Algorhythm Holdings Inc (RIME) 2005 Q2 法說會逐字稿

Welcome to The Singing Machine's second quarterly results conference call.

During the presentation, all participants will be in a listen-only mode.

Afterwards, we will conduct a question-and-answer session.

At that time, if you have a question, please press the 1, followed by the 4, on your telephone.

As a reminder, this conference is being recorded, Monday, November 15th, 2004.

I would now like to turn the conference over to Mr. Jay Bauer, Chairman of The Singing Machine.

Please go ahead, sir.

Thank you, operator, and good morning, everyone.

With me this morning are Interim CEO, Yi Ping Chan, and CFO, Jeff Barocas.

After our prepared remarks, we will be available to answer your questions.

Obviously, the highlight of the second quarter was our return to profitability.

Make no mistake, this was a major accomplishment for our Company, and I want to thank everyone on our team for their dedication, dedicated efforts to make it happen.

This dramatic turn around primarily affects the success of our last year's restructuring and our ongoing cost reduction initiatives.

Total operating costs declined by 53 percent for this year's second quarter, compared to the second quarter of fiscal 2004.

And I am pleased to note that we expect additional cost reductions in the current quarter.

For example, we expect additional savings on warehouse space, as we continue to reduce occupancy of our California facilities.

We also expect our (inaudible) costs to decline substantially, and we expect our transition to a new out set ordering firm to save us money, as well.

Longer term, we're committed to building on the progress we have achieved to date.

We will continue to rationalize our warehouse and repair operations.

We are also taking a close look at each of our licenses, to make sure they generate an adequate return on investment and are worth continuing to spend money on.

The point is that our cost discipline will continue.

Costs were only part of the story in the second quarter numbers.

Our gross margin improved to 23 percent from 16 percent last year.

Our cash flow was up substantially for the first half, and our cash position also increased.

In addition, we continue to work down our inventories, which amounted to just $3.4 million at the end of September, including both new goods and inventory carried over from last year.

On our last conference call, some of you may remember that we actually had expected inventories to be up at the end of September, as we had expected to receive several million dollars worth of new goods from our factories in China to meet customer orders in the first fiscal quarter -- in the third fiscal quarter, I'm sorry.

But as you may be aware, there's a substantial backup of container ships waiting to unload at ports in Los Angeles and Long Beach, that has affected everyone importing goods from Asia.

As a result, a lot of new goods destined to be sold in the current quarter, were a week or 2 late in getting into the country, which is why they did not show up our second quarter balance sheet.

These goods are now arriving on shore and we expect to get them into our customers hands, and on store shelves in time for the Christmas season.

In any event, our inventory of goods carried over from fiscal 2004, which is the inventory everyone has been worried about for the past year, is currently down to less than 2 million and we expect to sell the rest of it this fiscal year.

I want to emphasize, that we are acutely aware that we cannot restore The Singing Machine to full, robust health through cost cutting alone.

Obviously, in the recent quarters, we did what we had to do on the cost side to survive.

Our strategy for fiscal 2005 was to focus primarily on cash flow and profitability, not revenue.

But make no mistake, we believe that we can grow this Company again.

The improvement in our performance demonstrates the continued viability of our karaoke products in the marketplace, which is of particularly important consideration for the Company's future.

There is no doubt that some of our traditional customers were reluctant to order from us this year, because of our precarious financial condition.

As we complete our program during the next few months to rebuild the Company's financial health and restore our credibility among our customers and our shareholders, we will be properly positioned to turn our attention to enhancing our sales and distribution capabilities.

We're capturing market share and restoring revenue growth.

This is why it was so important that even this year when survival was job number 1, that we did not neglect new product development.

Even during this transition year we managed to introduce 5 new products that have been well received in the marketplace, including 2 whose radical and sophisticated design set us apart from our competition.

These products are now currently available at Best Buy, Sam's Club, Circuit City, JC Penney, and other major retailers.

We are -- we already are working on several innovative new products for next year, that will maintain our traditional design and technology leadership.

Strategically, we have scaled back substantially on the number of models we will offer to the marketplace in the new year.

We plan on a total of about 10 models.

This will allow us to achieve improved economies of scale in manufacturing, supply chain management, and inventory return management.

The karaoke market remains an attractive opportunity, and we are making excellent progress in building a strong foundation for The Singing Machine's future success.

Now, I'm going to turn the call over to Jeff to review the results in detail.

Jeff?

Thanks, Jay.

I begin with the Safe Harbor statement.

Please note that this conference call will include forward-looking statements.

These statements are based upon current expectations, estimates, and projections about our business, based in part on assumptions made by management.

These statements are not guarantees of future performance, and the actual results may differ materially.

A more detailed discussion of these risks and uncertainties is contained in this morning's press release and the -- and the Singing Machine's various filings with the SEC.

The statements made during this call are made only as of the date of the call, and we undertake no obligation to update these statements.

I will now briefly review our financial results for fiscal 2004.

Before -- for more detailed financial information, I urge you to read our form 10-Q, which we expect to file shortly.

For the reasons Jay explained, revenue for the second quarter of fiscal 2005 declined to $18,753,000 from 32,852,000 for the second quarter of fiscal 2004.

Gross margin increased to 23 percent of revenue from 16 percent last year, due primarily to a more favorable product mix.

Our total operating expenses decreased 53 percent for this year's second quarter compared to last year.

I am proud to note that the operating expenses declined across-the-board, and in every category.

As a result, operating income rose to $1,157,000 for this year's second quarter, compared to an operating loss of 1,253,000 last year.

Net income was $722,000, or 6 cents per share diluted.

This included a non-cash expense related to the amortization of discount on our convertible debenture of $411,000.

For the second quarter of fiscal 2004, the net loss was 657,000 or 8 cents a share, which included a non-cash amortization expense of $57,000 for the discount on the convertible debenture.

Note that on the fully diluted share count for the year's second quarter, increased to about 12.8 million shares from about 8.5 million shares a year earlier.

This reflects the dilutive effect of the subordinated debenture financing, as well as an issuance during the quarter of 400,000 shares in connection with the settlement of the class action lawsuit.

For the 6 months ended September 30th, 2004, operating income rose to $73,000, to an operating loss of $3,387,000 for last year's first half.

The net loss was 798,000 or 9 cents per share, which included a non-cash amortization expense of $744,000.

For last year's first half, the net loss was 2,974,000 or 35 cents a share, which included a amortization expense of $57,000.

Revenue for the first half of the year was 22,610,000 versus 40,480,000 for the same period a year ago.

Cash flow from operating activities for the first 6 months of fiscal 2005 increased to about 1.4 million compared to a negative 4.4 million from the first 6 months of last year.

An improvement of more than $5.8 million.

This reflects management's efforts to more tightly control working capital.

On the balance sheet, cash and cash equivalents increased to 2.5 million at September 30th, 2004, from 1.2 million at March 31st, 2004.

Inventories declined to 3.4 million at September 30, 2004, from 5.9 million at March 31st, 2004, reflecting a further reduction in inventories carried over from fiscal 2004.

Accounts receivable and accounts payable increased, due to the normal season pen of the Company's business.

Operator, we're ready for the first question.

(OPERATOR INSTRUCTIONS) Linda Donnelly, Franklin Group.

A couple of questions, if you don't mind.

My first one is kind of easy.

What do you anticipate your capital expenditures and depreciation/amortization to be for this fiscal year?

Linda, this is Yi Ping Chan here.

I do not have that number -- we do not have that number off the top of our head.

Can we get back to you on that questions?

Absolutely.

The second one is, can you give us some idea of how much of the inventory that was backed up off of California, is actually in transit?

And how much of it is still backed up?

Basically, the inventory we have, these shares, the new inventory we brought in from in China, was in the port of L.A. as of September, beginning of October.

And those inventory was scheduled to deliver to the store.

However, because the delay there, we did not get the -- the good for about 1 to 2 weeks.

The delay -- total delay to inventory is about a few million dollars.

But as we move forward now and there's less of issues.

All right.

And one thing I also noticed on the balance sheet, is the income tax payable, which has risen since the end of the last fiscal year.

Having had the loss you did for fiscal '04, why do you have such a tax liability?

The tax liability increased slightly due to a refund from the federal tax -- taxes that has to be repaid back to the U.S. government.

That will be paid back in the current quarter.

Linda, also want to add in too, a little bit on the tax payable.

For the people who did not have the benefit of following us in the past couple of quarter, as you recall, last year in June of 2004, we did expense the tax in Hong Kong related to the offshore income.

And that was approximately $2.5 million.

And that is part of the reason we did, in the statement for the previous couple of years.

What we have done was that, since then, so far we have not received any decisions from the Hong Kong government regarding these tax.

And this issue has still been pending, has been pending for the past couple of years.

And unfortunately, because of tax payable, we still have to carry on our balance sheet in the column liability, even though the Hong Kong government has not, has not up to this point, after 3, 4 years, has not demand any payment of the tax liability.

All right.

And finally, I know there's been some changes, like with Toys "R" Us, et cetera.

So, for this fiscal year, how do you see your top customers, versus '04?

As far as top customers, I think a slight change in terms of auto -- the top customer this year, Best Buy, Radio Shacks, Costco, Sam's Club.

And this year we did not do that much business with Toys "R" Us.

And we also -- the customer with European also decreased to some extent, because one customer was worried about our liability, and one other customer did have quite a lot of inventory left from last year, and fortunately he was able to sell off all his inventory for this year.

All right.

And what -- I'm sorry, did you mention Wal-Mart?

No, no, Sam's Club.

Sam's Club.

Sam's Club.

Thank you very much.

Eric Duncan of Maloney Securities.

Good morning, gentlemen, and congratulations on the turn-around corner -- quarter.

I just had a quick question regarding these convertible debentures that you had mentioned, having paid interest expense on.

What are the terms for those?

We're going to -- basically, they were issued at 3.85 a share.

Uh-huh.

And when we issued our 400,000 shares to the class action lawsuit, it triggered the dilutive effect of the debentures at 75 percent of the difference between the set price and the new price of the event, which was on September 8th, 2004.

As a result, the Company re-adjusted the price for the shares out of debentures it held from $3.85 to $1.41.

We also re-adjusted the warm price to $1.45 a share.

Okay.

And more detailed information is disclosed in our 10-Q filed later today.

Okay.

And one other question, is there a market for those?

Or -- ?

Currently these debentures are held by 4 hedge funds, and I do not believe that is a market for it -- to the best of my knowledge.

Okay, that helps.

Thank you very much.

No problem.

Ian Gilson, Granite Financial Group.

Congratulations.

Could you give us a little bit more information on U.S., breakdown Europe, and do we have any product today that is on consignment?

Thank you.

Ian, let me answer the second question first, and while Jeff looking for the break down of geographic mix.

As you know, our business is 2 part.

One is hardware, and the other one is software, which is music.

Music historically, and the industry practice, we do have consignment.

Basically, we ship the goods to the customers, and we get paid as they sell.

There is nothing we do to change the industry, and that's where it is.

Hardware, and we do not believe we have any consignment inventory with our customers.

Jeff, you want to answer the geographic breakdown?

I will give you some numbers, Ian, for the 6 month period.

In North America, for the 6 months, we had $18 million of sales revenue, compared to 21.5 for 2003.

In Europe, we had 4.2 million compared to 17.8 million in the prior year.

And the reasons are what Y.P. was talking about before.

And in Australia we had 238,000 compared to 310 for the prior year.

Okay.

Could you give me the music number overall?

Ian, I think historical, our Company policy is not to breakdown our music -- our music revenue separate for competitive reasons.

And the detail of the geographic breakdown, you can get it from our 10-Q which is filed today.

Steve Springer, Target Capital Management.

Congratulations on a good quarter to everybody.

Thank you.

I wonder if you could talk a little bit about the music business going forward.

You -- and some of the arrangements that you've made, and some of your strategy going forward.

Yes, Steve, this is Jay.

Yes, the music business, as you know, we have entered into a relationship with (inaudible).

And even though this is moving forward quite smoothly, I must say that it still needs a lot of work on both sides, actually.

We have made some vast improvements, also clearing out and trying to clear out some of the old inventory that we have had, and to position ourselves for new product and new titles.

What has happened is, that we are certainly selling quite well in some areas.

But the -- we also realized that we need to -- needed to reformat a bit more of some of the SKUs and the titles.

We fortunately have finally found a person who is very, very knowledgeable in this industry, and this is basically one of the areas that has eluded us before.

That we really didn't really have the best people in place to really know, not just the music business, but specifically the karaoke business.

And so it's a little bit of a long process.

We are making good improvements.

But let me say it's an area that we still need to work very hard at.

We are confident that we can reach the goals that we are expecting to reach, and that we're going to do much better next year.

But we are not totally satisfied with the business as it is right now, and working on it to improve it further.

And, Steve, I want to also add to what Jay said.

As we know, one of the key driver for the music business is the uniqueness of the title.

And 2 years ago we entered an agreement with Motown to license the original karaoke.

That really gives us a unique selling point with a lot of merchandise.

We have a lot of retail store, and that's coming along very nicely.

We continue to work with Motown to introduce more, what we call original karaoke, and also looking into with other music producer to do a similar thing.

On the other hand, one thing we also need to locate is that we have some other license, which we put -- license (indiscernible), but the music are not that unique.

The shelving are not up to expectation.

As we move forward, we are examining those licenses and then we want to make sure that we turn into investments.

Good.

Thank you for that.

Could you talk a little bit about the overall market for karaoke products, and how you see this market this year and going forward?

Yes, Steve, I think what I can say is that the market continues to be -- the category seems to be selling well, but the market definitely has matured.

And it is the reason, also, why as we have explained before, we are going more and more into somewhat more sophisticated products, prices -- products that are also not only innovative, but also at a bit of the upper end of the market, where profit margins are better.

And where actually the market is moving to, I think the -- just to sell huge quantities at no profit is no fun for the big retailers out there, and isn't fun for the suppliers either.

So, even though the market is maturing, we are experiencing that there is definitely an uptick to more sophisticated products.

For instance, 2 of the models we have made which are quite unique, are selling extremely well.

And this is the policy that we are following from now on, to bring out more sophisticated product, where we will also be competitive in the lower end.

However, the emphasis is on quality, innovation, where margins, profits, and stability of the market is much stronger than at the lower end of the market.

Jay, you mentioned that -- that the market is moving somewhat in that direction.

That is toward the higher end.

And I have noticed here in New York City, that there are a number of new karaoke bars in some of the more -- in some of the hipper areas of the city.

And there have been articles written about the more -- that some of the hipper kids are getting involved in karaoke now.

That it's become a more fashionable thing to do.

Have you seen that?

Are you seeing any anecdotal evidence along those lines?

Definitely.

It echoes what I just said before.

That we do believe that the -- that people getting more interested in karaoke, not just for the fun of it, but also for the really, the singing and the quality of it.

And these people are looking for products that are more sophisticated, that have better sound, where they really also then can be more acutely aware of how their voice sounds.

So, this trend is definitely developing and we would say are on the forefront of that.

This is where we're concentrating on.

This is where we're putting a lot of our new products in.

And I do believe that it's going to do as well, down in the future.

Okay.

And my last question is to Jeff Barocas.

I'd like to say that I -- I think Jeff has done a fabulous job of working on the financial side of this Company, which needed a great deal of work.

And I -- so I extend my congratulations to you, Jeff.

Thank you.

I wonder if you could talk a little bit about the reductions going forward that you referred to earlier.

Yes.

We're looking at 2 or 3 initiatives going forward.

The major one is to reduce our repair costs on products.

When I first came with the Company, there was a substantial amount of money, well over a $1 million, that was being paid to the Chinese manufacturers to repair goods.

We're now looking at alternatives to reduce that cost substantially.

In addition to that, we are looking at reducing costs of our warehousing.

As we sell off product and space becomes available, we are going to be subleasing space in our California warehouse.

In addition to that, we are looking at our licensing agreements, and basically the added value that the licensings bring by adding the name on our product.

And in addition to that, there were probably 2 or 3 other areas that we'll be looking at, that I do not want to go public with at this point.

But -- .

Also Steve, I want to mention also, one thing, just for with our licenses, that is correct.

But not only that, and we are also going to look at certain fees that we have been paying, and try to renegotiate or get better deals, which ultimately will work for the licensers or with the licensee, but which will make it maybe more interesting for us to then use certain licenses on more products, or not, if it is not in the best of our interest.

Okay, thanks very much.

Once again, great quarter.

Thank you.

As a reminder, to register for a question, please press the 1, followed by the 4, on your telephone.

We have a follow-up question from the line of Linda Donnelly from Franklin Group Wachovia.

Having had the wonderful quarter that you've just reported, do you think that you will get an increase now from the European business?

The European business is as -- as we know, is pretty much (indiscernible) business.

Now, we are in November, middle of November, and realistically, we do not anticipate our European business going into increase substantially for this fiscal year.

What we're looking at is next year now with our (indiscernible) is not going to be issued, and our one our major distributor has sold all of his inventory.

And we look forward to restore our revenue and profitability next year in Europe.

And I would also like to mention that we are well aware that there are some markets out there, that we have not really done business with.

And we are going to use our abilities and make sure that we're capturing a larger share of other developing markets, whether it be in the east block countries or that we just opened Greece, also.

So there is new markets out there that we are know are there, and we intend to pursue them, and to have our products in place for the next year's season.

All right.

And my congratulations on the quarter, as well.

Thank you, Linda.

I want to add to that, and then go back to one of your other questions.

Basically, if you look at our backlog, just due to the timing, we are going to have some additional shipments to the European market in the second half.

All right.

Thank you.

But as I think Y.P. has stated before, there is some, you know, inventory corrections and some uneasiness with the financial condition of The Singing Machine.

Which, hopefully with our financial statements, will, you know, dispel some of the issues they have.

Going back to your question on the capital expenditures.

You know, just as a rough calculation, and it looks like our capital expenses will be approximately between 660, $650,000 for the year.

And basically, what we are spending money on, is for the tools, dyes, and molds for our new machines.

And all of those expenditures are primarily in our Hong Kong subsidiary.

All right.

The other question you asked me on the amortization.

It looks like the amortization will be approximately $355,000 for the full year.

Ian Gilson, Granite Financial Group.

Yes, the -- excuse me, the products that you introduced of radical design, are they being sold in Europe?

Or are they purely going through the U.S.?

Yes, sold in both Europe and the U.S. market, as well.

More in the U.S. market at the moment, than in Europe.

Europe is a little bit -- still a bit conservative.

However, we have made some test shipments of those most Europe, as well.

And we do believe that they're going to catch on there, as well.

We have no further questions at this time.

I would like to turn the call back to you.

Thank you very much.

Thank you for listening to us, and for your support.

And we hope that we will, on the next discussion, have some good news, as well.

We are certainly working.

I can promise you that we are not resting and we are working into this direction.

Thank you very much.

Ladies and gentlemen, that does conclude the conference call for today.

We thank you for your participation and ask that you please disconnect your lines.