InfoSonics Corporation Q2 2008 Earnings Call Transcript

Executives

Mary Magnani – IR, MKR Group

Joseph Ram – Founder, President & CEO

Jeff Klausner – CFO

Analysts

Timothy Sehwag [ph]

Ray Archibald – Kaufman Bros

Jonathan Goldberg – Deutsche Bank

InfoSonics Corporation (IFON) Q2 2008 Earnings Call Transcript August 14, 2008 4:30 PM ET

Operator

Good day ladies and gentlemen and welcome to the second quarter 2008 InfoSonics Corporation earnings conference call. My name is Marsha and I will be your coordinator for today’s call. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. If at any time during the call you require assistance, press star followed by zero and an operator will be happy to assist you. As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the call over to Ms Mary Magnani of the MKR Group. Please proceed.

Mary Magnani

Thanks Marsha, good afternoon and thank you for joining us today to discuss InfoSonics’ second quarter 2008 financial results. I am Mary Magnani with the MKR Group, the investor relations firm for InfoSonics Corporation. Today’s presentation will be made by Joseph Ram, President & CEO and Jeff Klausner, Chief Financial Officer.

Before we begin, I would like to add that during this call we will make a number of forward-looking statements which are statements regarding 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 the caution we refer you to the documents that InfoSonics filed from time to time with the Securities and Exchange Commission and especially the sections titled Risk Factors in these documents including its 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 Web site under the investor info section of this 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 482 83456.

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

Joseph Ram

Thank you Mary, good afternoon everyone and thank you for joining us today. We appreciate your continued interest on InfoSonics. Before I begin, I would like to briefly discuss some positive news we announced earlier this week regarding our class action and derivative lawsuits. We have reached a settlement for both cases and we anticipate that the settlement amount will be funded entirely by our insurance company. These settlements which are subject to among other things preliminary and quarter (inaudible) results all claim in both losses. We (inaudible) these losses to avoid expenses and continued disruption to the business of protracted litigation. The company nor its director or officers [ph] admit any wrong doing and we do not anticipate any further impacts. With this mostly behind us, we can focus all our efforts and resources on our business.

I will begin by providing an overview of the second quarter ended June 30, 2008 and then discuss our results that relate to the region referred followed by an update on the performance of each of our product categories, and then review our growth strategy and plans for the remainder of the year.

Second quarter 2008 we achieved sales growth of 11%, although sales were up a 11% from a year ago, these results fell short of our expectations. While sales were solid in April and May, June sales were soft due to several factors including economic downturn, increased channel inventories, and lower level of consumer demand specifically in Central America. Over in July, we experienced a return to more historical sales and order volume and we are cautiously optimistic that our business will meet our sales expectations in the first quarter. We believe that the opportunity for our core distribution business remained strong. Our unit volume for the quarter was approximately 685,000 units. We feel confident in our growth strategy, we believe we can maintain an intense position in our core markets and continue to grow our proprietary line of verykool products. We remain committed to returning to profitability and we are focused on reducing fixed and other expenses. We realize the economic environment has changed and as such we have refilled our structure and model to position the company to be flexible in times of uncertainty.

Our strength in core focus is Latin American markets today where Samsung and LG continue to be the main vendors we work with. As anticipated, sales from the region accounted for almost 100% of our revenue. As our business from the US has declined to a minimal amount, as such during the quarter we discontinued the US operation in addition to our operation in Mexico. We expect this to decrease our operating expenses while not dramatically impacting our topline as the US and Mexico had become less than 1% of our revenues in recent quarters. Our goal is to remain lean during this time of economic uncertainty while keeping an eye on positioning the company for future growth.

South America was our dominant region during the second quarter representing 77% of net sales or $45.5 million. This region performed very well for us this quarter increasing 40% year over year. Central America including the Caribbean accounted for $13.5 million or 23% of net sales. Central America and the Caribbean were impacted by slower consumer spending due to the relatively low penetration rates some countries in the region remained very confident there is a future opportunity in Central America. Our ASP improved on both sequential and year-over-year basis, the increase was primarily driven by product mix as our line of verykool handsets and the introduction of high priced 3G phones ramp up in future quarters we hope to continue to see further increases in our ASP depending on product mix.

We remain confident that our proprietary line of verykool products will be a key driver for the future of InfoSonics. We currently sell verykool products in eight countries. These products carry higher margin than traditional OEMs, we are pleased with the performance related to verykool. During the second quarter we did experience some delays in shipping from some of our suppliers and as such many of our shipments did not make it in the quarter. That said, we remained very strong in the first quarter in the greater percentage of our sales. We currently have several models of very poor handset shipping and look forward to broadening our offering by adding additional products such as the i250 slated for release during the first quarter of this year. In addition, we have three more handsets that we have planned for launch this time for the 2008 holiday season.

Our focus has been to improve operations, increase inventory with (inaudible) margins. In the second quarter we made progress on many fronts and as an organization we are extremely focused on the task at hand. Combination of market opportunities, strong relationship with product line and a strong balance sheet and additional [ph] capital should provide us with a number of business opportunities in the future.

Now, I would like to turn the call to Jeff who will review our second quarter financial results in more detail.

Jeff Klausner

Thank you Joseph. For the second quarter we achieved net sales of $59 million, an increase of 11% over the second quarter of 2007. For the quarter we reported 77% or $45.5 million of net sales from South America and 23% or $13.5 million from Central America. The number of units sold in the second quarter of 2008 is approximately 685,000 units, a 2% decrease over the same period last year which was offset by an increase in average selling prices of approximately 10%. The increase in average selling price per unit was primarily due to the product mix. The increase in revenue was driven by a solid performance in South America and offset by some weakness in Central America which we believe is only temporary.

Gross profit for the second quarter of 2008 was $3.2 million or 5.5% of net sales compared to 5.3% of net sales for the first quarter of 2008 and $3 million of net sales for the second quarter of 2007. We believe volumes could increase in future quarters as verykool products become a larger percentage of our mix and higher price 3G phones are introduced into our markets.

Operating expenses for the quarter were approximately $3.2 million compared to $2.7 million in the second quarter of 2007. Our operating expenses as a percentage of sales was 5.4% compared to 5.2% for the second quarter of 2007. We have made progress in reducing our (inaudible) and believe we are well positioned to reduce our operating expenses as a percentage of sales in the back half of 2008.

Net loss from continued operations for the second quarter of 2008 was $155,000 or $0.01 per share based on 14.9 million shares outstanding. This compares to a net loss of just less than $1000 or nearly breakeven based on 14.5 million shares outstanding in the second quarter of 2007. During the quarter we assessed opportunities in the United States and Mexico and decided to implement actions necessary to close sales operations in both of these countries. Due to the changing environment, consolidation in the United States of the regional cellular carriers along with the challenges of opening sales relationship with cellular carriers in Mexico, we determined that it was necessary to take decisive actions to mitigate potential further losses.

Now turning to our balance sheet, as of June 30, 2008 we had $15.8 million in cash, we had quick assets of $45.3 million and we had working capital of $31.4 million in addition to $34.4 million in shareholders’ equity. Our annualized inventory turns were 14 times at the end of the second quarter and we continue to work to increase our inventory rotation. Our day sales outstanding were 71 days in the second quarter compared to 72 days at the end of the second quarter 2007. We continue to work with our customers and monitor our receivables in efforts to keep our customers’ payments in line with the terms that we provide them.

I will now turn the call back to Joseph for his concluding remarks.

Joseph Ram

Thank you Jeff. In summary, despite the macroeconomic backlog, we are confident about the market position with our core business and the position of verykool line. We remain focused on returning to profitability by taking steps towards positioning our business to grow, by securing the customer and the launch of new products. At the same time, we are reducing the cost, fixed cost and running a lean organization during these uncertain market conditions.

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

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Timothy Sehwag [ph], private investor. Please proceed.

Timothy Sehwag

Good afternoon gentlemen. Thank you. Are we going to become an exclusively South American company eventually or what is the business model here? Can you only make money – what is the belief about the future and the business model for making money across the whole western hemisphere?

Jeff Klausner

At this point our focus is on Latin America including Central and South America. There have been changes in the US marketplace related to distribution and the US marketplace is rather large and very difficult and expensive to launch a new brand, our verykool brand in, so at this point we are focusing on areas that we believe have short-term profitability and if you will the low-hanging fruit opportunities for us in both Central and South America.

Timothy Sehwag

But not formally vacating the US market?

Jeff Klausner

At this point we have vacated the US market however, if future opportunities arise, we can look at those to see if they make sense.

Timothy Sehwag

Just a couple of things here and I will get back in queue, you said that you believe margins could increase in future quarters, it sounds like you are optimistic for some margin expansion?

Jeff Klausner

We continue to work towards margin expansion both with our OEM partners as well as with our proprietary brand verykool. Clearly it is the margin expansion that we believe will enable us to return to profitability quicker as well as the reductions that we’ve made in our operating expenses.

Timothy Sehwag

Okay. I’ll get back in queue and let others ask questions. Thank you.

Jeff Klausner

Thank you.

Operator

Your next question comes from the line of Ray Archibald from Kaufman Bros. Please proceed.