Comments on the Conference Call
I listened to the recorded conference call last night and noted some interesting points which seem to have been overlooked by many:
Revenue Projection - By stating that revenues for the current quarter will exceed those of the prior quarter the company may be giving an indication of the size of the retail contracts which are expected. First, consider that the prior period sales of $592,000 included about $89,000 from Lanier. No further sales are expected from Lanier. This drops the base to $503,000, with two months of on-line product sales accounting for about $366,000. Next, it is likely that on-line sales are somewhat lower following the burst of initial shareholder purchases and the end of the holiday season. Also, the Treo has been out of stock for several weeks, further cutting into current on-line sales.
If we assume on-line sales generate $300,000 in this quarter and engineering services add another $100,000 that gives $400,000 for the quarter. No MTV/Evolution player lincensing fees are likely prior to March 31, so if the current quarter sales are $700,000 (a conservative increase) that means that the first retail shipments (which will cover only the month of March) must be at least $300,000. Not bad, considering that we can expect other retailers to be added soon.
Factor in reorders and the addition of other retailers and you can project sales well over $10 million per year from retail distribution.
Profitability - I assume that "revenue neutral" means cash inflows are expected to equal cash outflows within the next few quarters. Assume that occurs in four quarters and that cash outflows have risen to $650,000 per month by that time (as retail distribution grows). That implies that gross profit and licensing fees would equal about $2 million in that quarter. How much would be from licensing? Half? Say licensing is $1,000,000 that quarter. Given an industry average of 18% gross margins on consumer electronics, that would require retail shipments of $5.5 million in that quarter to generate the required $1 million gross profits to add to the licensing income needed to break-even on a cash basis. This seems consistent with the comments under Revenue Projection above.
Gross Margins - Positive gross margins are expected on all new products, at or above the consumer electronics industry standard.
Ownership of Treo Trademark - A comment was made that part of the high expense in the quarter was the cost of acquiring the rights to the Treo trademark. Not only does this mean no payments to the prior owner but it may lead to some favorable settlement and/or arrangement with Handspring down the road.
No Additional Equity Charges From Preferred Stock - The largest charge to earnings last year was due to the non-cash charges associated with the various preferred stock placements over the past couple of years. Those charges were all taken in the last quarter and no further such items are expected. Going forward the company expects to use common shares when necessary to raise cash. This is very significant for a number of reasons. First, by eliminating preferred stock and the price adjustment feature they eliminate any possible shorting incentive from the equity source. Second, the new equity investor has exactly the same motivation as the rest of the common shareholders to see the price rise. Third, the cost of equity financing and the amount of dilution is known precisely on the day of the transaction. This is a great improvement in capital structure.
New Equity Investor - The company confirmed that the lender of the $1 million 5% loan is a large potential equity investor with the right of first refusal on all equity placements. Clearly this is an interested party who has been given substantial access to the company's financial condition and business prospects. A very good development both for the cash source it represents and for the confirmation that those business prospects are very, very promising.
New Treo - As expected, the next generation of the Treo will have substantial improvements over the current version - smaller, lighter, greater storage capacity and ultrafast USB 2.0 support. Product availability is expected in the next two months.
Other Retail Customers - From previous letters and several comments made in the conference call it seems clear that other retail customers are expected soon. I personally expect the next such announcement to be one of the national consumer electronics chains (RadioShack, Best Buy or Circuit City).
In summary, no bad news, no major announcements (but none were expected) and there was quite a bit of information presented in the call if you listened carefully. It certainly could have been better organized (and I will submit some suggestions for improvements to the company) but it marks a big step in bringing the e.Digital into a more professional approach to investor relations.
One idea for better communications would be to add a frequently asked questions section to the website. Common shareholder questions could be addressed there with new questions and answers added each month. This would eliminate several of the most common problems we currently see and enable the company to concentrate on bigger issues in the quarterly conference call.
JimC
AI
