SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (date of earliest event reported): September 26, 2001
AUDIOVOX CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 0-28839 13-1964841
(State or other jurisdiction (Commission (I.R.S. Employer
of Incorporation or File Number) Identification Number)
organization)
150 Marcus Boulevard, Hauppauge, New York 11788
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (631) 231-7750
Page 1 of 3 Pages
Exhibit Index on Page (2)
Item 5. Other Events.
------------
On September 26, 2001 Audiovox Corporation (the "Company") announced
preliminary results for its fiscal third quarter ended August 31, 2001. A copy
of the Press Release is filed as Exhibit 1 hereto. On September 26, 2001 at
10:00 a.m., the Company held a conference call and live Webcast to discuss the
press release. The Company has prepared a transcript of that conference call, a
copy of which is annexed hereto as Exhibit 2.
Item 7. Exhibits.
------------
Exhibit 1. Press release dated September 26, 2001.
Exhibit 2. Transcript of conference call held on September 26, 2001
at 10:00 a.m.
Page 2 of 3 Pages
Exhibit Index on Page (2)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
company has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
AUDIOVOX CORPORATION
Dated: September 28, 2001 BY: s/John J. Shalam
John J. Shalam,
President and
Chief Financial Officer
Page 3 of 3 Pages
Exhibit Index on Page (2)
FOR IMMEDIATE RELEASE
C. Michael Stoehr
Audiovox Corporation
(631) 231-7750
For Financial Investor Relations Inquiries:
Glenn Wiener / Chris Fullam
PR21, Inc.
(212) 299-8982 / (212) 299-3956
AUDIOVOX CORPORATION REPORTS FISCAL THIRD QUARTER
AND NINE-MONTH FINANCIAL RESULTS
Hauppauge, NY, September 26, 2001 . . . Audiovox Corporation (Nasdaq: VOXX)
today announced results for its fiscal third quarter and nine months ended
August 31, 2001.
Net sales for the third quarter of fiscal 2001, were $313.9 million compared to
$470.3 million in the comparable period one year ago. Net earnings and earnings
per share for the quarter were $1.0 million and $0.05 basic and diluted compared
to net income of $10.0 million and $0.45 basic and $0.44 diluted for the three
months ended August 31, 2000.
For the nine months ended August 31, 2001, net sales were $920.8 million versus
$1.2 billion in the comparable period one year ago. Net loss and loss per share
were ($4.7) million and ($0.21) basic and diluted compared to net income and
earnings per share of $22.2 million and $1.04 basic and $0.98 diluted for the
same nine-month period in 2000. Excluding the charges associated with the analog
inventory write-down in the fiscal second quarter, net income and earnings per
share for the nine-month period were $3.9 million and $0.18 per share.
John J. Shalam, President and CEO of Audiovox Corporation, commenting on the
quarter said, "Third quarter results showed a modest increase over the second
quarter, which was in line with expectations. Throughout this year, the wireless
industry has undergone substantial negative changes, but we believe that
Audiovox has adjusted to the resulting new industry parameters. We feel that we
- more -
Exhibit 1
Audiovox Corporation Reports Fiscal Third Quarter and Nine-Month
Financial Results
Page 2 of 3
will emerge from this period of transition stronger, and better positioned to
benefit from new opportunities in the wireless industry. We plan product
offerings in the fourth quarter and the early part of 2002 that will include
state of the art handsets and competitively priced volume models. These new
products should help improve both our revenue and our margins next year."
Shalam further stated, "Audiovox joins the world in mourning the loss of so
many people in the senseless destruction here in New York, Pennsylvania and
Virginia. Our heartfelt sympathies and prayers go out to all that have lost
someone dear. Our employees have been active participants in the rescue and
relief efforts here and we will continue to be involved in those efforts as we
rebuild."
Philip Christopher, President and CEO of Audiovox Communications Corp. (ACC),
said "During the third quarter unit sales remained on track with increases
quarter over quarter this year. Over the summer, ACC initiated significant
programs with Canada's two largest carriers utilizing the CDM 9100 and the brand
new tri-mode CDM 8100. In addition, during the quarter we sold all of the
remaining hand-held analog inventories, clearing the way for new technologies
that we expect to be important to our success in 2002." Christopher continued,
"We are very excited about the upcoming launch of several new products including
1X phones and our first PDA product, which will be sold with a CDM 9100 and has
been designed to support the data initiatives of our major carrier customers."
Patrick Lavelle, President and CEO of Audiovox Electronics Corporation (AEC)
said "Most product categories experienced sales increases over third quarter
2000 with overall AEC third quarter performance up 8% over the same period last
year. Year to date figures are 7% ahead of last year with Consumer products
posting the highest category gain." Lavelle continued, "The introduction of new
products and broader distribution has allowed us to expand sales in spite of the
overall economic decline."
Audiovox Corporation will be hosting a results conference call today at 10:00
a.m. (EDT). Interested parties may participate in a listen-only mode via a
real-time web cast by visiting the Company's web site http://www.audiovox.com. A
replay of the call will be available for thirty days on the Web site for those
unable to listen today.
Audiovox Corporation is an international leader in the marketing of cellular
telephones, vehicle security and entertainment systems, and consumer electronics
products. The Company conducts its business through two subsidiaries and markets
its products both domestically and internationally under its own brands. It also
functions as an OEM (Original Equipment Manufacturer) supplier to several
customers. For additional information, please visit Audiovox on the Web at
http://www.audiovox.com.
Exhibit 1
Audiovox Corporation Reports Fiscal Third Quarter and Nine-Month
Financial Results
Page 3 of 3
Except for historical information contained herein, statements made in this
release that would constitute forward-looking statements may involve certain
risks such as our ability to keep pace with technological advances, significant
competition in the wireless, mobile and consumer electronics businesses, quality
and consumer acceptance of newly introduced products, our relationships with key
suppliers and customers, market volatility, non-availability of product, excess
inventory, price and product competition, new product introductions, the
uncertain economic and political climate in the United States and throughout the
rest of the world and the potential that such climate may deteriorate further
and other risks detailed in the Company's Form 10K for the fiscal year ended
November 30, 2000 and the 10Q for the second quarter ended May 31, 2001. These
factors, among others may cause actual results to differ materially from the
results suggested in the forward-looking statements.
- Table Attached -
Exhibit 1
Audiovox Corporation and Subsidiaries
Consolidated Statements of Operations
(Dollars in thousands, except share and per share data)
Three Months Ended Nine Months Ended
August 31, August 31,
(unaudited) (unaudited)
2000 2001 2000 2001
----------- ------------ ----------- ------------
Net sales $ 470,334 $ 313,897 $ 1,192,124 $ 920,776
Cost of sales (including an inventory write-down
to market of $13,500 in 2Q 2001) 427,587 282,384 1,077,377 848,880
----------- ------------ ----------- ------------
Gross profit 42,747 31,513 114,747 71,896
Operating expenses
Selling 10,363 10,561 31,673 27,525
General & administrative 11,806 12,261 34,350 33,971
Warehousing, assembly and repair 5,520 5,895 15,574 17,197
----------- ------------ ----------- ------------
Total operating expenses 27,689 28,717 81,597 78,693
----------- ------------ ----------- ------------
Operating income (loss) 15,058 2,796 33,150 (6,797)
Other income (expense) 369 (1,172) 2,120 (468)
----------- ------------ ----------- ------------
Income (loss) before provision for income taxes 15,427 1,624 35,270 (7,265)
Provision for (recovery of) income taxes 5,471 618 13,103 (2,573)
----------- ------------ ----------- ------------
Net income (loss) 9,956 1,006 22,167 (4,692)
=========== ============ =========== ============
Net income (loss) per common share
basic $ 0.45 $ 0.05 $ 1.04 ($ 0.21)
=========== ============ =========== ============
diluted $ 0.44 $ 0.05 $ 0.98 ($ 0.21)
=========== ============ =========== ============
Weighted average number of common shares outstanding:
basic 21,885,232 21,966,461 21,224,604 21,847,312
=========== ============ =========== ============
diluted 22,883,444 22,170,039 22,614,472 21,847,312
=========== ============ =========== ============
# # #
Exhibit 1
PR21
Host: Glenn Wiener
September 26, 2001/9:00 a.m. CDT
Page 1
PR21
September 26, 2001
9:00 a.m. CDT
Moderator Good morning, ladies and gentlemen and thank you for
standing by. Welcome to the Audiovox Fiscal Third
Quarter Results conference call. At this time all
participants are in a listen-only mode. Later we will
conduct a question and answer session. As a reminder,
this conference is being recorded.
I would now like to turn the conference over to our host, Mr.
Chris Fullem. Please go ahead.
C. Fullam Good morning, everyone, and thank you for joining us
today for Audiovox's Fiscal Third Quarter conference call for the
period ending August 31st, 2001. The company announced results
prior to the market opening this morning. If you have not
received a copy of today's announcement, please do so by
contacting PR21 at 212-299-8965 or by visiting the company's Web
site at www.Audiovox.com. Additionally, today's conference call
is being Web cast on the company's Web site.
Before getting started I would briefly like to read Safe Harbor
language. As far as historical information contained herein,
statements made in this release that constitute forward-looking
statements may involve certain risks such as our ability to keep
pace with technological advances; significant competition in the
wireless, mobile, and consumer electronic businesses; quality and
consumer acceptance of newly introduced products; our
relationships with key suppliers and customers; market
volatility; non-availability of products; excess inventory; price
and product competition; new product introductions; and other
risks detailed in the company's Form 10K for the fiscal year
ended November 30th, 2000 and the 10Q for the second quarter
ended May 31st, 2001. These factors, among others, may cause
actual results to differ materially than the results suggested in
the forward-looking statements.
At this time I would like to introduce John Shalam, Chairman,
President, and Chief Executive Officer of Audiovox Corporation.
J. Shalam Thank you. Good morning and thank you for joining us on
today's conference call to discuss our financial results for the
fiscal third quarter and nine months, and for our outlook for the
Exhibit 2
PR21
Host: Glenn Wiener
September 26, 2001/9:00 a.m. CDT
Page 2
remainder of this fiscal year.
Audiovox today reported net sales for the third quarter of $313
million versus $470 million in the comparable year ago period.
Compared to our second quarter performance this represents an
increase of approximately 12%. Net earnings for the quarter were
$1 million or $0.05 per share, both basic and diluted. While our
top line results fell slightly below expectations, we managed the
bottom line prudently amidst a difficult economic environment and
we met the lower end of our guidance. During the past two
quarters we had cautioned investors that our sales for the first
half of the year would be adversely impacted by the industry-wide
slowdown and the delayed release of new digital products.
Additionally, we affirm that our performance during the second
half of the year would improve sequentially as new products were
introduced and as consumers purchasing patterns improved in what
historically has been a hard period of seasonal activity. Our
performance during the third quarter is indicative of these
statements. We continue to strengthen our relationship with
leading carriers around the world and are in talks with new
partners to expand our distribution. We successfully introduced
our CDM 9100 handset, currently selling in Verizon outlets across
the country, as well as other carriers, and experienced modest
success in regard to our TDMA offerings. I am pleased to report
that all of the remaining analog units have been sold, and from
this point onward we are focused on further penetrating the North
American digital marketplace.
Philip Christopher, who is the President and CEO of Audiovox
Communications Corporation, will discuss with you in greater
detail our accomplishments for the quarter and our product
outlook for the fourth quarter and the beginning of 2002. Our
Consumer Electronics division led by Pat Lavelle, President and
CEO, continues to perform well and to exceed expectations. This
past quarter we saw increased demand for portable DVDs and FRS
radios in addition to other home consumer goods categories, and
believe while the fourth quarter will prove challenging we should
show positive results.
Before I turn the call over to Michael Stoehr, our CFO, I would
like to comment on the events of the past weeks and extend my
heartfelt sympathies and prayers to all who are impacted by this
national tragedy. On a personal level I was touched by the show
of support, not only by New Yorkers, but also by all Americans.
We are actively participating in the rebuilding effort and will
continue to do so.
Now I would like to turn the call over to Michael Stoehr, our
Senior VP and CFO, who will review our financial and operating
results with you in detail and provide guidance on our expected
results for the fiscal fourth quarter. Michael.
Exhibit 2
PR21
Host: Glenn Wiener
September 26, 2001/9:00 a.m. CDT
Page 3
M. Stoehr Thank you, John. Good morning, everyone. Consolidated
net sales for the third quarter of 2000 were $313 million versus
$470 million for the same quarter last year. Sales for the third
quarter increased sequentially of 12% for the second quarter of
2001, which was $276 million.
Our wireless group sales for the third quarter were $241.9
million versus $403 million last year. Wireless unit sales were
2,108,000 units with an average selling price of $108. The
average selling price was affected this quarter by the closeout
of approximately 300,000 analog ... phones. We also sold
additional TDMA product during the quarter at good margins, but
with lower ASPs than we normally get.
The Electronics group had sales of $71.9 million, versus $66.6
million last year, an increase of 8%. Mobile video and consumer
goods continue to show increases, as well as most other
electronic categories. Our consolidated gross profit margins were
10% this year this quarter versus 9.1% last year. The Wireless
group GP was 6.6% and our Electronics group GP was 21.6%. Both
groups showed improvement from the second quarter.
We also had a better recovery on our analog sales than we
anticipated. Consolidated overhead was $28 million versus $27
million last year. These increases occurred mainly in the
manufacturing warehouse expenses, principally in the use of
outsource labor used to refurbish, reflash, and program our
wireless units. Our selling expenses increased in commissions
related to sales increases in the AE group and some increased MDF
program.
The G&A expenses, professional fees, and provision for doubtful
accounts increased. Please note, this increased provision for bad
debts was primarily due to our review over our Malaysian
operation in light of the economic conditions in that area, but
other receivables are good.
Interest expenses increased this quarter versus last year as a
result of higher inventory balance this year versus last year. On
our balance, sheet our days on hand continue to improve from the
second quarter. For the third quarter AR days on hand, 50 days
versus 58 days in the second quarter 2001. Our AR balance is now
$187 million ending third quarter versus $198 million second
quarter. Inventory balances have declined to $228 million versus
$236 million the second quarter. This inventory balance is down
from its peak of $269 million during April. Our days on hand for
the inventory were 68 days versus 78 days for the second quarter.
The company continues to complete its inventory reduction
programs as all analog handset
Exhibit 2
PR21
Host: Glenn Wiener
September 26, 2001/9:00 a.m. CDT
Page 4
inventory has been sold. We continue to reduce the balances of
CDMA 8000s, and the remaining balance is anticipated to be sold
out by the end of the fourth quarter.
Direct borrowings from our $250 million bank line was $73
million, down from $82 million at the end of the second quarter.
Currently our balances on the direct borrowings are $43 million,
reflecting continued reduction of inventory balances. Our ending
cash balance at the quarter was $4 million. EPS was $0.05 a share
versus $0.44 last year. Our tax rate was 38% and the book value
of the company is $14.86. Total shares outstanding year to date,
21,847,000.
We would like to give some guidance for the fourth quarter. Based
on the tragic events that occurred on September 11th, we wish to
proceed cautiously as we assess the economic issues that may
arise as a result of these events throughout the economy. With
this in mind we are anticipating $2.1 million to $2.3 million
wireless unit sales at an average selling price of $130.
Consolidated sales are anticipated in the range of $340 million
to $360 million. Our consolidated gross profit margin is in the
9% range. We're looking at EPS between $0.05 to $0.10 per share.
At this time we will not give guidance for fiscal 2002 until the
latter part of the fourth quarter, as we are watching economic
developments as they unfold. Thank you and I'd like to turn the
presentation back to John.
J. Shalam Thank you very much, Michael. At this time I would like
to introduce Philip Christopher, who is the President of Audiovox
Communications Corporation. Philip.
P. Christopher Good morning. As John and Mike mentioned, the
third quarter, basically, was a closeout quarter. We were
successful closing out all of the analog phones in our inventory,
and the TDMA phones in our inventory as well. Plus in addition to
that, in view of the new technology coming out we also closed out
all of our GSM phones and positioned ourselves to be ready for
the new technology, the new GPRS telephones that will be
introduced beginning in the fourth quarter of this year.
Along those lines I think it's important to note that Mitsubishi,
which was our TDMA supplier, has become the latest Japanese
supplier to exit North and South America. That's leaving only two
competitors from Japan, U.S. Arab, and to a limited extent,
Sanyo. Most of the other Japanese competitors exited from the
wireless industry in North and South America.
So as of today we're in a very strong position, remaining number
one in CDMA. In terms of
Exhibit 2
PR21
Host: Glenn Wiener
September 26, 2001/9:00 a.m. CDT
Page 5
TDMA, we will buy the remaining inventory of Mitsubishi, which is
approximately 300,000 units, and that will be our last sale of
TDMA phones. We will be in a position at that point to be
introducing 1X products for both regular CDMA and wide-band CDMA
in the future.
In regards to GSM, for the first time we opened a new carrier in
South America, TEM, which is important to know that TEM is the
Tonam company. We delivered for the first time our GSM 1.9 phone.
Forty-thousand phones were delivered in the third quarter, and we
are now in a position to begin delivering the 1.9 GSM phones,
including dual-band and fly-band phones, to all GSM carriers in
North and South America.
So with that, ending the third quarter I think we are in a
position to look forward towards the fourth quarter and what is
happening in the industry. First of all, the consolidation of
carriers has continued, and all of the carriers in North and
South America are continuing to consolidate their positions and
many of the small carriers are disappearing. In terms of the
CDMA, all of the carriers are looking now towards the 1X
products. With the need for data and data being the way to
increase their revenues, data products will be introduced. I'm
happy to tell you that we will be one of the first suppliers in
the market with 1X products, introducing two such products in the
fourth quarter, the 8150X from Curitel in Korea and the 9150X
from Toshiba.
In addition, during the fourth quarter we will be entering the
market of the PDAs. We have spoken to you in the past about the
need of convergence of technology, and indeed, this conversion is
taking place. Our PDA will utilize the latest Microsoft software.
We are fortunate to have a license now with Microsoft on a direct
basis, and our PDA manufactured by Toshiba will be the first
product in the market utilizing Pocket PC 2002, the Merlin
software.
On October 4th in San Francisco, there will be a major launch and
a major press conference, and Audiovox will be participating next
to Microsoft announcing this product line. We will be selling
this product coupled with our CDM 9100 through the Verizon retail
outlets, as well as indirect channels such as Radio Shack, the
Wiz, and other major retailers.
Of course, the PDA convergence of technology is just the
beginning. Early next year the second generation part of our PDAs
will be introduced and that will be, again, a Microsoft Pocket PC
2002, but this time built in with an RF, a PDA with a built-in
telephone. Although the actual market for these products is
estimated to be at only 20% of the subscribers, it is also
estimated that it will generate the highest revenue for the
carriers. As a result, companies like Verizon and Sprint will be
looking forward to entering the data market on a very strong
basis and utilizing 1X products and PDAs to increase their
revenues and to improve their
Exhibit 2
PR21
Host: Glenn Wiener
September 26, 2001/9:00 a.m. CDT
Page 6
financial conditions.
This type of situation will occur not only in North America, but
also in Canada with Bell Mobility and Telus, and to a certain
degree in South America. In regards to the European's GSM, all of
you are aware that GPRS is slowly coming on board. We are now
testing with Sonofon of Denmark our GPRS phones, and we do expect
to be a player next year in the GPRS. In addition, we are
entering with Microsoft again into the development of new
products similar to Stinger, utilizing GSM technology and to have
a PDA based on GSM technology for the European markets. I will be
going to Taiwan in October to discuss with our different
manufacturers the Microsoft license and the development of these
kind of products.
I think overall under these scenarios most of the carriers today
have reduced their inventory levels. We entered this new year,
2001, with extremely high inventory levels. VoiceStream, Verizon,
and many of the other carriers have substantially higher
inventory levels than they expected. You probably have read that
they all missed their projections. The new subscriber growth has
been slow, but there is something very, very positive that we
should keep in mind. In our industry we have an advantage and a
disadvantage. The disadvantage is often the fact that technology
forces us to close our products, products like the analog, but on
the other hand, the revolution of our industry and the continuous
changes that are taking place give us the opportunity to remain a
leader and it keeps our competition awake.
The introduction of 1X products in the fourth quarter will put us
in a leadership position. In addition, the GPS location, and the
government forcing all of the carriers next year to at least have
50% of their subscribers with GPS phones, will give us an
opportunity for an extreme growth in 2002. We are bullish for
that growth, and I think the tragic events of September will spur
even a higher demand for these type of products, since it has
been proven that both wireless, cellular phones, and GPS
locations are something that is needed in our fight to avoid such
tragedies as we had in September.
I am happy to tell you that we will be the first CDMA
manufacturer introducing a GPS phone. We will be introducing that
phone in the early first quarter next year. Again, we are in
negotiations with both Verizon and Sprint for substantial
quantities of these products, along with the rest of the CDMA
carriers. The bright spot is that the growth of CDMA is
continuing, TDMA is phasing out, and GSM will become wide-band
CDMA.
Technology is the next phase of what we are looking for. Our
partners, particularly Toshiba, are poised to develop these type
of products and for us to play such a role in the industry. We
are positive that the growth will continue and the introduction
of the new products will
Exhibit 2
PR21
Host: Glenn Wiener
September 26, 2001/9:00 a.m. CDT
Page 7
give us the opportunity to remain either in the CDMA technology,
but in addition, become a very instrumental player in GSM/GPRS
phones and the future of wide-band CDMA. So that's about where we
stand today. During the fourth quarter we will continue to sell
our present dual-mode CDMA phones, the CDM 9100, the CDM 8100 and
we will be introducing our 1X products. As John mentioned before,
we are forging some very strong new partnerships with new
carriers, and that will give us an additional growth both for the
fourth quarter and the first quarter.
So the technology is sound, the industry is going to grow, and
the projections of the carriers are very good. I think both the
fourth quarter, and particularly next year, we will enjoy a very,
very strong year in the wireless industry. Thank you.
J. Shalam Thank you very much. I would like now to introduce Pat
Lavelle, who is the President of Audiovox Electronics
Corporation. Pat.
P. Lavelle Thank you, John. Good morning, everyone. Sales for the
Electronics company grew by 8% quarter over quarter, and we have
maintained a 7% increase over 2000 through the first nine months
of 2001. All categories posted increases except Car Audio, which
was down 6% for the quarter; however, we believe this is within
industry performance for 2001. Our growth for the period was led
by Mobile Video, where we continued to maintain a dominant market
share. Penetration at OEM and after-market segments has grown and
we are confident that the introduction of our new combination DVD
overhead video systems will allow us to expand our penetration
across all market segments. We expect deliveries of this
first-to- market product in November of this year.
During the third quarter, Ford added our rear-seat entertainment
system to the Expedition XLT, and we are experiencing a 20%
increase in orders and forecasts due to this addition. Also, we
are currently in negotiations with Ford on a multi-vehicle
program utilizing the new DVD overhead, and I hope to advise you
shortly of our success in securing this business.
On the consumer side, consumer product sales are running 70%
ahead of last year and we have established good placement for the
upcoming Christmas season. Our DVD portables, FRS/GMRS radios,
and video entertainment systems are placed in many of the largest
retailers in the country, and we believe this increased
penetration will help offset the general softness expected in the
economy in the fourth quarter.
Wal-Mart, Kmart and Target stores lead the list of accounts that
will retail Audiovox portable DVD players. We will introduce two
new units for Christmas, and believe these units will firmly
establish Audiovox as a major supplier of DVD portable players.
Based on the success
Exhibit 2
PR21
Host: Glenn Wiener
September 26, 2001/9:00 a.m. CDT
Page 8
that we have enjoyed with these players, we will also introduce a
line of home DVD during the first quarter of next year, which
will give us the ability to further expand market share in this
critical category.
Overall, margins were lower quarter over quarter due primarily to
increased price pressure as the Mobile Video business matures and
it moves into the mainstream. In addition, we have had a shift in
business over the year towards more high-volume mass merchant or
national account business. For the year our sales to the mass
merchant market has grown 23% and represents approximately 43% of
our overall sales. Internationally, third quarter sales at AX
Malaysia are off 20% due to the stagnant economic conditions in
Malaysia; however, Audiovox Venezuela has grown 48% quarter over
quarter. This is a direct result of increased car production at
GM and Chrysler plants as the economy has substantially improved.
Over the years Audiovox has gained acceptance by our customer
base as an aggressive leader of new technology to existing
markets. This aggressiveness has allowed us to grow our business
as older categories mature. Our strategy is to continue this
leadership.
In the months ahead Audiovox will introduce two new satellite
radio systems, and we will be the first to offer both an XM
receiver and a Sirius satellite receiver. Satellite radio is a
new service being launched by two companies, offering 100
channels each of digital quality music with no terrestrial
limitations. I am sure many of you are familiar with XM and
Sirius. We believe these new products and services will be
enthusiastically received by customers and consumers, and
Audiovox is well positioned to take advantage of this new
technology and opportunity.
Although we are facing a challenging fourth quarter, I believe
the programs that we have secured and the new product
introductions will allow us to meet our plan for the balance of
the year. Thank you. John.
J. Shalam Pat, thank you very much. Ladies and gentlemen, we are
now ready to receive your questions and comments or suggestions.
Moderator Very good. Thank you. The first question comes from the
line of Donald Newman with Ladenburg Thalmann. Please go ahead.
D. Newman Good morning, everybody. Could you describe the
relationship, Phil, with Verizon? How large a percentage of
business was Verizon to cellular and to total sales and what do
you see going forward?
Exhibit 2
PR21
Host: Glenn Wiener
September 26, 2001/9:00 a.m. CDT
Page 9
P. Christopher As you know, last year we represented 42% of their
purchases, and last year I think Verizon was close to 60% of our
business. That percentage has been coming down, and as of the end
of the third quarter, I would think that our business with
Verizon was about 50%. It will continue to be reduced as the new
carriers that are coming on board with the new products are
increasing their sales. Don't forget that last year the CDM 9000,
and to a certain degree the 9100, up to this point was sold
exclusively to Verizon. That exclusivity is now over and we're
opening it to other carriers as well in North America. So that
percentage of Verizon, I would say it's about 50% at this point.
The other thing that is happening, the old Prime Corp region has
now become an independent. It was sold by Verizon to a venture
capitalist group so a percentage of our sales in the Midwest will
now be showing up under Prime Corp, the new name that they will
be marketing under.
D. Newman Now your total cellular sales were what, $242 million or am I
wrong on that?
M. Stoehr $241 million.
D. Newman I can't hear you, Mike.
M. Stoehr It's $241.9 million for the third quarter.
D. Newman Right. So Verizon would represent $120 million of that. Is that
correct?
M. Stoehr Approximately. Yes.
D. Newman Okay. Now you had an ASP of $108 and that represented,
you liquidated how much in the way of analog, 300,000?
M. Stoehr Donald, this is Michael....there were 300,000 phones.
In regular digital product the average selling price was $130. D.
Newman $130 for regular digital. Again back to Phil, in Q4 ending
November 30th, you said that you've taken on 300,000 TDMA to
liquidate. Is that right?
P. Christopher I don't know if we're going to ever see them all,
but we made a deal with Mitsubishi to buy the remaining inventory
of the TDMA phones. We expect them to be delivered in the month
of October and to be sold between October and November.
D. Newman You wouldn't have made this deal unless you had a buyer
for that, is that correct?
Exhibit 2
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September 26, 2001/9:00 a.m. CDT
Page 10
P. Christopher That's correct. There is a demand for these TDMA
products. It's a matter of software being put in on a timely
basis. As you know, different carriers use different software. We
are working with Mitsubishi to quickly bring these units and
close them out very quickly.
D. Newman Then going forward, your bet here in the U.S. is CDMA. Is that
correct?
P.Christopher Yes, as you know, CDMA is the strongest
technology. VoiceStream utilizes GSM and we're working with
VoiceStream to develop such products. Both AT&T and Cingular, who
are the two TDMA carriers, they are beginning to overlay their
networks with GSM and GPRS products, and in the year 2002 you
will begin to see a shift from TDMA completely.
D. Newman I might have missed it, but what was your gross margin for
cellular?
M. Stoehr 6.6%, Donald.
D. Newman 6.6%. It was 21.5% for automotive, is that right?
M. Stoehr 21.6%.
D. Newman 21.6%. Can we have a breakdown between the three
divisions, Mobile Electronics, Consumer Electronics and Sound,
what you did in Q3?
M. Stoehr Yes, we can. I'm going to give it to you as we report
it in the queue because that's the way we report out. The third
quarter sales for Sound were $17.9 million. The accessories were
$41.3 million.
D. Newman What's that, mobile...?
M. Stoehr Mostly that's mobile video and security products.
Consumer Electronics were $12.3 million.
D. Newman $12.3? That's a big drop, isn't it, from Q2?
M. Stoehr From Q2 it's down slightly; it's up from last year.
D. Newman Twelve point three for consumer electronics? All right.
I'll give you a call on this later. Thank you very, very much.
J. Shalam Thank you, Donald.
Exhibit 2
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Page 11
Moderator Thank you. Next is a question from the line of Rary
Bessinger with Standard and Poor's. Please go ahead.
R. Bessinger Hi. Looking at the third quarter income statement,
I'm wondering on expense controls was there any significant
reasons why there was a little jump in the GNA? Also going
forward, how does the company intend to increase their gross
margins? Also just some numbers, if you could give me your
forecasted capital expenditures for the year. That's it.
M. Stoehr Okay. Let's take it one at a time. In the GNA for
expenses, the cable-related expenses are down from last year. We
do have a reduction in head count. The expenses increased, as I
mentioned, in provision for bad debts are in that category. That
really occurred in our Malaysian operation when we took a real
hard look at the receivables to see what the status of them was.
We're still collecting the money from the accounts; we thought it
was prudent to put a provision in.
The other category that went up was our professional fees,
specifically in the area of legal, and also some tax work that we
had done for state minimization programs. As for the gross
margins, as both Phillip and Pat outlined, as new product comes
on stream this has a positive effect for our gross margin. The
cap ex for the company for the last quarter probably will be in
the $300,000 range. Year to date our cap ex has been $1.6
million.
R. Bessinger Thank you. Do you have a forecast on the CDMA market
for handsets for '01?
P. Christopher Mike doesn't want to give projections, but as I
mentioned before, bear in mind that there are two unique things
happening. The new technology. Beginning in January, Sprint,
Verizon, Alltel, U.S. Cellular, and all the other carriers in
North America will be forced by the FCC to begin utilizing EPS
handsets. Therefore, you will see a tremendous growth for us
because many people will be changing. Existing subscribers will
be changing from their existing phone to the new GPS phone. So we
are bullish for the first quarter. I don't want to give you exact
numbers, but I think it will be much higher than last year's
first quarter.
R. Bessinger Thank you.
J.Shalam I want to remind you that we had a very similar and a
very beneficial increase in our handset sales due to the
migration of subscribers from analog to digital in the last two
years, which accounted for a good portion of the growth in
handsets last year. Hopefully, this will repeat itself next year.
R. Bessinger Thanks.
Exhibit 2
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September 26, 2001/9:00 a.m. CDT
Page 12
M. Stoehr This is Mike Stoehr again. Projections that we gave at
the... we gave for the fourth quarter, anticipates the
introductions of products, but there is always sometimes delays
which we don't anticipate our approvals, but we would just be
cautious for a protection....
Moderator Thank you. The next question comes from the line of
Thomas Kahn with Kahn Brothers and Company. Please go ahead.
T. Kahn Good morning. I checked out the 9100 in the Verizon
stores versus the Motorola 120. It seems to me that, being sort
of an unsophisticated buyer, that the Motorola 120 has some
better features, particularly with respect to the battery life. I
wondered whether you could give us a little color on how the 9100
is selling versus the Motorola instrument. I guess the Motorola
instrument has sort of better name recognition, and it also seems
to have better features with respect to the battery. Also, is
there anything that can be done to improve the battery
performance of the 9100 so that when a consumer looks at it
versus the Motorola 120 the playing field is leveled a little
bit?
P. Christopher First of all, I don't think our battery time is
much less than Motorola; we're about even in terms of
specifications. I think the main reason why Motorola was
outselling the 9100 was the price. Initially, Motorola was at $69
and we were at $99 retail price. As of September 1st, if you went
out you would see now that the tri-model phones, Nokia and...are
$49 retail at the Verizon stores. Audiovox and Motorola are $69,
even up. Now that we're even in the pricing, the 9100 is gaining
on the Motorola phone.
T. Kahn That's correct. I noticed that the price was different
and I notice now that the price is the same. Would you say that
you're pleased now with the sales of the 9100 versus the Motorola
120 in terms of what you find out from Verizon?
P. Christopher We're pleased, but we would rather see the 9100 at
the $49 level because that's really where the action is.
Unfortunately, still you get 50% of the volume was at the low
end. So when you're not at the low end and your positioned as a
mid-tier phone, you're being squeezed into the low end and the
high end. So we do have this situation. We are taking steps with
Verizon to promote the phone. You probably saw that there is
a...with the Verizon salesmen now on the CDM 9100. We expect
that, as I mentioned before, in the fourth quarter it will be
coupled with the PDA to give the 9100 an edge.
In addition, the 9150X, which is on the same platform, will be
the first 1X product that will be ... in the fourth quarter, so
that will give the 9100 additional recognition, and the same
platform will be used in January as a GPS phone. So I think there
are reasons why Verizon
Exhibit 2
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September 26, 2001/9:00 a.m. CDT
Page 13
will be pushing this phone during the fourth quarter.
T. Kahn Thank you very much.
Moderator Thank you. Next is a question from the line of Minh Do
with Voltaire Capital.
M. Doh Hi, Mike. What was the unit number for this quarter?
M. Stoehr Two million, one hundred, and thirty thousand.
M. Doh I don't know if it's John or Phil that made a comment on
carrier inventories. Did you guys say that it was higher than
normal right now?
P. Christopher I did. I said that. You remember we had to start
from the first quarter. During the first quarter, Verizon had
unusually high inventory levels which resulted for two reasons.
One, the consolidation took place between all the independent
carriers...as Verizon. That consolidation took place last year,
and as a result based on their projections, during the first
quarter they had unusually high inventory. Then their
projections, because of the slowdown in the economy, both Verizon
and other carriers did not meet their subscriber projections. You
had a double type of situation.
So the comment that I have made as of the end of the third
quarter of inventory levels had improved with most of the
carriers. The carriers now are in a position to actively be
looking for a promotion during the fourth quarter to find ways to
increase their subscribers. We think we have a solution for the
carriers. One is the PDA and the convergence of the technology
between the cellular phone coupled with the PDA. We think we have
a solution in view of the fact that data generates revenue, and
we will be introducing the 1X products with the CDMA carriers.
For the first quarter we were working very closely with them for
the development of GPS handsets that will give them momentum in
their sales and smooth transitioning of their present digital
into 1X products.
M. Doh Okay. Just to follow up on that, are the inventories now
back to normal or do they continue to be greater than normal?
P.Christopher I would say they're above average.
M. Doh I'm sorry. They're still above average?
P.Christopher Yes. They're still above.
Exhibit 2
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September 26, 2001/9:00 a.m. CDT
Page 14
M. Doh Okay. But they're improving?
P. Christopher Yes, they're improving. What they will need, in
particular, is the 1X data products. Let me also mention to you
why the demand for the 1X products. Even though the deployment
has been slow in terms of the networks for 1X, they kept patching
it in major cities like New York City and Los Angeles. It's under
pressure, so they must lower their network and their switches for
these new 1X products.
I don't mean to be hammering this thing, but I want you to see
through what is happening; basically, capacity and transition
into this new technology. The year 2001 will be a very difficult
year, and it has been a very difficult year. It has been crowned
by the tragedy of the last two weeks. Obviously, the economy and
the industry has suffered, but if there is a bright spot in what
is happening today, I think you will see through this tragedy
that the wireless cellular industry is an industry that's going
to gain momentum for two reasons; particularly, the GPS location
and the data products. Number two, the revolutionary products
will be introduced both in CDMA and DSN in terms of 1X and GPRS
positions Audiovox into a leadership position with these
products.
Our competition has become smaller. I mentioned before that
Mitsubishi has exited the industry. At this point in North
America, Audiovox will remain one of the leaders in CDMA. We will
be fighting among Motorola and Nokia for a leadership position on
a world basis.
M. Doh Okay. Just one last thing. For the industry, not just for
Verizon, when would you expect the inventories to be back to
normal levels?
P.Christopher Sprint is in a much better position. In my
meetings with Sprint, as a matter of fact, Sprint has high
demands for the fourth quarter, and they're looking for inventory
levels. We're trying to help them. Alltel, U.S. Cellular, and
Western Wireless also have given us some bullish projections.
Outside of the U.S., Canada Bell Mobility, and Telus, are the two
carriers that we work with on an exclusive basis. We have some
very strong projections for the fourth quarter from them.
M. Doh Okay. Great. Thanks, Phil.
Moderator Thank you. Next is a question from the line of John Bucher with
GKM. Please go ahead.
J. Bucher Phil, a question for you regarding the two catalysts
that you talked about, the 2.5G upgrade, both for data as well as
the better capacity utilization of the phone.
Exhibit 2
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Host: Glenn Wiener
September 26, 2001/9:00 a.m. CDT
Page 15
P.Christopher We're in beta testing.
J. Bucher And comparing that to the GPS, the E911 compliance
requirement. As you look to 2001, which of those two requirements
do you see the more significant driver of handset demand as 2002
unfolds?
P. Christopher Definitely the E911. There is no question. What
has happened that you should know is that many carriers in the
past were positioning themselves to have a network solution. In
other words, the network was going to provide the GPS location.
With that in mind, it really had no bearing on the handset.
However, what has happened is for different reasons. The carriers
for Sprint and Verizon, the two major CDMA carriers, as well as
Cingular and AT&T on the other side, they have decided to use
handset solutions. By utilizing handset solutions it means that
by the end of the year 2002 at least 50% of their base must be
changed from the present cellular form to a GPS type of form.
We're talking about a whopping type of increase of growth, and
the question is how do we take advantage of this growth. First,
you must have the technology, and I think we are positioned and
we can assure you that we will have that. Number two, to have the
product ... enough to gain momentum. Number three, for your
product to be competitive. So we are working on those three
equations to have a successful E911 compliance with the carriers.
J. Bucher So when you compared this to the transition period from
analog to digital, and the increase in demand that that accounted
for, do you see this E911 requirement for the carriers to comply
with the FCC's requirements there on the handset side, that
that's going to be a similar catalyst?
P.Christopher I think it's going to be a greater catalyst
because the position from analog to digital was optional. I mean
the carriers made it an option to the consumers. Of course, the
consumers, because of different capacity reasons, the carriers
switched the subscribers. This is a mandatory legal issue. For
Verizon and Sprint to comply they must have a certain percentage
by each quarter have a certain percentage of GPS phones.
J. Bucher For next year you're talking about just your CDMA
phones having the E911 capability?
P.Christopher Yes. For next year we will be strictly on our CDMA
phones. That's the technology that we have with Toshiba at this
point. However, we will be working with other manufacturers for
GPRS-type of products.
Exhibit 2
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September 26, 2001/9:00 a.m. CDT
Page 16
J. Bucher What will the embedded solution to have E911 and GPS
capability, what is that going to add to the ASP for handsets on
average?
P.Christopher Let's just say, first of all, the increase in the
product itself is approximately a $30 delta between a regular
digital phone and a GPS phone. We have to utilize the 5100 MSN
chip set from Qualcomm versus the 5105, which is approximately a
$10 delta there. But the big issue is the memory of the phone,
which increases and adds to the course of the telephone. The
approach that we have taken in order to be very quick and very
competitive is taking our existing CDM 9100 platform, increasing
the memory, putting a GPS antenna on it, and working with both
Verizon and Sprint to introduce this in January.
J. Bucher So about a $30 increase in ASP, other things being
equal?
P. Christopher We will be selling this for close to $200.
J. Bucher Okay.
P. Christopher I figured that out.
J. Bucher Do you have a rough idea of what the mix is going to be
next year for your CDMA line between those that have E911
capability and those that don't?
P. Christopher As I said, if everyone complies, and unless there
is a waiver from FCC which would give some leeway to the carriers
to slow down percentage-wise, we expect...should. All of the
carriers have filed for some waivers with the FCC, trying to gain
some time period for this transition. It's an awkward transition.
So there is this fact that we have to take into consideration,
but let's just put it this way, it will be substantial. It will
be somewhere between 33% and 50% of the subscriber base.
J. Bucher A question for you on your new PDA product. Is Toshiba,
I know it looks like they're selling the Genio PDA, which looks
like it's going to be very similar to the one you're going to
sell. Are they also going to sell that with the embedded CDMA
capability?
P.Christopher The first PDA product, you say standalone
PDA-based on CDMA technology and Microsoft Pocket 2002. Toshiba
will, because of their past history of selling computers, the
Toshiba in Irvine, California will continue to sell standalone
PDAs. Anything that has a built-in RF, which goes through the
carriers, obviously will be exclusive to Audiovox Communications,
which this is regarded more of a cellular phone rather than a
standalone PDA.
Exhibit 2
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September 26, 2001/9:00 a.m. CDT
Page 17
The approach that we are taking on the standalone PDA to offer
both the Verizon and Sprint is the cable that connects to our CDM
9100, particularly the 9150X which gives you the speed, and to
couple these products together, and utilizing the subsidies that
they have on the cellular phones, we feel that we will have a
strong second approach to the carriers in retail.
J. Bucher Okay. So there won't be any potential channel conflict
then with Toshiba selling a built-in CDMA-capable PDA through
other channels? You will have an exclusive on that?
P. Christopher As of now, we have an exclusive.
J. Bucher Okay. As far as GPRS phones go, can you say what the
delta's going to be in average selling price over and above GSM
phones when you start selling GPRS phones?
P.Christopher You know there has been a major deterioration in
the GSM market. Last year, unfortunately, when we entered we sold
approximately 300,000 GSM phones. Standard GSM phones went as low
as $49 in Europe and in different areas. So the GPRS phones, I
think everyone is looking and they are very, very cautious as to
how the manufacturers proceed.
We are estimating right now that the regular watt phones in
Europe are going between $80 and $99. The old GSM phones are all
being closed out. You have some significant closeouts with
Phillips, Alcatel exiting the market, Ericsson basically dropping
their prices because of their joint venture with Sony. So there
has been a heck of a revolution in the GSM industry.
Now the GPRS, all the carriers are looking at this very
cautiously. In Europe in particular, where the carriers are much
in debt and they're looking for how to increase their revenues.
They're also questioning whether or not deployment of GPRS very,
very quickly will give them those solutions. So we will be
proceeding cautiously on the GPRS. The average selling price of a
GPRS phone will be somewhere around $130, depending on the
category of where it is. So you will also have from $99 to $129
delta. So $30, again, GPRS delta between the standard GSM phone
and this one.
J. Bucher Okay. Last question, sorry for monopolizing the time
here. On the 9100, I know that you, as you mentioned, you ship a
data kit that goes along with that. Can you say, roughly to date
since you've been selling the 9100, how many data kits have you
shipped with 9100s? Do you know roughly what percentage of 9100
customers are using the phone for data also? Thank you very much.
P. Christopher We've only sold approximately 10,000, but I think
percentage-wise it's more. However, the reasoning is the speed of
the networks. With the deployment of 1X you will see significant
Exhibit 2
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September 26, 2001/9:00 a.m. CDT
Page 18
growth. Also, bear in mind that when we coupled the 9150 along
with the cable that you just plug into your CDM 9150X and gives
you that speed, we expect a ....
Exhibit 2
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September 26, 2001/9:00 a.m. CDT
Page 19
Moderator Thank you. Next is a question from the line of Bruce
Brewster with Brewster Asset Management. Please go ahead.
B. Brewster Hello. There's been a lot of discussion about the
technology here, but there are still a couple of points of
clarification I'd like to get. A couple of years ago they began
talking about third generation or 3G phones. More recently
they're talking about 2.5G phones and you're speaking about 1X
phones. Is this synonymous or would the 2.5G obsolete the 1X?
P.Christopher It's synonymous with 2.5.
B. Brewster 1X is synonymous with 2.5?
P. Christopher Correct.
B. Brewster Okay. The GPRS phone, you're saying that this should
create a tremendous replacement demand.
P. Christopher Let me correct you. I said the GPS handset will....
B. Brewster The GPS handsets.
P. Christopher GPRS is an expression they use for GSM....
B. Brewster Okay. GPS. The GPS facilitates the location of a caller on a
911 call.
P. Christopher Correct.
B. Brewster If the phone has GPS capability, are there any other
inducements to the end user, aside from 911, that might come from
that GPS capability, such as being able to determine distance to
a point or location based on the phone itself, or the ability to
send back to the person listening to the call where the call is
coming from, such as a child and a parent, locating them?
When you say that there is a mandate to employ GPS phones that
means, I suppose, the number of handsets sold with that
capability or does it pertain to the number of phones in the
field or some aspect of the system in order to be able to utilize
GPS technology? What I'm looking at is the motivation that you're
speaking of for users to discard their current phones and buy a
GPS phone.
P.Christopher Well, there's two things. First of all, overall
the longevity of the lifetime of the phone has
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September 26, 2001/9:00 a.m. CDT
Page 20
become smaller and smaller so consumers changing to a better
product is not an issue because automatically we have consumers.
In the old days it used to be 48 months. Now it's beginning to be
as soon as their contract is up, and obviously there's a reason
for it.
The carrier gives it to you free. The carrier, after your one
year is up or your two-year contract is up, in order to maintain
you as a customer, and for Verizon not to lose you to AT&T and
for AT&T not to lose you to VoiceStream, they encourage you to
re-sign a new contract. As an incentive they give you the new
technology. They replace your old technology with new technology.
B. Brewster Absolutely. But I wonder how that ties in with GPS?
P. Christopher That answers one of the levels of your questions.
Let me try and respond to you as intelligently as I can. In
regards to FCC, the FCC mandates that a percentage of all new
subscribers must have GPS handsets. As of now that mandate says
that as of the end of the fourth quarter, December 31st, it must
be 25% of the new subscribers for the fourth quarter. Most of the
carriers have filed a waiver. They will get some lead time, and
we will see that it will be first quarter 25%, second quarter
30%, and so on. I'm not sure exactly what the percentages will
be, but that mandate is in regards to new subscribers. In other
words, if during the first quarter Verizon does one million
subscribers, I think that mandate would say that 25%, 250,000 of
those subscribers must be sold a GPS handset. So this is the type
of situation.
Now in regards to what GPS does. Initially, all the GPS phones
will do is, basically, give the location, but as you can see the
new chips coming out, all those ideas that you brought out in
terms of encouraging the consumer. You will see new technology
being developed, and we will utilize that GPS for different
incentives for the consumer to have this phone. At the moment the
only thing the consumer gains is GPS, and because the Qualcomm
chipset that includes GPS also includes data and is the most
expensive, you will see that this product will be the higher end
of the technology. In other words, we cannot be a low end phone
with just simply GPS at this moment because the chip that we are
using is the most expensive Qualcomm chip that gives you the
maximum amount of memory, and it forces us to have 1X capability
data with this product.
A lot of carriers, for emergency purposes, are looking for what
we call low-end GPS phones. I'm sure Qualcomm and some other
manufacturers will be developing these types of chips that would
allow you to have an inexpensive phone. This is the predicament
that the carriers are in. In order to meet the mandate of FCC,
they must spend more money on higher-priced handsets. Of course,
all of us know that the carriers, in their efforts to generate
revenue, they
Exhibit 2
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September 26, 2001/9:00 a.m. CDT
Page 21
must balance the subscribers between low-end, mid-range and
high-end products. I hope that answers your question.
B. Brewster The FCC, according to how I understand what you say,
is not going to allow other methods of phone location, such as
triangulation?
P. Christopher The different carriers have the ability to apply
to FCC with different systems and say this is what we would like
to do to meet your specifications or your mandate. As I mentioned
in my opening remarks, until the month of June it was Verizon's
intention to have a network solution, not a handset solution for
their product. To a certain degree that would have made it easier
for us because we would just sell our standard products, and the
application would have been on the carrier to meet that mandate.
On the other hand, right now by switching to a handset solution,
... Sprint, Verizon, Alltel, and U.S. Cellular are all handset
solutions. It forces us as a manufacturer to immediately react
and manufacture a product that utilizes GPS, the GPS antenna and
the 5100 Qualcomm chip. So as I said in my opening remarks, we're
in a very good position and I'm happy to advise you that we will
be one of the first ones out there with a GPS phone in the first
quarter. I think all ... that I have given remaining intact that
this will be a benefit to our sales.
B. Brewster Thank you.
Moderator Thank you. Next is a question again from the line of
Donald Newman with Ladenburg Thalmann. Please go ahead.
J. Malpass Hi. This is actually John Malpaz for Donald. Just a
quick follow up. Have you seen any sort of spike in your sales
for handsets over the past two weeks since September 11th?
P. Christopher Not really. Actually, the last few weeks since
September 11th there have been several logistical problems with
deliveries and things like that. However, Verizon has reported a
very big increase in the New York region and in other regions. A
number of the carriers...their existing inventory. It doesn't
necessarily translate to us immediately in terms of deliveries,
but it will help, of course, the fourth quarter because they are
selling out of their existing inventories and promotions.
Also, I'm happy to tell you that we participated with Verizon in
contributing phones and accessories and helping in this crisis.
Many of the phones that were working out, at least I'm happy to
note that the Audiovox phones never lost their signal ... our
competition in the New York area.
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J. Malpass Okay. Great. Thank you.
Moderator Thank you. Next is a question from the line of Mark
Seady with Foreign Communications. Please go ahead.
M. Seady Yes. Just a quick question. Regarding the PDAs, how will
they be priced in terms of the combo, the package you're talking
about with the initial model and then as a standalone? Also, as
far as the specs on them, how much memory will they have? What
size screen are we talking about, that type of thing?
P. Christopher We'd say contemplating similar to Ipaq, which is
being sold by Compaq with PDA alone. Of course, Compaq is making
certain moves in the retail market today. One of the reasons is
that the Ipaq utilizes the old technology. In anticipation of
Pocket PC 2002, they are reducing their prices.
Up to this point I think the retail price was approximately $549
with a $50 rebate giving you a $499 retail price. Our intention
is to introduce our combo package PDA and cellular phone for $649
to the Verizon retail stores. It is our anticipation, I shouldn't
be giving this out, but you can do the math. If the average
activation commission for a phone is $200 that brings you down to
$449, and actually a retailer can retail our product for $499, a
better product than Ipaq, and get a free phone. Whether they will
do that or not, if I was the merchandise manager that's what I
would do.
M. Seady Okay. Centrally, as far as the DVD home decks go, are we
talking two or three different models or are you talking
changers? How will you differentiate them? I know that pricing
out there has been anywhere from $99 to $200, but I guess I was
just trying to get an idea of how you would position your home
decks there?
P. Lavelle Our basic plan is to have three units, stepping up
from a promotional model to one with e- Scan, which will be at
the higher level. We have created a number of good relationships
for Audiovox product within certain major mass merchants, and
they have expressed an interest in marketing Audiovox branded
home DVD units. So we have an entree to enter into the business,
and we will have three models stepping up from whatever the price
point is going to be at that point, whether it be $79 or $99,
right through.
M. Seady Up to $200 or somewhere in there?
P. Lavelle A little under $200.
Exhibit 2
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Host: Glenn Wiener
September 26, 2001/9:00 a.m. CDT
Page 23
M. Seady Okay. Are you talking all single play or will you have a
changer in there as well?
P. Lavelle All single play.
M. Seady Single play. Okay. Thanks very much.
Moderator Thank you. Next is a question is from Chris Blackman
with Empirical Capital. Please go ahead.
C. Blackman I've been answered. Thank you.
Moderator Very good. Thank you. We have a question from the line
of Richard Greenberg with Donald Smith and Company. Please go
ahead.
R. Greenberg Two topics I'd like you to just expand on a little
bit. First, I'm still grappling with this increase in operating
expenses. Mike, I hear what you're saying on the reserves. But
could you give us some sense of should we expect operating
expenses to dip back down in the fourth quarter despite the
increase in expected sales? Should we expect something more in
the $26-$27 million range or are they going to remain at this
high level?
M. Stoehr No. You'll see it in the $27 million range.
R. Greenberg Okay. Then I guess my second question is the quality
of the inventory, $228 million. I know probably 20% or so of that
is the Electronics business, but the quality of the cellular
inventory. You've discussed with us in the past how you're
pre-selling your inventory much more now. Are we confident that
there will be no risk of inventory write-down in the fourth
quarter or is there a certain amount of the 8100s, whatever, a
certain level of inventory that you are concerned about and
there's a possibility of a write-down?
P. Christopher There's no possibility of a write-down during the
fourth quarter. It is true, however, that we do pre-sell the
inventory. However, this has been an unusual year where there has
been a deterioration of prices very quickly. As we have been
discussing all along, how we are blessed when the new
technologies come on board, but that blessing often becomes a
problem with technology moving very quickly it obsoletes other
products. We and the carriers, we're working very closely with
both Verizon and Sprint to make sure that our 9100, which is the
main inventory level with the highest inventory levels, to make
sure that we sell through without any type of write-downs. So I'm
pretty confident that will take place.
Exhibit 2
PR21
Host: Glenn Wiener
September 26, 2001/9:00 a.m. CDT
Page 24
The rest of the digital phones that we have are in a very good
position, and we have no product that has any type of a risk. The
only problem area was the 9100.
Let's just go through the history. If you remember, it was the
replacement of the 9000. We delivered those 9100s in March,
400,000 units into our warehouse. However, we ran into technical
issues with World, Verizon, and other carriers. By the time we
got approval it was April 28th and we started selling in May.
That gave our competition ... Nokia, and Motorola an edge, in
that the transition from the 9000 to the 9100 unfortunately was
not smooth and we lost momentum.
I think we are regaining that momentum. The proof is the fact
that the retail price of the 9100 now is $69 in the Verizon
stores. Western Wireless and Bell Mobility have picked up the
9100. The exclusivity with Verizon is over so it's open to other
carriers. That will give us the opportunity to promote the 9100
heavily in the fourth quarter and avoid any need for write-down.
The need for write-down, by the way, has nothing to do with the
technology. It's just strictly the deterioration of pricing, and
many of the carriers are looking for assistance when they order
something that's $160, but the competition's selling it for $130.
So this has the merchandising and marketing problems that we are
dealing with on a daily basis. In answer to your question, we are
confident that there will be no write-down.
R. Greenberg Okay. Thank you very much.
Moderator Thank you. Next we have a question from the line of
Glen Douchet with Voltaire Capital. Please go ahead.
M. Dolan Hi. It's MaryAnn Dolan for Glen. How are you? I just
wanted to clarify two things. Units in Q3 that you reported and
the expectations for Q4, and will Q4 units be impacted by this
GPS mandate? Because why would you buy a phone in Q4 if you're
just going to have to buy another phone in Q1?
P. Christopher I think most of the consumers do not know about
this FCC mandate of what is happening. Most existing consumers
are changing technology when their contract is up. Most of the
consumers or subscribers have gotten used to the idea if I sign a
contract with Verizon for a year, my year goes up and then I get
the latest phone.
Again, let me explain that the mandate which begins in the first
quarter, it's in regards to new subscribers. In other words, if
Verizon, Sprint, Alltel, VoiceStream or whoever, a certain
Exhibit 2
PR21
Host: Glenn Wiener
September 26, 2001/9:00 a.m. CDT
Page 25
percentage of their new subscribers must be sold a GPS handset.
There are all kinds of negotiations going on between the carriers
and the FCC. As a matter of fact, there was a ... last night with
the FCC and I'm not sure exactly, I'm not in a position to tell
you how those applications for waivers are going to wind up. But
certainly I think, in general, what we want to do here is now
pinpoint the exact interests or whatever; what we should do is
see the vision. In general, there is a change taking place and
that change is beneficial for industry. That change is beneficial
as a result to our Communications division.
M. Dolan So if you had to say that benefit coming from people
just upgrading phones without the end of service life happening,
does this accelerate units or does it just accelerate your market
share within the units being sold because you have the phone
ready?
P. Christopher Let's just say this, we think we're going to be
ready. Things happen. There's testing that has to go through. I
want to caution everyone that when you're dealing in the wireless
industry you anticipate that you will be one of the first ones
and you will be ready, but if for some reason on the Lucent
switch or on the Motorola switch or on the Nortel switch our
phone does not operate correctly, then there's a delay. So we
anticipate, and we have reason to believe, that we will be one of
the first ones out there. We're in the testing process now with
our GPS phones. We will begin to deliver in January to Verizon
first and to other carriers, depending on our production
capacity.
I'm not sure what the other part of your question was.
M. Dolan I missed the numbers you gave.
M. Stoehr This is Mike Stoehr. Two million, one hundred, thirty thousand
in the third quarter.
M. Dolan Q3. So you're looking for about that in Q4?
M. Stoehr Yes. As I prefaced the conversation, at this point
we're being extremely cautious, as Philip mentioned. We've
mentioned that we have new product coming in, but as always,
there may be some delays so we've decided to be more conservative
in our estimate.
P. Christopher Also, the GPS does not take effect until the first
quarter. It has no affect on the fourth quarter, now it's just a
little.
M. Stoehr That also is one of the other issues that we're going
to address in the latter part of the fourth quarter, our vision
for fiscal 2002. Clear us up a little bit more.
Exhibit 2
PR21
Host: Glenn Wiener
September 26, 2001/9:00 a.m. CDT
Page 26
M. Dolan Great. Thanks. I really appreciate it.
Moderator Thank you. Speakers, we have no further questions in
queue. Please continue.
J. Shalam Thank you very much. We appreciate you joining us today
for this conference and we wish you all well. Thank you.
Moderator Thank you. Ladies and gentlemen, this conference will
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That concludes our conference call for today. Thank you for your
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Exhibit 2