InfoSonics Corp. Q3 2008 Earnings Call Transcript

InfoSonics Corp. (IFON)

Q3 2008 Earnings Call

November 13, 2008 4:30 pm ET

Executives

Mary Magnani – Investor Relations, MKR Group

Joseph Ram – Founder, President and Chief Executive Officer

Jeff Klausner – Chief Financial Officer

Analysts

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the third quarter 2008 InfoSonics Corporation, earnings conference call. (Operator Instructions). I would now like to turn the presentation over to your host for today's conference, Ms. Mary Magnani with MKR Group. Please proceed ma'am.

Mary Magnani

Good afternoon and thank you for joining us today to discuss InfoSonics third quarter 2008 financial results. I'm Mary Magnani with the MKR Group, the investor relations firm for InfoSonics Corporation. Today's presentation will be made by Joseph Ram, President and Chief Executive Officer and Jeff Klausner, Chief Financial Officer.

Before we begin, I'd like to add that during this call, we'll make a number of forward-looking statements, which are statements regarding the future events, including the future financial performance of the company. These forward-looking statements are not guarantees of future results and in fact, we must caution you that actual results could differ materially from those predicted in the forward-looking statements made during this call.

As part of that caution, we refer to you the documents that InfoSonics files from time-to-time with the SEC and especially the sections titled Risk Factors in these documents, including annual report on Form 10-K filed on March 31, 2008 for the fiscal year 2007 and its Form 8-K and Form 10-Q filings. These documents identify important factors that could cause actual results to differ materially from those contained in any forward-looking statements.

InfoSonics undertakes no obligation to publicly update any forward-looking statements, whether as a result of new information or future events. As a reminder, today's call is being recorded and will be accessible on the InfoSonics website under the Investor Info section of the site. The following replay will also be available commencing two hours after the call for the following two weeks by dialing 888-286-8010 and entering the following pass code, 14261926.

I'd now like to turn over the call to Joseph Ram. Joseph?

Joseph Ram

Thank you, Mary. Good afternoon, everyone, and thank you for joining us today. We appreciate your continued interest in InfoSonics. I'll begin by providing an overview of the third quarter ended September 30, 2008 and then discuss our results as they relate to the regions we serve. And then we'll review the plans for the remainder of the year.

Although we're somewhat pleased with the overall outcome of the first quarter, we're also disappointed by the decrease in revenues from Central America. While our business in South America remains strong and increased over the third quarter of last year, the Central American region was dramatically impacted by the soft demand resulting from current diverse economic conditions internationally. As a result, our total revenue was down fairly significantly on the year-over-year basis.

At the beginning of the quarter, we were hopeful that some of the inventory channel problems in Central America would ease and we could resume more traditional shipping volumes to those markets. However, due to the continued economic weakness, this did not occur and negatively impacted our results for the quarter.

While revenue for the quarter was down year-over-year, revenue for the first nine months of the year was up 11% over the same period last year. This is due to the positive growth we have seen in South America in addition to the contribution from the sales of our proprietary verykool line of product as compared to the prior year.

Despite the challenges we are currently facing in Central America, we believe that the opportunity for our core distribution business remains strong. Our yielded volume for the quarter was approximately 657,000 units and more than 2.2 million for the year-to-date. As you know, after finalizing the discontinuation of our U.S. business last quarter, we're entirely focused on our Latin American marketplace where we currently sell Samsung, LG and verykool.

South America performed well for us during the quarter representing 83% of the total net sales or $44.1 million. This represented an increase of 7% from the same quarter of 2007. The results of South America were driven by especially strong performances in Argentina, Uruguay, and Colombia. Given the relative strength of this area right now, our goal is to increase efforts there.

And now in Central America, including the Caribbean, which accounts for $8.8 million or 17% of the total sales, this represented a decrease of 62% from the same quarter of last year. This dramatic decrease was related to the regions previously mentioned. As most of you know, Central American economy closely mirrored the North American economy and as such, we expect continued weakness in this area until we can obtain improved visibility on the economy in that region.

In the long-term, we remain confident as we saw growth opportunity in Central America for us. In some countries we will have current low presentation rate – penetration rates to allow for carriers to add new subscribers while other countries with more mature markets have handset upgrades which bodes well for us when the economy rebounds.

Our ASP improved by 2% on a year-over-year basis. This increase was primarily driven by the elimination of our sales in the U.S. market and the introduction of verykool line of handsets. Given the overall slowdown in consumer spending, we expect gross margin to be flat or down in the future. However, the largest factor impacting this remains still our product mix.

Verykool continues to be a viable business for us and we hope to see some acceleration of units shipped and dollars build as we move forward. This product has a potential for higher margin compared to our OEM business and as such we are focused on increasing verykool as a percentage of overall sales.

We are looking to have three new models ready to launch for this quarter. We have developed some feature rich and innovative products at attractive price points for our target markets, which should help to solidify position in a very competitive marketplace.

One particular part we are very excited about is the i250 handset which recently won the Star award in the best cell phone category due to the PC World Latin America award presentation in Miami, September 2008.

The i250 is a functional design complemented by the integrated two-megapixel camera and has both photo and video capabilities which is also to be used as a webcam and a music player with external memory.

We look forward to it reporting progress on this and other models in the future quarters. Now I would like to turn the call to Jeff for review of the financial results for the quarter.

Jeff Klausner

Thank you, Joseph. For the third quarter we achieved net sales of $52.9 million a decrease of 18% over the third quarter 2007. For the quarter we reported 83% or $44.1 million of our total sales from South America, and 17% of our net sales come from Central America or $8.8 million.

Number of units sold in third quarter 2008 was 657,000 units. A 20% decrease over the same period last year. The decrease in revenue is a result of significant weakness in Central America as discussed by Joseph. The average selling price per unit for the quarter increased 2% as compared to the third quarter of 2007. The increase in average selling price per unit was primarily due to the product mix in addition of sales of our verykool products.

Gross profit for the third quarter of 2008 was $2.9 million or 5.5% of net sales compared to $3.9 million or 6.1% of sales in that third quarter of 2007. Operating expenses for the quarter were approximately $3.2 million a decrease compared to the $3.6 million for the third quarter of 2007.

Our operating expenses as a percentage of sales were 6.1% compared to 5.6% in the third quarter of 2007, the differential being change in net sales. During the quarter we made some adjustments to our work force with a focus on reducing our fixed expenses and will continue to streamline our expenses as we go forward.

Net income from continued operations for the third quarter of 2008 was $182,000, which includes a $650,000 settlement from a former service provider. While this continued operations incurred a loss of $81,000. The overall result was net income of $101,000 or $.01 per share based on 15.3 million diluted shares.

Now turning to our balance sheet, as of September 30th 2008 we had $10.2 million in cash. We have quick assets of $51.7 million, [$31] million in working capital and $34.6 million in shareholders' equity.

Our annualized inventory turns were 16.5 times at the end of the third quarter as compared to 14 times at the end of the second quarter 2008. We are proud of this improvement. Our days sales outstanding were 62 days at the end of the third quarter as compared to 71 days at the end of the second quarter 2008.

We continue to work with our customers to have them adhere to their payment terms, which vary and now are either 30 or 60 days depending on the customer and the region. With that I will now turn the call back to Joseph for some concluding remarks.

Joseph Ram

Thank you Jeff. In summary in the current economic environment we are pleased that we have been successful in strengthening our balance sheet, increasing our liquidity and maintaining access to our line of credit.

During the quarter we took several steps to prepare for the continued weakness in the economy including significant reduction of inventory levels and reduction of operating expenses. While we are facing some challenging market conditions right now we are confident in our long-term opportunity and our ability to execute on our strategy.

For now we will continue to control expenses during this severe economic time. We have working capital of approximately $32 million, which we believe will allow us to continue to secure our position in Latin American marketplace and investment opportunities when the economy recovers. I look at the special opportunity throughout the region including sales of more verykool handsets as well as other distribution opportunities.

Now I would like to turn the call back to the operator for the question and answer session. Thank you.

Operator

(Operator Instructions). You have no questions at this time.

Joseph Ram

Thank you again for joining us for the call and we look forward to reporting our fourth quarter and year-end results in March 2009. Again we appreciate your continuing interest in InfoSonics. Thank you for joining us. Have a good day.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Good day.

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