EXHIBIT 99.1
FRB
MOBILITY ELECTRONICS 2ND QUARTER CONFERENCE CALL
LEADER, ROSE TUCKER
ID# 1636170
7/22/03
DATE OF TRANSCRIPTION: JULY 24, 2003
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ID# 1636170 PAGE 2
Operator: Good afternoon. My name is LaShonda and I
will be your conference facilitator. At this
time, I would like to welcome everyone to
the Mobility Electronics conference call.
All lines have been placed on mute to
prevent any background noise. After the
speaker's remarks, there will be a question
and answer period. If you would like to ask
a question during this time, simply press
"*" then the number "1" on your keypad. If
you would like to withdraw your question,
press "*" then the number "2" on your
keypad. Thank you. Ms. Tucker, you may begin
your conference.
Rose Tucker: Good afternoon everyone and thank you for
joining us to discuss 2nd Quarter results
with the management of Mobility Electronics.
With us today from management are Charlie
Mollo, President and Chief Executive Officer
and Joan Brubacher, Executive Vice President
and Chief Financial Officer. Management will
provide a brief summary of the quarter and
open up the call for questions. During the
course of the conference call, management
may make forward looking statements as
defined by the Private Securities Litigation
Reform Act of 1995 which involve risks and
uncertainties. Among the important factors
which could cause actual results to differ
materially from those in the forward looking
statements are economics, competitive, and
technological factors affecting the
company's operations, market, products,
services, and prices as well as other
factors detailed in the Company's filings
with the Securities and Exchange Commission.
At this time, I would like to turn this call
over to Charlie Mollo.
Charlie Mollo: Thank you, Rose. Good afternoon ladies and
gentlemen and welcome to Mobility
Electronics Q2 '03 Investor Conference Call.
Thank you for taking the time to join us.
Our call today will be divided into four
parts: an overview of the quarter, financial
results, a detailed review of each business
area and a summary and outlook. Before I get
into the overview, I want to note this was
another great quarter for Mobility. The
success of our flagship Juice product has
been even better than expected and this new
technology continues to represent a
generational change in the way computer
power adapters are both viewed and used.
Combined with closing two powerful
distribution arrangements and solid
performance in our other product areas, this
has led to record revenues and continuing
financial improvement setting the stage for
sustained growth in the latter part of 2003
and 2004. I'll provide more detail on each
of these important items throughout today's
call.
I'll begin now with the overview. Important
highlights include the following: Number
one, financial performance continues to
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improve. Most notably, sales grew to
$13.1 million exceeding the top end of our
guidance for the quarter and representing
96% year over year growth and 10% sequential
quarterly growth. This follows 39% and 16%
sequential quarterly growth in Q4 '02 and Q1
'03 respectively and it represents our
fourth consecutive quarter of sequential
growth. In addition, we had higher margins
generated from new products like Juice, an
increased sales volume and growth margins
increased slightly to 35.3% continuing the
substantial improvement over 2002 margins
which were in the low 20%.
Number two, we were proud we shipped over
80,000 Juice units in Q2 to a broad range of
customers up from 30,000 units in Q1 '03,
driving the sequential quarterly growth of
over 35% in our power adapter areas for the
third quarter in a row. We now have a
current backlog in excess of 250,000 Juice
units.
Number three, we closed major strategic
distribution relationships, one with
Kensington and one with Fellows. These are
major strategic milestones for our company.
These powerful worldwide distribution
partners represent tens of thousands of
retail locations as well as many other
channels providing a substantial opportunity
to drive continued growth in our power
product area.
Number four, as planned, by the end of Q2 we
had Juice in about 5,000 retail locations
including 3,500 United States Radio Shack
stores where early sales results have been
excellent. We also received a commitment to
add Juice to an additional 800 Radio Shack
stores in North America, including Canada,
which will launch in Q3 '03.
Number five, we ramped up production of
IBM's new combination AC/DC power adapter
which began shipping early in Q2 '03 and is
now available on the IBM WebSite and through
all of IBM's distribution channels.
Number six, we achieved 78% year over year
growth and about 23% sequential quarterly
growth in our handheld product category
driven by sales of our connectivity cradles
and handheld software products.
Number seven, we won the distinguished Palm
Source Power Up Award for the best
enterprise solution of the year with our
Mobile File software product.
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Number eight, we closed several partnerships
to bundle QuickOffice software with
SmartPhone OEMs such as Handspring, Samsung,
Syncrologic, and others whose names we
cannot yet disclose.
Number nine, since restructuring our
expansion and docking product line in Q3 '02
we achieved a positive contribution margin
for the third quarter in a row.
Finally, number ten, we settled our patent
dispute with Comarco in a very positive
manner eliminating ongoing legal expenses
and strengthening the barriers to entry in
our power adapter market. I am now going to
pass the baton over to Joan who is going to
provide a little more detail summary of our
financial results.
Joan Brubacher: Thank you, Charlie. As Charlie noted, our
second-quarter revenue was $13.1 million
compared to $12 million in the previous
quarter and $6.7 million in the same quarter
of last year. The change in revenue from Q1
2003 to Q2 2003 represents an increase of
10% and exceeds the top end of the revenue
range we forecasted in our last earnings
conference call. Charlie will provide more
color on the various components of quarterly
revenue in his review of the different
product lines in just a few minutes.
Gross margin for the quarter was 35.3% which
represents a small increase over Q1's gross
margin of 35%. The increase is due primarily
to higher volumes in the second quarter as
well as to continued sales of higher margin
products such as Juice. We expect to see
margins continue at about the same rate in
the third quarter.
Operating expenses in the fourth quarter
were $6 million or approximately 46% of
revenue. Operating expenses for the quarter
included approximately $700,000 of expenses
that we do not expect to recur in the third
quarter of 2003. The bulk of that amount is
legal fees related to our patent litigation
with Comarco which as Charlie noted, has
been settled. As a result, we expect
third-quarter operating expenses to decrease
to a level that is at or near our
first-quarter operating expense level of
$5.3 million.
Net loss attributable to common stockholders
for the second quarter was $1.4 million as
compared to a net loss attributable to
common stockholders of $1.5 million in the
first quarter of the year and a net loss of
$3 million in the second quarter of 2002.
Net loss per share was 7 cents for the
second quarter, compared to net loss
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per share in Q1 also of 7 cents and a net
loss per share of 19 cents in the second
quarter of last year.
Turning now to the balance sheet, our net
working capital increased to approximately
$6.6 million at the end of the second
quarter from approximately $5.9 million at
the end of Q1 2003. Net accounts receivable
increased to approximately $12.5 million as
of June 30, 2003. Which represents
approximately 85 days sales outstanding.
However, this increase DSOs is largely due
to the timing of certain customer shipments
relative to their payment terms which
resulted in heavy collections and accounts
receivable shortly after quarter end. As a
result, days sales outstanding has been
reduced to 69 days as of July 18th, 2003 or
last Friday, which represents a small
increase over DSOs of 65 days at the end of
Q1. This increase is due primarily to heavy
sales in the distribution channel which
customers are typically slower paying.
However, as our sales to Kensington,
Fellows, Radio Shack and our OEM customers
become a more significant portion of our
power product revenues in particular, in the
third fourth quarters, I expect day sales
outstanding to decrease to a level in the
low 60 days.
Inventories increased to approximately $6.5
million at the end of Q2 from a balance of
$5.1 million at the end of Q1 of 2003. Due
to the rapid increase in demand for the
product, inventory levels of Juice were
extremely low at the end of the first
quarter. The increase during the second
quarter is primarily the result of
increasing Juice inventory levels at both
our channel fulfillment center and the
fulfillment hubs of certain OEM customers in
order to meet the rapidly increasing demand
for the product in the upcoming quarter.
Inventory turns as of the end of the quarter
were approximately 5.3, however, we expect
to see improvement in that number over the
next few quarters with sales to Kensington
and Fellows coming online as both of those
agreements have shipping terms of FOB Hong
Kong.
As expected, we began utilizing our line of
credit in the second quarter to support our
working capital requirements. As of the end
of the quarter, our cash balance was
approximately $800,000 and we had drawn down
$2.2 million on our line of credit. We
continue to have availability under our
borrowing base calculation and believe that
our line of credit will support our working
capital requirement through the balance of
the year.
As of the end of the second quarter, our
balance sheet also reflects a zero long-term
debt balance. This is the result of two
events. First, the issuance of approximately
507,000 shares of common
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stock to satisfy certain portions of the
Portsmith Earn Out and second, in accordance
with the terms of the related agreement, the
election by the holder of a convertible debt
instrument to convert it to common stock at
a rate of $3 per share. The conversion will
result in the issuance of approximately
300,000 shares of common stock. With regard
to stockholders' equity, in addition to the
issuance of common shares to satisfy the
long-term debt obligations just discussed,
we also issued approximately 416,000 shares
of common stock to our outside legal
counsel, Jackson Walker, in lieu of cash
payment of legal fees. As we were incurring
hefty legal fees in Q2 related to our patent
litigation with Comarco, we felt this
transaction was prudent to assist us in
conserving our cash. An added benefit was
that it improved our tangible net worth and
therefore gives us extra cushion with regard
to this particular covenant of our bank line
of credit.
A final note with regard to the balance
sheet relates to future income tax exposure
as we become profitable. Although it is not
currently reflected as an asset on our
balance sheet, we have approximately $90
million in net operating loss carryforward
that can be used to offset future taxable
income. As a result, we anticipate that it
will be sometime before we will be required
to pay federal income taxes which allow us
to retain cash generated from profits to
continue to invest in our growing business.
On that note, I'll turn it back to Charlie
for some additional comments.
Charlie Mollo: Thank you, Joan. I am now going to provide
an update for each of our three key product
areas.
Power: Our Q2 '03 power product sales grew
to about $6.1 million or about 47% of our
overall company sales. This represented
nearly 450% growth year over year growth and
about 18% sequential quarterly growth.
Within our power area, power adapter sales
increased by 35% on a sequential quarterly
basis while battery sales decreased due to
some issues with a change in suppliers. We
continue to receive an excellent response to
our new flagship Juice product, the first
combination AC/DC unit that allows you to
simultaneously power your notebook and
handheld device or cell phone in the home,
office, car, or airplane. We also continue
to receive positive media coverage from
literally dozens of publications, including
major newspapers, TV networks, and
magazines, most recently Newsweek,
increasing further consumer awareness
reviews. Initial Juice sales results
continue to be excellent, resulting in
shipments of over 80,000 unit in Q2 spread
across all of our distribution channels and
resulting in multiple reorders for many key
accounts. As importantly, as anticipated,
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we're steadily expanding an already strong
network of resellers, retail, and direct
partners and customers in the United States,
Canada, and Europe. For example, in Q1, we
were in nine chains and about 350 retail
stores in the United States and Canada. This
grew to about 20 chains and about 5000
stores by the end of Q2, including Dixon, PC
World, Staples, and Tenac in Europe, Radio
Shack, Microcenter, Altitude, Wayport, Prize
and Brookstone in the United States and
Future Shop and Business Depot in Canada.
With the addition of Kensington and Fellows,
this retail presence should grow
substantially in Q4 and in 2004. We are also
particularly pleased with the plans that
Radio Shack has put in place to promote
Juice. They will be prominently displaying
Juice in approximately 45 million printed
circulars that will be sent out at the end
of July and again at the end of August. In
addition, their CEO, Leonard Roberts,
mentioned Juice as one of Radio Shack's top
initiatives for driving revenue growth on
their second-quarter earnings conference
call this morning in which they reported
very positive trends in their business. We
are also continuing to make good progress at
the corporate level where we are winning
major accounts such as The Boston Consulting
Group which purchased a large number of
Juice units during the quarter. As noted
above, to date we have over 250,000 units of
Juice on order or committed for Q3 and
beyond with at least 100,000 units scheduled
to be released in 2003. It is important to
note that both Kensington and the Fellows
relationships represent very powerful and
formidable distribution capability.
Kensington is the technology division of
Fortune Brand, a well-known multibillion
dollar company with such brands as Titalist,
Daytimer, Acco and Jim Bean, and has a
well-established computer product offering
in worldwide distribution network.
Similarly, Fellows is a substantial
well-known and established provider of a
broad range of electronic products with a
well-established worldwide distribution
network. Together, these partners have their
products in literally tens of thousands of
retail locations, including Best Buy,
Circuit City, Sam's Club, Wal Mart, Office
Depot, Staples, and the like. We expect full
launches with Kensington in Q3 in the United
States and in Q4 in Europe. In fact,
Kensington has already secured numerous
customers for their customized version of
our combination AC/DC power adapter and is
off and running. We expect Fellows to launch
their customized version of a combination
AC/DC power adapter in Q4. We will support
both of these partners with a full line of
highly competitive and differentiated
products and both parties have signed a
three-year arrangement with Mobility for
this phase.
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With respect to major OEM power product
activity, we continue to make significant
progress with both computer manufacturers
and other OEM prospects. We are now shipping
varied powered products through six quality
OEMs, including IBM and Apple and have
closed additional major OEM deals which will
be announced when we received approval to
discuss them publicly. We will continue
discussions with almost all major computer
OEMs as well as certain other OEM parties.
Stay tuned for additional press releases as
new programs progress and these customers
allow us to announce their new programs.
These programs will also lead to sustained
revenue growth in the latter part of 2003
and in 2004.
From an overall perspective, Juice is
already displaying that it has an excellent
potential to be sold with a large percentage
of the over 30 million portable computers
that are sold each year. We continue to work
with our manufacturing partners to drive
down costs and develop new derivative
products that leverage our technology,
expanding our market potential and insuring
we can maintain a position of leadership in
this emerging new product category. This
product family has positioned Mobility with
a first mover advantage leading a major
generational change in the way computer
power adapters are used.
We also are very encouraged by trends we are
seeing in the marketplace. A recent survey
issued by the market research firm MPV Group
indicated that sales of notebook computers
surpassed sales of desktop computers for the
first time ever in May of this year in
certain channels. They attributed to shift
in an increasing desire for mobility on the
part of the computer user. Our product
offerings are perfectly positioned to
capitalize on this trend and with our
growing worldwide distribution network, we
continue to believe our Power product
category will add significantly to our
revenue base and profitability throughout
2003 and 2004.
I am now going to turn to our handheld
business. Our Q2 '03 handheld hardware and
software product sales grew to over $4
million or just over 30% of our overall
company sales. This represented
approximately 78% year over year growth and
about 23% sequential quarterly growth. This
included substantial sales to Symbol
Technologies and Envision, a company that
provides complementary cradles for Symbol
customers. Also sales of modem cradles to
enterprise uses such as Navartus and sales
of our software product.
In the last few quarters, our historical
intelligent cradle business has been
augmented with sales from two additional key
product
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areas. Software products, where in Q2 we
launched our QuickWord product for Symbian
which enables users to create, view, edit,
and print Word documents on their hand-held
device and which is a follow-on to our
presentation software product for Symbian,
the Major Smart Phone Operating System. And
B, our pitch product family which is now
shipping with a Microsoft operating system
device compatibility and Blue Tooth for
certain SmartPhones and handheld devices.
This allows users to make high-quality
presentations with most SmartPhone or PDA
devices from a video projector or video
monitor without requiring a notebook. We
continue to believe there is also a
significant growth opportunity for our
products and technology related to the new
combination phone/PDA devices or SmartPhones
which are being introduced by major phone
manufacturers. We have now closed deals to
bundle our software on a trial or permanent
basis with many new SmartPhone manufacturers
including Kiacesara, AlphaSmart, Handspring,
Syncrologic, Samsung and several other
notable companies that we cannot announce
this time. As these devices grow in
popularity, so will the need for our
hand-held solutions. We view this product
area as more of a long-term opportunity, but
believe it potentially represents
significant incremental growth for our
company in 2004 and 2005. The net effect of
all of the above is that we expect continued
revenue growth in this area in the latter
part of 2003 and in 2004.
Expansion and docking: while sales were down
somewhat in Q2 as certain major OEM
customers that play significant orders in Q1
did not place repeat orders in Q2, we remain
very pleased with our continuing
accomplishments in the expansion and docking
areas. This includes achieving the
following. No. 1, positive contribution
margin from this area for the third quarter
in a row. No. 2, launch of our new 64/66
switch fabric product which has been very
well received and opens up substantial new
market opportunities for us. No. 3, progress
with a number of COEM opportunities in the
service storage space where our chassis
allow for significant server expansion and
No. 4,continued progress with a number of
significant opportunities in the government
and military area. As a result, we are now
solidly profitable on a contribution margin
basis in this product area and have the
potential to take advantage of our unique
leading-edge technology. Looking forward, we
expect to achieve steady profitable growth
in this product category throughout 2003 and
2004.
Summary and outlook: for the reasons cited
above, we expect each of our major product
areas to continue to grow nicely both for
the remainder of 2003 and for 2004. More
specifically, we expect
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70% year over year growth in 2003 with Q3
revenues of approximately $14 million
followed by Q4 revenues of approximately $15
million. With the forecasted increase in
revenues in Q3, the anticipated reduction in
operating expenses and continued growth
margins of about 35%, we are targeting
positive EBITDA in Q3 followed by P&L
profitability, or GAAP net income in Q4. We
remain comfortable with our financial
resources at this point and expect that we
will continue to utilize a modest level of
our $10 million line of credit for working
capital purposes throughout the remainder of
the year. Based on our current visibility
and our new partnerships with Radio Shack,
Kensington and Fellows, we are also
confirming our guidance of at least 50%
revenue growth in 2004. This will be driven
by continued momentum in each of our current
base product areas, the continued success of
Juice with OEMs, major strategic partners,
retail outlets and other channels, continued
growth in our traditional and emerging
handheld product line and a successful
introduction of a wide variety of additional
innovative products. With continued margin
expansion due to increased volumes,
operating expense stabilization and
favorable new product margins, we will have
excellent financial leverage as sales
increase. Naturally, we will continue to
provide more specific guidance as we gain
additional visibility. At this time, I'm
open for questions and would ask the
operator to please proceed with the Q&A
session.
Operator: Thank you, sir. At this time, I would like
to remind everyone if you would like to ask
a question please press "*" then the number
"1" on a telephone keypad. And we will pause
for just a moment to compile the Q&A roster.
Your first question comes Serene Quadry with
Pilot Advisors.
Serene Quadry: Hi. Congratulations, that was a great
quarter.
Charlie Mollo, Joan Brubacher: Thank you, Serene, we appreciate it.
Serene Quadry Everything is so impressive that is going on
in the company and I guess with all of this
information, I'm just sitting here trying to
put it together and understand what it could
really mean for '04 and you seem really well
positioned going into '04 now that both of
the big distribution deals will be signed.
If you could just run through, and not so
much what you think the product sales and
sale through will be for next year because I
know you can't predict that or guess that,
but just hypothetically, if you just got
penetrated in half these
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doors and sold it at the price or selling it
today, what that could mean for earnings?
Charlie Mollo: Let me take a shot at answering that,
Serene, and then we'll see if Joan wants to
pile on to my answer. I think the
opportunity for the Juice product in
particular, which I think is the heart of
your question in the short-term, is to
really take as big a share as we can of the
current aftermarket for power adapters. As I
think you may know, there are about 35
million computers sold annually and we think
about 19 million are sold with an additional
aftermarket adapter. With the distribution
we now have, and you are correct, I believe
we're extremely well-positioned, we are
going for as big a share of that 19 million
units as we can get. Now, if you look at the
guidance we're giving, we're trying to give
guidance for next year that we believe we
have good visibility to and that is very
much comfortable so that we can not
disappoint anyone. There is obviously a
small penetration rate that is being assumed
to get the kind of numbers we're giving so
we have lots of upside in that our current
average pricing is probably in the $50-60
range to the company for Juice. There's lots
and lots of upside potential, we're not
prepared yet to say that we're going to go
get some enormous share of that, but we're
the only ones shipping today and we're
certainly going to try and make ourselves do
a tremendous amount there. I think Joan can
comment as we get to different levels of
sales, what the net income kinds of numbers
are, and anything else you want to add.
Joan Brubacher: Well, I think rather than speak specifically
to those bottom lines, Serene, I think that
if you look at our model right now, we are
running just over 35% gross margin. You can
calculate the numbers. We did $31.3 million
last year, so 70% growth this year targets
of $54 million annual revenue level, 50%
growth next year would put us just over $80
million. We'd be in a little over a $20
million average quarterly run rate.
Serene Quandry: Which yields you about roughly 10 cents a
quarter at that revenue run rate?
Joan Brubacher: You're calculating quicker than I can,
Serene. I'm just sort of running the
numbers. Again, we are running at about 35
points margin, we'd like to hope that as
volumes increase, that that would continue
to move upward a bit. We feel like our
operating expenses, you know, we did have an
uptake in operating expenses this quarter
which we had forecasted, again largely due
to the litigation experience we've just been
through with Comarco, but given that that
goes away in subsequent quarters, we feel
like our
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operating expense level now is in the low
fives and quite frankly, the nature of the
distribution agreements we've entered into
don't really require us to expand our
spending to any great degree in order to
support those accelerated levels of revenue.
Serene Quandry: Even with the Fellows distribution
agreement?
Joan Brubacher: Absolutely.
Serene Quandry: It's a very high fixed cost model you have
in reality.
Joan Brubacher: I think you can probably crunch the numbers
yourself and see that it's a very highly
leveragable model. At an $80 million plus
revenue run rate, we should take some nice
numbers to the bottom line.
Serene Quandry: Are there other distribution opportunities
still or do you feel comfortable that you
are where you want to be?
Charlie Mollo: In terms of our broad-based distribution,
Serene, we are where we want. We have two
key partnerships in the broad worldwide
channel. Fellows and Kensington. We are very
happy. They're the two best partners anyone
could ever dream for. And while we have both
of them out there, we certainly don't want
to confuse that by adding more. That doesn't
mean there isn't a lot of other niche
opportunities for our company that are
sizable and will continue to expand our
relationship with Radio Shack, we are very
pleased with their excitement about what
we're doing and there's other areas like
that that are not the same competitive
environment as the Fellows and Kensington.
We will be doing more things, but not of
that nature.
Serene Quandry: The average unit per store, how should that
vary from say a Best Buy versus a Radio
Shack?
Charlie Mollo: We are on the front end of it and I'd rather
not predict exactly how that is all going to
play out. I think over the next few
quarters, we will get some really good data
that we can begin to share.
Serene Quandry: Thanks a lot. Congratulations
Charlie Mollo: You're very welcome, and thank you.
Operator: Your next question comes from Jason Sand
with Philer.
Jason Sand: How are you guys doing?
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Charlie Mollo: Good, Jason, how are you?
Jason Sand: Good, thanks. Joan, just real quick, if you
could do me a favor and break out op-x for
me and also let me know about the 700 K in
litigation expenses. Are they all in G&A?
Joan Brubacher: Yes. I'll answer the last question first.
Yes, it is all in G&A. The 6 million breaks
out about $1.8 million in sales and
marketing, $1.2 million in R&D, and $3
million in G&A.
Jason Sand: Great. Question relating to the backlog. The
quarter million units, does that include any
Kensington in there?
Charlie Mollo: It includes some Kensington, not a huge
number, but some.
Jason Sand: No Fellows, right?
Charlie Mollo: You know, there is probably a small amount
of Fellows in there, but not a big number as
well. It's pretty much spread around.
There's a pretty good chunk of OEM in there
and we don't give the break out of who
customers are in there, but it is spread
around. With probably a heavy emphasis on
the OEM side.
Jason Sand: Right now, it's a nice growth from last
quarter, I think it was 35,000 that you had
announced.
Charlie Mollo: Yes, we shipped 30,000 in Q1, we had about
35,000 on back order at the beginning of
last quarter. We shipped 80,000 in Q2 and
grew the backlog, obviously.
Jason Sand: So right now could you talk a little bit
about order visibility and then the type of
order rate per month that you're seeing?
Charlie Mollo: I think Jason, the visibility we have, we
feel good with the guidance we gave and
that's do the 14 million number. I don't
think we have a specific unit number that we
have given out or that we should give out on
the forecast side, but the 14 million is
taking advantage of, not taking advantage,
but also takes into account a little bit of
additional cannobilization as we roll
through allows Kensington folks and continue
to get completed with the historical AC/DC
only products that we sold historically and
that is sort of accounted there, and then as
we go forward, I think will begin to see a
real presence with Kensington and Fellows.
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Jason Sand: Charlie, for the last quarter, how much of
the adapter business is lazy?
Charlie Mollo: In Q2?
Jason Sand: Yeah.
Charlie Mollo: Very little. We've gotten through most of
the cannobilization. There's a little bit
left, which I would guess would go away
shortly.
Jason Sand: So, you expect Q3 to be pretty much all
Juice on the adapter?
Charlie Mollo: On the power adapter business, it will be
predominantly Juice and then we have some
new products coming out based on this
technology that we'll announce at the
appropriate time and I also expect some of
those to begin ramping towards the end of
Q3.
Jason Sand: Ok. Battery, is that like, you know, what's
the [unintelligible] adapter in batteries?
Charlie Mollo: Batteries has been a relatively modest
business. We were actually off this quarter
in batteries due to some supplier and other
issues that we are addressing in the market
and we had hoped would come back to the
historical level. It's modest in the grand
scheme, Jason.
Jason Sand: Over 10%, less than 10%?
Charlie Mollo: No, it's 100s of 1,000s of dollars, not
millions.
Jason Sand: Ok.
Joan Brubacher: Jason, it was less than 10% of the total
Power product revenue in Q2.
Jason Sand: Great. Can you, Charlie, talk a little bit
about the sell through and just the, you
know, some of the European stores and the
U.S. stores, if there's any difference, and
also how is Radio Shack doing in terms of
inventory, because I know they have a habit
of under stock?
Charlie Mollo: Well, you asked a bunch of different
questions. Let me take them one at a time.
Sell through has been very strong in every
place that we have good visibility and the
way I know that is that we are getting
reorders from most of the major accounts on
a regular basis now so, by the way, that
includes Radio Shack who reordered at
FRB
ID# 1636170 PAGE 15
the end of the quarter. They indeed are
selling through at a rate faster than I
believe their stores have inventory, so we
are working with them to stabilize that.
They have already placed a second reorder
that we just got. So, I think I'm very
pleased with sell through, as a matter of
fact, we got several more at the end of Q1
which is why we ended up the revenue level
that we did, that we hadn't anticipated so
I think generally good. Radio Shack is just
getting going is the real answer. They have
done their first order and the two reorders
without any training and without any
advertising. We have just literally this
past week completed training all of their
people and as I noted in my remarks, they
are literally going to ship out 45 million
printed circulars, which is an amazing
number to me at the end of July and then
another 45 million at the end of August and
Juice will be prominently featured in
there. I couldn't be more pleased with
their interest and performance and
dedication here.
Jason Sand: So from a capacity standpoint, there's going
to be a nice ramp for the Christmas season,
are you going to be able to handle it?
Charlie Mollo: We certainly would like to think we can. We
have prepared for, our partners have done a
great job. If you look at it, Q2, I think
reproduced about 100,000 units, we shipped
80 and we brought some and so we had some
inventory so we could fulfill all of these
increased surprise orders. So I was very
pleased that they went from 30,00 to 100,000
in Q2. Now, does that mean that we won't
have challenges? Of course not. But they're
first-class and doing a good job.
Jason Sand: Good. Thank you.
Charlie Mollo: Thank you, Jason.
Operator: Your next question comes from Joe
Blankenship with Aspen Financial.
Joe Blankenship: Good afternoon guys.
Charlie Mollo: Hey Joe, how you doing?
Joe Blankenship: Good, thanks. A couple of questions. And of
course, a lot of them were just answered
with Jason. The pricing on Fellows and
Kensington. Is that comparable to an OEM
deal or is it different in any manner?
FRB
ID# 1636170 PAGE 16
Charlie Mollo: Let me answer it generally, Joe, we
obviously don't give out specific numbers on
any of this, but some of the OEM guys, like
the IBM's of the world are typically the
most pressured price margin if you will.
Kensington and Fellows and the Radio Shacks
are sort of in the middle and then we
achieve the highest margins on our iGo brand
of products which we sell to the
distribution channel and through our
directs. So, they're somewhere in the
middle. I can't give you any more color than
that. We're targeting to blend our company
to the 40% number and we are there. In terms
of the Juice product category we're probably
exceeding that some right now.
Joe Blankenship: Ok. Does the Kensington and Fellows
arrangement preclude you in any way from
signing other OEM computer deals?
Charlie Mollo: It doesn't preclude us from signing OEM
computer deals, we have agreed to certain
things in the market that I don't want to
get into that we would allow them to be the
predominant player in.
Joe Blankenship: Ok, can you give me what your direct sales,
other than distribution and OEM was on Juice
for the second quarter through iGo and
indirect?
Charlie Mollo: Joan, do you have that number, I have a
ballpark number unit, but. . . .
Joan Brubacher: I don't. If you've got the number. . . .
Charlie Mollo: Here's what I can tell you Joe. About half
of those sales of Juice, the 80,000 were iGo
branded.
Joe Blankenship: Ok.
Joan Brubacher: Yeah, so if you're looking at mechanics.
Were you asking about those sales to end
users or were you . . . like on the web?
Joe Blankenship: Yeah. Through iGo and your web sales.
Joan Brubacher: That continues to be a smaller portion of
our overall Juice sales, Joe. I can't give
you an exact number, but it's probably in
the 10-15% range maybe.
Joe Blankenship: Ok. One other question. There seem to be a
lot of unknown names on 144 filings. Is that
a part of what you were using your stock for
- paying legal fees and other things out
there and do you have any idea how much of
that stock might still be overshadowed in
the market?
FRB
ID# 1636170 PAGE 17
Joan Brubacher: It is not related to the items that I
discussed in my earlier remarks, except with
regard to some of the Portsmith
shareholders. Certain of those shareholders
who are no longer employees of the Company
have been selling some shares, and I think
those are the ones you're probably seeing,
Joe. I don't think there's a big number
hanging out there that I would expect to see
on 144. It's hard for me to tell you
exactly. To be honest with you, I haven't
tracked the number on the head, but that is
the bulk of what you're saying.
Joe Blankenship: All right. Thanks very much.
Charlie Mollo: Thank you, Joe.
Operator: Your next question comes from Patrick
Donahue with Northland Securities.
Patrick Donahue: Good afternoon. First off, thank you for
taking my call, and once again,
congratulations. Every time I'm on this call
it's very impressive.
Charlie Mollo: Thank you Patrick, we appreciate that.
Patrick Donahue: Could you give us a feel for pitch sales in
Asia? Obviously we've been hearing a lot
about China once again. Could you give us
some broad statements there?
Charlie Mollo: Yeah. Well, the honest answer is we're not
doing much in Asia at this point in time to
be honest with you. We would hope to do a
lot there, particularly through our
partnerships with Kensington and Fellows.
It's a clear market opportunity for us that
is on our radar, but we have not had the
resources or capability to go after without
these partnerships. So, pitch itself is just
beginning to, you know, right now it's early
in the market, because I think it will be
driven a lot by the SmartPhone success and
that market is really just emerging, so it
hasn't been a big factor yet as a general
comment.
Patrick Donahue: Ok. In Juice. Do you or your customers have
a feel for return rates on Juice, and if so,
could you share that with us or make some
general comments of what you've seen thus
far?
Joan Brubacher: Well, the return rates are affected in part,
Patrick, by arrangements with some retailers
who buy through distribution and are, you
know, accept product back from their
customers, no questions asked, and those
come back to distribution, and our agreement
is
FRB
ID# 1636170 PAGE 18
those come back to us. Also, sales on the
web. When we sell product on the web, those
sales are generally made with a 30 day
no-questions asked kind of return policy. So
those policies are. . . some of those
policies are fairly liberal. Even with those
numbers mixed in, our return rates have only
been running about 5%.
Charlie Mollo: And I think an important comment also as we
go forward and a bigger share is OEM, it's
Kensington, it's Fellows, it's Radio Shack.
We do not have return rights with those
customers, and therefore I would expect it
to blend way down over time.
Joan Brubacher: I would agree with that.
Patrick Donahue: Ok. Thank you.
Charlie Mollo: You're very welcome.
Operator: Your next question comes from Robert Sussman
with Bentley.
Robert Sussman: Hi. Congratulations on your quarter.
Listening to, as I understand it, in the 3rd
quarter, Kensington will come up full blast,
and I presume they were relatively small in
the second quarter, and Fellows comes on in
the 4th quarter.
Charlie Mollo: That's correct.
Robert Sussman: Ok. Keeping that. . . I've got two questions
then. Number 1, it sounds like, if that's
true, and the number of retail outlets, I
believe each of them reach something like
20,000 retail outlets?
Charlie Mollo: They each have a very sizeable number, yes.
Robert Sussman: It would sound like the guidance that you
are providing is relatively modest, assuming
you would have the capacity to meet their
needs in the 3rd and 4th quarter. My second
question is if the Juice margins are 40% if
not higher, and that's clearly the fastest
growing part of the Company now, why
shouldn't the overall margins of the Company
be climbing sequentially if that's the case?
Charlie Mollo: I'll take the first one, and I'm going to
let Joan answer the second one. In terms of
the growth rate, keep in mind, when I
indicate that our partners are going to come
on line in Q3 and Q4, that doesn't mean
instantly all of their retail locations are
going to be up and running. They have
relationships with people like Best Buy, and
Circuit City and Sam's Club and WalMart. It
will take a
FRB
ID# 1636170 PAGE 19
number of quarters to get those
relationships fully in place, to get those
accounts making product and to be up and
running. Second, as we migrate with these
new accounts, we will actually cannibalize a
little bit of the business we've been doing
directly. Certain accounts will go through
Kennsington, for example, which in the long
term is better for us. We don't have the
marketing expands and so forth, but it will
actually put a little bit less on the top
line, even though the bottom line would
still be strong. So it's going to take some
time for that to all happen. Could it end up
being that we exceed the numbers? Yes, it
could Robert. I just don't have that
visibility yet to be able to give you that
kind of a guidance. In terms of the margins,
I'll let Joan comment on that issue.
Joan Brubacher: Certainly, Robert. Good afternoon. With
regard to the margins, the Juice margins do
tend to run higher than the 40 point mark,
but although power products in total was
about 46-47% of our total revenue in Q2,
keep in mind that handheld products still is
a fairly significant part of the revenue at
just over 30%. Our handheld hardware
business is largely OEM. Symbol is our
biggest customer there, so the margins in
that business are considerably lower.
Actually down around the high 20s to 30
points in margin. So that brings the margin
down somewhat. The other item is, when we
speak to those margin numbers, we are
speaking to direct margin relative to the
product, so that does not include
fulfillment expenses such as freight and
such as the fulfillment charges we incur,
you know, through the distribution channels
through our fulfillment partner. So, when
you net all those kinds of things down in
there, that's what gets us down to the 35
point range. If we maintain those margins,
which we expect to do, and as Power becomes
a more significant part of our business, I
would expect to see gross margins start to
move their way up. I'd like to kind of see
how all of that plays out before I give
affirmative guidance as to what those
numbers might actually be, other than to say
we'll continue to be in the 35 point range
and should edge up somewhat as volumes
increase.
Robert Sussman: Ok. One longer question with regard to Juice
and other products that you are introducing
in the area. Charlie was mentioning earlier
there's 19 million after-market chargers
sold each year in the marketplace. With your
product [unintelligible] as it is now, and
if that were to stay that way, is there any
way you can't get at least 10% of that
market with your Juice product?
Charlie Mollo: Robert, I'm going to let you make your own
judgment. We're trying to - we're going out
to try and get as big a share as we can,
FRB
ID# 1636170 PAGE 20
and you know, why would someone buy an AC
only or a DC only is the question. Between
our OEM channels and our other channels we
certainly hope to drive big numbers. We're
giving guidance based on what we can see and
touch in the near term, however, so you
know, that's the bet I'd take in looking at
a play in Mobility.
Robert Sussman: Ok. Thanks a lot and congratulations.
Charlie Mollo: Thank you, Robert.
Operator: Your next question comes from George Groth
with HB [unintelligible] & Company.
George Groth: Yeah, hi. A couple of questions here. I
don't know if you mentioned - how much was
available under the revolver?
Joan Brubacher: I didn't speak to availability, but it just
so happens that I saw the borrowing base
calculations just today and the borrowing
base that we've calculated as of this
morning is about 5 million.
George Groth: Ok. Any 10% customers?
Joan Brubacher: You know, I actually - we generally tend to
crunch that when we look at the Q, but I
would expect that there will be some 10%
customers. For instance, IBM, Symbol would
be a 10% customer. Those are the two that
would come immediately to mind.
Charlie Mollo: By the way, we think that will come down
over time as these other accounts come on
line.
George Groth: Ok. In terms of the expansion and docking.
Like you talked a little bit about the
sequential drop there, I guess in percentage
of revenues?
Charlie Mollo: Yes.
George Groth: Is that viewed as one time or I guess like
system repeat customers and not place
orders, or ?
Charlie Mollo: Yeah. Actually, that area has generally been
doing very well and is on a very positive
uptake. In Q1 we had a major deal with Acer
where we launched a docking program with
them. They're going to continue with us on
that, but we had the big initial order in
Q1. We also had one other no-name kind of
deal that we did that was fairly unusual in
Q1. So, it wasn't so much that Q2 was down
as it
FRB
ID# 1636170 PAGE 21
was Q1 was up. Overall, it's a nice positive
contribution margin, and we're working on
some really interesting deals in that space.
George Groth: And going forward can we expect more
lumpiness or is it pretty more stable there?
Charlie Mollo: I think it's going to be stable and up,
would be the general comment. With a few
possible upside bumps from time to time.
George Groth: In terms of the Juice. International margins
versus domestic US. Are they pretty much
[END OF SIDE ONE]
In terms of the power product. If I do a
little bit of quick math here, stripping out
the Juice sales in Q1 and Q2, it looks like
there's been . . . like the other segments
of this division looks like I get a little
bit of a drop off in sales there.
Charlie Mollo: Yeah, you absolutely did and it's a
combination of cannibalization and the
battery business being off in Q2 as I
mentioned. I think the battery business will
come back. The cannibalization won't.
George Groth: And what was sort of the combination - what
is it, 50-50 battery-cannibalization?
Charlie Mollo: I think the primary reason you see that
shift in Q2 is the battery softness, which
is related to some, we think, one-time
events that will get reversed as we go into
the next few quarters.
George Groth: And would this be like 70% of that, or . . .
Charlie Mollo: The battery business is actually quite
small. I think it was about, I don't know,
$3 or 400,000 kind of number in Q1, in Q2,
I'm sorry. So you, know, it's not a huge
thing, but you know, a few hundred thousand
dollar swing drives the overall growth rate
to the level you're seeing.
George Groth: Ok, and in Q1 it was a little higher?
Charlie Mollo: It was much higher in Q1, yeah. And some of
that's just balancing and some of that is a
supplier change we did and some impacts
related to that and some intelligence
related to that.
George Groth: Ok. So that. . . that's pretty much is one
time there?
FRB
ID# 1636170 PAGE 22
Charlie Mollo: It certainly isn't going to go down further
from here. We think it will close - we think
we'll be able to recover and actually grow
that as we go forward, yes.
George Groth: Ok. And I guess to tap this off, I mean
pricing - there's been no change between Q1
and Q2?
Charlie Mollo: In terms of like Juice pricing you're
referring to?
George Groth: Yeah.
Charlie Mollo: Yeah. Oh, yeah. The pricing on Juice has
held absolutely fine. We're not seeing any
material fracture. There's nothing else out
there right now, so I expect that will
continue for the foreseeable future.
George Groth: Ok. And. Ok. That's it there.
Charlie Mollo: Thank you, very much.
George Groth: Thank you, very much.
Operator: Your next question comes from Josh Goldberg
with Artsley Partners.
Josh Goldberg: Hey guys, great quarter.
Charlie Mollo: Thank you, very much.
Josh Goldberg: Just a couple of quick questions here.
Number one, just so I understand. Your
margins on the Juice product sound like a
little bit over 40%. What was the margin on
the products that are being cannibalized
from the Juice product?
Joan Brubacher: Considerably lower.
Josh Goldberg: So, kind of the 20% range or so?
Joan Brubacher: They varied, but probably closer to the 30
point range. It kind of varied from product
to product, but I would average it all out
around 30%.
Josh Goldberg: Gotcha. That's great. And just so I
understand as well. It sounds like your
battery product seems to be getting a little
bit better here in the 3rd quarter,
handhelds will be up, expansion looks like
its not
FRB
ID# 1636170 PAGE 23
going lower. Why, you know, my guess is that
Juice will also probably be up in Q3. It
just seems like based on your orders that
you now, that a million increase in
sequential revenue growth seems a little bit
conservative.
Charlie Mollo: Yeah, again, you know I think it may seem
that way, and it may end up proving to be
that way, but right now with the visibility
we have, with some of the orders we got at
the end of Q2, reorder rates, some of the
ships to Kennsington and Fellows, we're
trying to give you numbers you can count on,
and I think if you look at the last few
quarters we've been right around the top end
of what we've told you, but we've been
consistent with the visibility that we've
had. I think at some point we'll see a break
out in what we're doing as Kennsington and
Fellows really get all the way up on line.
Until I have that history and until Radio
Shack runs its ads and I really see those
new run rates, we're not going to give you
optimistic guidance, so you can judge what
I'm telling you however you'd like, but I
think you should fee1 good if we do our 14,
if we blow it out, you know, we'll be happy.
Josh Goldberg: Gotcha. So I understand you . . .
Charlie Mollo: But don't get mad at me if we do our 14.
Josh Goldberg: No, no no. The other power products that
were down in Q2, my guess probably down a
million dollars in revenue. Where does that
kind of stabilize? I mean are you going to
cannibalize the entire thing so it should be
down so it should be down almost another
million in Q3 or is that kind of stable here
maybe at a million and a half?
Charlie Mollo: Yeah, it was down a million - that's
probably too big a number, it's probably
more like half a million. But the bottom
line is we're through most of it. There's
not much more to do.
Josh Goldberg: Gotcha. Ok, that's great. Just a couple of
other things so I understand. Beyond the
one-time item of the 700,000 on the
litigation costs. You actually seem like you
significantly exceeded the earnings per
share number this quarter. Does that make
sense? I mean by that three or four cents?
You back that out since that seemed very
one-time in nature?
Charlie Mollo: Oh. You're saying if you took the 700,000
and the bottom line number? It depends on
what scud rate you were applying, but we
feel we're pretty close to where we thought
we'd be. We probably
FRB
ID# 1636170 PAGE 24
feel very good about where we'd be without
those legal things. I don't know, Joan if
you want to add anything.
Joan Brubacher: No, I think well, you know, you can
certainly crunch the numbers if you want
to back that out and see what the earnings
per share would be, but we feel comfortable
viewing it on a bottom line basis.
Charlie Mollo: I think our financial model is very
predictable. If you look at all of our
numbers the last few quarters, and what
we're telling you, the operating expenses,
if you back that out, are pretty consistent.
We feel good about that. The margins have
had some nice stability in it. So, I think
the top line will be the only variable that
drives what's on the bottom. I think you can
sort of predict where we'll be based on your
revenue assumptions.
Josh Goldberg: Gotcha, that's great. And just so I
understand. Basically, you Edgared Q2 with
orders of Juice of 35,000 orders and you
actually ended up the quarter at 80,000
orders so your turns in the quarter were
significant, so to speak.
Charlie Mollo: That's correct.
Josh Goldberg: Ok. And when I look out in Q3 I understand
that you have a backlog of 250,000, but
shouldn't things like Radio Shack and some
other things maybe order now ahead of the
Christmas season in terms of some of
orderings that Q3 should be up on the Juice
product versus Q2.
Charlie Mollo: You know, I don't know what their ordering
pattern will be to be honest with you and
the other variable is in this quarter
they're going to put out 90,000,000
circulars. I don't know what that's going to
do. I don't think they actually order for
the Christmas season until we get to the end
of Q3 and early Q4. So, we're just sort of
predicting and looking at the visibility of
where we are now and what we project that to
do if it sort of stables through the
quarter. If any of those things go up we'd
have some upside.
Joan Brubacher: And also be sure to keep in mind that that
$250,000 includes orders on the books for
product that is scheduled to ship after Q4,
so in 2004. Again, about 100,000 of the 250
is actually scheduled to ship in Q3 and Q4.
Josh Goldberg: Ok. You know, looking at Q2, for example,
may be an indication. You almost did two
times as much as you first thought - almost
FRB
ID# 1636170 PAGE 25
three times. So even though you might think
you're doing 100,000 in the next two
quarters it might end up being more like
300,000.
Joan Brubacher: I like your optimism.
Charlie Mollo: We hope you're right. I think the only
comment I would make is you know, we've
sort of closed the big deals that helped
drive some of that in the last quarter or
two so I'm not sure how it's going to play
out. Again, what we're giving you is the
guidance based on the visibility we have.
Josh Goldberg: And I'm assuming. Just one last question on
the Juice side is that you're just assuming
increased number of stores say at Radio
Shack versus kind of an increased number of
orders within each store. You know, I've
gone to a few stores and from what I get a
sense of is that they basically, Radio Shack
has discontinued all other chargers and are
just focusing now on the Juice product. And
my guess is that's probably going to
increase the number of chargers in each
store as well.
Charlie Mollo: You know, we're working with them to
maximize the opportunity. I'm not sure I
should speculate on how that will play out,
but I think we've got a great opportunity, I
agree.
Josh Goldberg: Great. Guys, thanks so much. Have a great
quarter and we'll talk to you soon.
Charlie Mollo: Thanks, very much.
Operator: Your next question comes from Diane Hucolla
with Hucolla Capital.
Diane Hucolla: Hi!
Charlie Mollo: Hi Diane, how are you doing?
Diane Hucolla: Great! How are you? Just a couple of things.
Could you go over again the Radio Shack and
when you got that fully ramped in the third
quarter, and then secondly, what do you have
so far, or what's your ramp expectation on
what you have so far for your numbers this
year from Kensington and Fellows for the
'03?
Charlie Mollo: Yes, here's sort of the two answers. Radio
Shack we launched in Q2, it wasn't until
really the very end of the quarter that they
actually had product in all of the 3,500
stores that they ramped in, so...
FRB
ID# 1636170 PAGE 26
Diane Hucolla: Is that 2 weeks or 4 weeks, or...
Charlie Mollo: You know, I think it's over the...they sort
of received our product in the mid part of
the quarter and rolled it out over the
6-week period to the entire group, so, you
know we got some early good results from the
top 8 stores that they initially went into,
I think it's going to take another quarter
before we have good steady, predictable
kinds of run rates to be candid with you,
and I think with the new mailings and all,
you know, somewhere by the next conference
call we should have some good history to
report on. In terms of the Kensington folks,
they are very aggressively in the market.
They are great guys and they're making
really good progress, had a lot of people
signed up already. There's not a lot in our
numbers yet for them; there's a little bit
but not a lot.
Diane Hucolla: And what about Fellows?
Charlie Mollo: Fellows is just getting going. We're doing a
unique version of our product for them and
they will be launching in Q4 so I don't want
to say too much about their plans but it's
really a Q4 launch.
Diane Hucolla: And is the Fellows deal very similar to the
Kensington deal as far as expenses, etc.?
Charlie Mollo: In terms of the financial structure, yes. I
mean, they obviously will each, we have
tweeks that I won't talk about, but in terms
of the financial structure, they're FOB Hong
Kong deals with statement terms and no
return.
Diane Hucolla: OK. Thanks a lot guys.
Charlie Mollo: You're very welcome Diane.
Operator: Your next question comes from Ian Wyatt with
Growth Report.
Ian Wyatt: Congratulations on a good quarter, guys.
Charlie Mollo: Thank you, we appreciate it.
Ian Wyatt: Just one quick question. I show at the end
of the quarter you had 21 million shares
outstanding; are you guys planning on any
financing activities in the coming quarters
or can we assume that that's going to remain
the number of shares outstanding for our
financial modeling?
FRB
ID# 1636170 PAGE 27
Charlie Mollo: Yeah, I think, 2 comments. First of all, the
actual, that's the weighted average, I think
the actual outstanding is a little higher
than that, you probably ought to use around
23 million. You know, we're looking at all
our financing options, the bank line is
adequate until the end of the year, we're
looking at different options that we may or
may not choose to do and, you know, until we
do them I don't know what to tell you to be
honest.
Ian Wyatt: OK. But no financing activities on the
horizon right now...
Charlie Mollo: There's nothing we're able to announce
tomorrow morning, now, whether that changes
over the next period of time or not, I
honestly won't predict for you yet.
Ian Wyatt: OK, great. Thanks so much and
congratulations.
Charlie Mollo: Thank you very much.
Operator: We have reached the allotted time for
questions. I would now like to turn the call
back over to management.
Charlie Mollo: Well thank you very much and I want to thank
everybody for taking the time today and for
the work out on the questions. We really
appreciate the interest and we'll keep you
as informed as we can as things continue to
unfold for us. Have a great afternoon.
Joan Brubacher: Thanks everyone.
Operator: Thank you for participating in today's
Mobility electronics conference call. You
may now disconnect.
[END CONFERENCE CALL]