The Singing Machine Company, Inc. (MICS) on Q3 2022 Results - Earnings Call Transcript
Operator: Good day, everyone, and welcome to today’s Singing Machine Announces Third Quarter Earnings Call. At this time, all participants are in a listen-only mode. Later, you’ll have an opportunity to ask questions during the question-and-answer session. [Operator Instructions] Please note, this call may be recorded, and I will be standing by should you need any assistance. It is now my pleasure to turn the conference over to Brendan Hopkins. Please go ahead.
Brendan Hopkins: Thank you, Nikki. Thank you, everyone for joining us today. We have a brief Safe Harbor and then we will get started. Except for historical information contained herein, the statements in this conference call are forward-looking statements that are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties that may cause our actual results in future periods to differ materially from forecasted results. With that said, I would like to turn the call over to Gary Atkinson, CEO of The Singing Machine.
Gary Atkinson: Thank you, Brendan. Good afternoon, everyone. My name is Gary Atkinson, Chief Executive Officer of The Singing Machine Company. I want to thank you all for taking the time to join our earnings call for our third quarter ended December 31, 2021. Joining me on the call today is Lionel Marquis, Company’s CFO; and Bernardo Melo, VP of Global Sales and Marketing. I’d like to start the call today by saying I couldn’t be more pleased with the results and the effort from the entire team during the 2021 year. As you were all aware, there were many, many supply chain challenges last year. In fact, it was the most disruptive year we have ever experienced from a supply chain perspective. So I’m particularly proud of these results, given the shortage of containers and significant unexpected rise in freight costs that we encountered last year, semiconductor and component shortages that we faced during production and significant port and trucking delays that we faced when we finally built our products and brought them into the states. So with that being said, I’m thrilled to say that despite all of those challenges, we successfully overcame all of those obstacles. During the third quarter ended December 31, we defended and expanded our retail presence, while driving revenue for the quarter up 25% to $21.2 million compared to the same quarter of the prior year. We successfully grew year-to-date revenue for the nine-month period by 6%, now up to $44.7 million. Income from operations for the quarter increased 13% up to $1.7 million. In summary, we not only survived the supply chain challenges of last year, but we thrived. I also have some positive news to share regarding our new recurring music content business. Through our strategic key partnership with the Stingray Group, we continue to focus on the digital content subscription aspect of our business. Our recurring revenue – our recurring subscription business continues to accelerate with 25% increase in year-over-year subscription revenue across all platforms, including iOS, Android, and our proprietary integrated WiFi product. In fact, the primary driver of growth came from the new WiFi streaming product, which was carried in Costco and Sam’s Club nationwide this last year. We saw digital subscriptions from that device growth 370% year-over-year. As we remain the number one brand in home karaoke with the largest and strongest distribution network, we believe we are well-positioned to scale this subscription revenue business by focusing intently on converting our fleet of karaoke products into higher technology devices that support the recurring revenue model. We also continue to succeed at all major retailers nationwide, including Walmart, Target, Costco, Sam’s Club and Amazon, where we defended our market share and even saw opportunities to refill stores before the holidays due to our strong sell through and demand. As we move into the new calendar year, we’re already hard at work to secure more retail shelf space and add new technologies to our machines to better support the subscription business. We look forward to calendar 2022 and sharing these developments with you. Now, I’ll turn the call over to Lionel Marquis who will talk through the third quarter numbers in more detail. Go ahead, Lionel.
Lionel Marquis: Thank you, Gary. Good afternoon, everyone. I’d like to cover some key financial highlights for our third quarter ended December 31, 2021, compared to our third quarter ended December 31, 2020. As Gary mentioned earlier, net sales were $21.1 million compared to $17.0 million for the three-month periods ended December 31, 2021, and 2020 respectively. These results represent an increase of $4.2 million or a 24% increase. Net sales for the nine-month period were $44.7 million, compared to $42.3 million an increase of $2.4 million or approximately 6%. As Gary mentioned earlier, despite significant global challenges and delays in transporting goods from China and additional delays extracting goods from the port of LA, our major customers were flexible and extended season of delivery deadlines and that allowed us to continue shipping late into the holiday season and continue to support strong product demand. Vice President of Sales and Marketing will expand on the customer relations issue in his discussion later. Our gross profit for the three month periods with $5.3 million compared to $5.0 million, representing an increase of approximately $300,000. Gross profit for the nine month periods were $10.2 million compared to $11.8 million and that represented an increase of $1.6 million. We experienced a drop in gross profit margin of approximately 500 basis points, primarily due to cost increases in components that had limited supply due to the supply chain disruptions during the global pandemic. As well as significant increases in transportation cost also related to the global supply constraints of 2021. Income from operations for the three-month period were $1.7 million compared to $1.5 million, that was an increase of $200,000. Income from operations for the nine-month period were $2.0 million compared to $3.2 million a decrease of approximately $1.2 million. The company was successful in executing strict cost control measures within the selling, general and administrative expense categories during a three-month period. This was a key contributing factor in the company’s ability to generate 13.3% higher operating income during the three months end December 31, 2021, compared to the same period in the prior year. However, the abrupt developments related to cost of goods sold were primarily contributed – with the primary contributor to the overall decrease in income from operations for the full nine-month period. So as a result of these discussions, net income, for the three-month period were $1.4 million compared to $1.2 million, representing a $200,000 increase for the quarter. Net income for the nine-month periods were $2.0 million compared to $3.4 million for the same period in 2020. Now we ended December 31, 2021, in a strong cash position at $7.3 million compared to this $4.4 million on December 31, 2020. As we leveraged our outstanding accounts receivable inventory, we improved our working capital position to $9.8 million compared to $7.6 million a year ago. Inventory at December 31, 2021 was $11.1 million compared to $5.3 million in the prior year, primarily due to the unprecedented backup and delays of the Port of Los Angeles experienced – this was experienced across all industries, where goods intended for holiday shipments were not able to be delivered timely. So since then all of the goods have now been received and all those goods consist of active and in demand products. And they’re expected to ship during the current calendar year. In fact, having these goods on hand could be an advantage in some instances, should we continue to experience some of these delays during the upcoming season. The total outstanding debt on our financing facilities was approximately $8.6 million at December 31, 2021 compared to only $100,000 in the prior period – in the prior year. As of December 31, 2021, we are in compliance with all of our lenders covenants and our relationships with our lenders remains really strong as they’ve been very flexible and accommodating with regards to our needs. Our accounts receivable increased by $3.2 million due to later than usual shipments and our inventory increased by $5.8 million as we mentioned earlier, due to the Port of Los Angeles delays. And we have leveraged both assets through our financing facilities to strengthen our cash in hand by $2.9 million in our working capital by $2.2 million. We continue to collect on outstanding receivables and we’re using proceeds paid down the debt reduced interest expense. Our overall receivables base is largely current. The current payment terms with the vast majority of these balances due to the company being owed by national household retailers with excellent credit quality. So altogether, we believe that our balance sheet is the strongest it’s ever been and we continue to believe that with our cash on hand, our financing facilities and our working capital, we have adequate liquidity to support the business for the next 12 months. And that is my report. Back to Gary.
Gary Atkinson: Thank you, Lionel. I appreciate the update. At this point of the call, I want to turn it over to Bernardo Melo, our VP of Global Sales and Marketing, who will give us an update on sales. Go ahead, Bernardo.
Bernardo Melo: Thanks, Gary. And thank you all for joining. I’ll continue the same narrative as everyone. I mean, overall our third quarter was strong for The Singing Machine at retail. The category – the karaoke – the Home Karaoke category remained strong a year after a lot of the stimulus pandemic spike that we saw. And in some cases across retailer an increase. So the demand for Home Karaoke is still top of mind for consumers. Our top two discount retailers, as Target had been a years. The Walmart toy department held strong in all three inline items with coverage on all 3,900 stores for those products, remaining top in the game youth electronic category at Walmart. The annual event in Black Friday occurred once again, three weeks prior to the traditional Thanksgiving weekend, which we saw strong sales results with 98% sell through for both .com and in line. Target once again, carried out items in above 1,700 plus stores as part of the legacy electronic. Our two day item, during the holiday was well with almost 100% sell through. And then the rest of the items saw the same strong sell through throughout, even though we had to increase some of the MSRPs. We didn’t see a lag in sales at all in some of those items. And in particular, the party Bluetooth microphone continued strong sales in year two. And now is accounting for about 20% of our overall sales. So that category continues to do well. For our other regional and national stores whether discount or specialty stores, we still saw strong demand going right into holiday. And we were able to fulfil a lot of those orders by having the inventory, even though it might have come in a little bit late. So we were still able to fulfil those demands. As far as e-commerce goes, Amazon had another strong season. They followed up a momentous Prime Day that we had for The Singing Machine and that momentum continued to the holiday. Given an example of Turkey Week, which is their cyber week, we saw the promotions that we ran have really good results especially on three of the items that were top selling in the entire category. So, again, The Singing Machine brand for Amazon is key for driving traffic and strong sales. Our drop ship expanded this year to some non-traditional discount retailers with some department stores and we saw some gaming stories as well. And those sales are strong. So we’re now positioned to continue to expand those drop ship and we’re looking forward to it. The partnership at the clubs is stronger than ever with Costco and Sam’s expanding their assortment to include more than just one traditional skew. Costco for example, carried our WiFi streaming machine for the second year. And they were able to increase sell through and the demand we were shipping stuff even a week before Christmas, we’re shipping it just to try to fulfill, especially some of those west coasts clubs that saw that higher demand in California and Texas and Arizona and things like that. So that bodes well, and that also builds a strong business case for us on that reoccurring revenue machine. And we’re looking to expand that sort of technology or casting technology into the future. So we have those strong and those clubs are going to continue to support us. And Gary will get into that a little bit more as he ends the conversation. Internationally we remain strong. We’re still in the UK, in Italy and France, in Spain and Australia. And although they had harder restrictions than in the U.S., in terms of retail shutting down, we still saw an uptick in Australia. And they’ve already had strong commitments for calendar year 2020. So with that being said, I’ll turn the call back over to Gary and I’ll stick around. I’m sure you guys will have a little bit more detailed questions at the end to ask. So I’ll be around for that.
Gary Atkinson: Perfect. Perfect. Thank you, Bernardo. I do believe we have a lot of callers on the line today and I want to be mindful of time. So I think let’s open it up for some Q&A, so we can make sure we can address everyone’s questions.
Operator: [Operator Instructions] We’ll take our first question from Eric Nickerson with Third Century. Please go ahead. Your line is open.
Operator: [Operator Instructions] We will move next with Jordan, Private Investor. Please go ahead. Your line is open.
Operator: We will move next with Mike Schellinger with MicroCapClub. Please go ahead.
Operator: We will move next with Eric Nickerson with Third Century. Please go ahead.
Operator: [Operator Instructions] Your next question from Kritik Gupta, Private Investor. Please go ahead.
Operator: [Operator Instructions] And we show no further questions over the phone at this time.
Gary Atkinson: Okay. Well, thank you very much everybody. We certainly appreciate all the spirited questions today and appreciate everyone taking time out of their busy days to get an update on our third quarter fiscal – third fiscal quarter updates. And we look forward to sharing new developments and new progress as we close out the fiscal year end. So we’ll look forward to talking to everybody soon. Thank you everybody. Take care. Have a great day.
Lionel Marquis: Yes. Thank you. Bye-bye.
