Vehicle Theft Reduction Council over four years
has been conducting an independent survey on marked cars with DataDot and over
that four year period Subaru’s stolen and unrecovered rates are down 92%. BMW is
down 74% and HSV, Holden Special Vehicles is down 65%.
2. Lower theft - lower insurance claims ratios, lower insurance premiums. IAG, Alliance,
QBE – all offering lower insurance premiums with other insurers now lined up to do the
same things and other things being equal. IAG has even introduced a whole new
category for microdot vehicle identification in its premium calculations.
3. Lower application costs probably resulting from our new high volume robotic application
technology which we have just developed and will be launching at the end of
September, early October. That will enable us to go on to our production lines whereas
in the past we had a manual spraying system for our DataDot technology.
4. Our police support which is now so widespread, that the next Australian Police
Minister’s conference is being asked to consider compulsory microdot application in
vehicles. This has also been taken on in other countries for example, New Zealand. A
regulation of that kind in New Zealand has already been decided on whole of vehicle
marking to commence early next year and we believe other governments will follow.
The demand drivers then for the DNA, the DataTraceDNA are equally optimistic:
1. Because the trace is going to provide a solution to counterfeit products and product
authenticity. At the moment the counterfeit problem is growing at about 5-10% of world
trade each year and it is absolutely out of control.
2. Also too, supply chain management, especially where new regulations are going to
apply. So there will be regulations on the marking of explosives and also other bulk
product areas which are needed.
Consumer Discretionary Sector
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3. We would probably be able to go into batch mixing, which is when you start working
with groups like the RTA, they want to know that the concrete that they purchase is
mixed properly and uniformly and at the moment there is no way of doing that. So we
have patents with the Australian government, with CSIRO, that will fix that and we will
be able to put our new product so that we will be able to determine that the batches are
mixed properly. Also batch identification is going to become a very important part.
Really to be able to bar code each batch of whatever bulk product it is.
So the industry outlook sounds really quite rosy and the product sounds like it provides a very
strong value proposition, but what about the competitive environment? What sort of degree of
competition does DDT face from other microdot-based technologies and various alternate
asset identification systems?
Datadot CEO - Ian Allen
Well DataDot has lead the way with microdot development. We are by far the largest microdot
producer in the world. There is nothing else that comes even close. With very little direct
competition right at this stage. There is only two other competitors and one of them is so
minute it’s not funny, and the other one doesn’t work into the same areas that we are working
in. They just don’t have that technology to be able to do it.
As the market matures and demand increases, we expect that things are going to change.
The new entrants won’t find it easy. They’re going to have to work their way around our
patented IP, and they will soon find that this business is not just about selling dots. It’s about
building a crime-prevention system that secures the buy-end of manufacturers, also the law
enforcement agencies, insurers, vehicle owners, associations and other stakeholders. You’d
need a very big back-end to this.
Indirectly, there’s a wider range of competitors in the asset ID market. One recent report
published by the Vehicle Theft Reduction Agencies in Australia, the Netherlands and South
Africa, identified 15 other competitive technologies. But it also rated DataDot as the number
one ID technology to combat professional motor vehicle theft.
Now with regard to DataTraceDNA, there is no competitor product of equivalent standing.
There are lots of product markers out there, even some based on DNA, but none other than
the DataTraceDNA can be integrated into the composition of the materials into the molecular
structure and be read in less than one second by a portable reader without using any chemical
testing or forensics.
And is that product patent protected?
Datadot CEO - Ian Allen
The patents of that were lodged by the CSIRO about two months ago.
Is that just in Australia or broader?
Consumer Discretionary Sector
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Datadot CEO - Ian Allen
No, no under the Madrid Protocol, worldwide.
Moving to the company strategy. What are the key elements of DDT’s strategy?
Datadot CEO - Ian Allen
Well we’ve broken them down into four areas:
1. To increase the penetration for the Australia OE market, vehicle market with whole of
vehicle marking using DataDotDNA. The key to this strategy will be our new robotic
applicator which will be ready early next month.
2. Also the penetration of the European OE vehicle market. We have already been
working with some of the large motor vehicle manufacturers over there on robotics with
our DataDotDNA and again, using our new robotic application for whole of vehicle
marking. Developing a market segment for key component marking, in other words,
some manufacturers may not want to go down the whole of marking route, but a lot of
them want to protect key components of that vehicle and mark them. We think this
European opportunity will also be fuelled by regulatory developments in the EC which
we have meetings commencing next week in the Netherlands and we have been invited
to those regulatory developments.
3. Penetration of the US market, both of the OE market for parts marking as with our
Nissan and Lexus contracts, and the after market through the huge dealer groups such
as the JM&A Group which I previously mentioned.
4. The commercialisation of our DataTraceDNA product worldwide.
Earlier you touched on issues such as patent protection and also some of the marketing
alliances you’ve developed. So I am just wondering if you could perhaps elaborate on what
you see as DDT’s key differentiating factors?
Datadot CEO - Ian Allen
What we have, I think the essentials that differentiate us from our business model are:
• That we’ve got IP ownership and protection of our IP ownership with our spraying
system, which is very important. The spraying of microdots.
• The continuous R&D project development, to stay at the leading edge where we are
working with people. We have got our own research and development organisation
now, such as the CSIRO – we are in a joint venture with them, so it is a most amazing
R&D facility that any company can have in the world.
• Marketing strategies based on selling solutions, not just the products, and the backend
of our solutions. We put so much time and effort into working with police,
governments, regulatory authorities and insurers to provide them with a system that
they have complete confidence in, and has been endorsed by governments.
Consumer Discretionary Sector
Datadot Technology Limited
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• Distribution to after markets and retail market via specialist distributors. So we have
specialist distributors at various channels set up around the world now and each of
those are experts in their area.
• Then of course the big one is the joint venture with the CSIRO, to commercialise a
completely new product. Now what that means to us – it means that not only are we
out there commercialising the product under the new company DataTraceDNA Pty Ltd,
but the government is also bringing to us various contacts which are coming through to
them and placing in through this new joint venture company.
I am just wondering what you see as perhaps the key risks to DDT?
Datadot CEO - Ian Allen
We do face risks on the demand side from our reliance on a disproportionate number of large
customers, but we are addressing that with expansion and diversification which I have already
mentioned.
On the supply side we have been reliant until recently, on a single product, DataDotDNA and
several variants of that product. With the development of DataTraceDNA and our joint venture
with the CSIRO we are now broadening our project base and markets considerably.
There have also been operational risks in financing the company’s rapid expansion
geographically while continuing to finance product development R&D. But these have been
mitigated by our public listing and our improved capital management that has come with that.
We think we’ve got a good handle on both our appetite for risk and on keeping the actual
levels of risk under prudent control.
Just on the DataTraceDNA product – to what degree have you sounded out the potential
market and potential customers there?
Datadot CEO - Ian Allen
Well we have a significant amount of global companies that we are speaking with now. From
the DVD industry, we are talking to people in the explosives industry and the concrete
industry. We are talking to people in the fabric industry because – for example wool – once it
goes into a suit, there is no way of protecting that from counterfeit. We are looking at the
glass industry, perfumes, we are looking at windscreens and we are looking at motor vehicle
component parts for identifying those at the source. Of course packaging, such as
pharmaceuticals and tobacco.
We are involved in high-level discussions with a lot of these major companies now in Australia
and around the world.
That’s been very rapid because we’ve only just launched this product recently, but we have
had a number of discussions with these companies and none of them have an answer until
now. They do have one now.
Consumer Discretionary Sector
Datadot Technology Limited
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So given the speed of that progress, would I guess the market might be really quite receptive
to it?
Datadot CEO - Ian Allen
The market still has to come to grips and understand what we’re doing – which has been a
deliberate ploy. We haven’t [tried to get the market to understand it], because we haven’t
been in the position due to patents being lodged by the government. Once the patents were
lodged, then we have been in the position then to go out and really talk about it.
I’m starting a trip this week into China, Hong Kong – it’s my second trip into there. With very
specific high level discussions, not only with government but also major, major suppliers of
products throughout the world. Then onto Moscow – the same thing there with meetings with
the government and also other areas. Then into London to talk to the various industries in
London.
With regards to earnings outlook, the FY05 result was disappointing, but with expanding
customer base and an expanding products – how do you see the FY06 earnings outlook?
Datadot CEO - Ian Allen
In the current year we haven’t issued a forecast and we are not going to, due to the effect that
even single delays in orders can have upon a company our size. That’s exactly what
happened with us in the early stages. We budgeted to bring these companies in, it is not a
fact that the companies are disappearing off the radar, and they just move and move out.
Nonetheless management’s confident that we’ll achieve a significant improvement on our
revenue line. This confidence is based on the contract decisions that I have referred. Lexus
USA, Audi, Lotus and current contract discussions with customers in Australia, USA, Russia
and of course Asia.
In particular we have experienced an excellent response from numerous corporates regarding
trace – DataTraceDNA. Although we have yet to finalise our sales contracts for this product,
we do anticipate doing so over the coming months. In addition we continue to anticipate some
significant sales being finalised for our DataDotDNA in the Russian and US auto markets as
referred to above.
Furthermore our relationship with numerous law enforcement agencies, semi-government
organisations, insurers and end-customers continue to go from strength to strength – we are
not losing one yard here, one metre.
This gives us the confidence that the overall market demand for the various technologies is
growing and this will naturally drive our revenue growth upwards. So we’re looking – we are
just very confident. Once again, we’re just moving forward