EF Johnson continues to land large orders

This micro cap company could be an interesting story, if it continues to progress to profitability.

Headquartered in Irving, Texas, EF Johnson Technologies, Inc. (NASDAQ: EFJI) focuses on innovating, developing, and marketing high-quality secure communications solutions to organizations whose mission is to protect and save lives. The company’s customers include first responders in public safety and public service, the federal government, and industrial organizations. The company’s products are marketed under the EFJohnson, 3e Technologies International, and Transcript International names. Yesterday the stock was up 22% on trading volume of 100,800. A quick look at the company’s 2008 restructuring tells the story.

At the beginning of the year, EFJI had some difficult times. Some product delays and much-needed cost cutting left the company with a net loss for the fourth quarter of 2007 of $37.8 million, or $1.45 per share. The company responded by undertaking an aggressive program of corporate restructuring, cost cutting, and a new focus on the convergence of integrated voice, video, and data solutions. EFJI also stated its intent to diversify revenues by acquiring new customers outside the department of defense.

EFJI’s diversification efforts are working. On June 9, 2008, the company announced a $10 million contract from the Yukon government which contracted for EFJI’s Project 25 compliant infrastructure system along with its Project 25 compliant portable and mobile radios and accessories. EFJI soon followed with orders for the same types of equipment for the city of Marietta, Georgia, and the California Highway Patrol. Obviously EFJI’s efforts to expand its sales channel to include new federal, state, and local government customers are paying off.

For the second quarter 2008, revenue decreased $24.7 million, or 43%, to $32.6 million, as compared to last year’s second-quarter revenue of $57.3 million. Also, gross profit decreased $7.7 million, or 42%, to $10.8 million in the three months ended June 30, 2008, from $18.4 million for the same period in 2007. However, EFJI was up against some tough comparisons from some big department of defense orders during the previous year, and the company stated that it was on track with its plan to return to profitability.

During the last two months EFJI has shown more signs of diversification and announced four large contracts for more than $6 million in new business. The company’s most recent win was on September 29, 2008, when it announced that it had received an order valued at $1.9 million from a state and local customer to provide its Project 25 compliant radios and accessories to several different counties in a particular state.

So what are my thoughts on this one? EFJI made some large sales to the U.S. Department of Defense (DOD) last year. The company has had to adjust to an absence of large DOD orders by lowering its cost structure and diversifying its customer base. EFJI could have some large competitors like Motorola, Inc. (NYSE: MOT) or RELM Wireless Corporation (NASDAQ: RELM).

Still EFJI has recognized that the public safety/public service market is moving towards convergent telecommunications solutions and interoperability by quickly reorganizing the company. In January 2008, EJFI consolidated its businesses into a single centralized corporate structure for competitive reasons. EFJI has also lowered its cost structure, extended it customer base, and executed against a well-articulated plan at the beginning of the year. Though the company has negative cash flow from operations during the first six months of 2008 of $6.4 million, it has $8.4 million in cash and over $36 million in receivables. EFJI appears to have a good niche business with sound strategy. If the company continues its progress toward profitability, EFJI could prove a most interesting story for micro cap investors.