Singing Machine (NASDAQ: SMDL), a leader in consumer karaoke products, has recently revealed during its second quarter 2024 earnings call a strategic pivot towards the automotive and connected TV sectors. This shift comes as the company announced the acquisition of SemiCab, an AI-powered freight transportation software company, and the integration of karaoke microphones into vehicles, with Tesla (NASDAQ:TSLA) introducing the feature in its North American models. Despite a decrease in net sales and gross profit, Singing Machine is optimistic about transforming its business model into a more technology-driven, asset-light, and higher-margin entity.
Key Takeaways
- Singing Machine is expanding into the automotive and connected TV markets.
- The company has acquired SemiCab, an AI technology firm specializing in freight transportation efficiency.
- Tesla will feature Singing Machine's karaoke microphones in all North American models.
- Strategic partnership with Stingray Group to further automotive brand integrations.
- Plans to reduce product offerings and focus on WiFi-enabled models by 2025.
- Company is undergoing corporate rebranding to reflect its new market direction.
Company Outlook
- Singing Machine is transforming its business model to focus on technology-driven, asset-light, and higher-margin opportunities.
- The company is looking to reduce the number of offerings and introduce mostly WiFi-enabled models in the upcoming year.
- Singing Machine aims to create higher shareholder value by disrupting traditional markets with innovative technology.
Bearish Highlights
- There has been a decrease in net sales and gross profit compared to the same quarter in the previous year.
- The company is facing challenges in the karaoke business, prompting a pivot to new markets.
Bullish Highlights
- The acquisition of SemiCab offers the potential to disrupt the global freight industry, plagued by inefficiencies and wasted expenses.
- Singing Machine has successfully cleared older inventory, improving its balance sheet.
- Interest from major automotive brands and the connected TV market presents significant growth opportunities.
Misses
- The financial results for the quarter showed a decrease in net sales and gross profit compared to the same period in 2023.
Q&A Highlights
- CEO Gary Atkinson addressed concerns about the acquisition of SemiCab, emphasizing the company's reinvention in the face of karaoke business challenges.
- The company is actively evaluating further growth opportunities and will provide updates on business segments in the future.
Singing Machine's strategic shift towards integrated technology solutions in the automotive and connected TV industries represents a significant pivot from its traditional karaoke business. By leveraging partnerships and innovative AI technology, the company is positioning itself to tap into new markets with high growth potential. While financial results have shown some setbacks, the company's proactive measures to streamline its product offerings and improve its balance sheet demonstrate a commitment to long-term strategy and shareholder value. As Singing Machine continues to evolve, stakeholders and industry watchers will be keenly observing how these new ventures unfold.
InvestingPro Insights
Singing Machine's recent strategic pivot towards technology-driven sectors is a bold move that aims to redefine the company's market position. Here are some key insights based on the latest data from InvestingPro that could further inform stakeholders about the company's financial health and market performance:
- Singing Machine's stock has experienced a significant return over the last week, with a 15.96% increase in price total return. This uptick might reflect investor optimism about the company's new direction and its potential to disrupt the automotive and connected TV sectors.
- Despite the recent positive price movement, the company's stock has fared poorly over the last month, with a -35.88% price total return. This volatility could be indicative of the market's initial uncertainty about the company's strategic shift and its ability to execute the new business model successfully.
- The company's current market capitalization stands at a modest 3.85 million USD. While this valuation may seem low, it's important for investors to consider the long-term growth potential that Singing Machine's pivot could bring, especially with the integration of its karaoke microphones into Tesla vehicles and other automotive partnerships.
InvestingPro Tips for Singing Machine highlight the company's financial state and market performance:
1. Singing Machine holds more cash than debt on its balance sheet, which could provide the financial flexibility needed to navigate its strategic pivot and invest in new technology-driven initiatives.
2. The company's valuation implies a poor free cash flow yield, suggesting that investors should be mindful of the company's ability to generate cash from its operations as it transitions into new market segments.
For those interested in a deeper analysis, InvestingPro offers additional tips on Singing Machine, which can be found at https://www.investing.com/pro/SMDL. These tips may provide further guidance on the company's financial status and future prospects in light of its recent strategic decisions.
Full transcript - Singing Machine Company Inc (MICS) Q2 2024:
Operator: Good afternoon, everyone, and welcome to Singing Machine Second Quarter 2024 Financial Results Earnings Call. My name is Savannah, and I will be your operator. As a reminder, today's call is being recorded. We have a brief safe harbor and then we'll get started. This call contains forward-looking statements under U.S. Federal Securities Laws. These statements are subject to risks and uncertainties that could cause actual results to differ materially from historical experience or present expectations. A description of some of the risks and uncertainties can be found in the reports that we have filed with the Securities and Exchange Commission, including the cautionary statement included in our current and periodic filings. I would like to now turn the call over to Gary Atkinson, company's CEO. Please go ahead.
Gary Atkinson: Thank you. Good afternoon, ladies and gentlemen. I want to start off by thanking everyone for taking the time to listen in and participate today on our second quarter 2024 earnings call. I'm joined by Richard Perez, company CFO; Bernardo Melo, Chief Revenue Officer; and Vivek Sehgal, SemiCab’s Chief Product Officer. This past quarter was highly unusual for the Singing Machine. Normally, we use the second quarter to finalize buying commitments with our retail partners, coordinate upcoming product manufacturing for the holiday season and planning to ensure retail shelves are fully stocked with Karaoke products for the holiday season. This past quarter, we were busy with all of these normal activities. But on top of that, we were deeply entrenched in two new very exciting projects that I'm pleased to discuss on today's earnings call. First, as recently announced, we closed on the acquisition of an AI-powered freight transportation software company called SemiCab which has the potential to disrupt the global logistics industry. We spent most of the quarter conducting due diligence and negotiating legal structure to perform the acquisition, which closed as an all-stock deal. After we discussed our second quarter financial results, I'm going to ask Vivek Sehgal, our Chief Product Officer at SemiCab to share a brief update on this acquisition from his perspective. Second, we spent much of the quarter deep in progress to advance our automotive initiative for our microphone business. We are very optimistic on the potential for this business and it is rapidly becoming a central focus for growth within the Karaoke category. Lastly, we are also finalizing our corporate rebranding and hope to share it with all of you shortly. As a company, we have successfully shifted from a single line of business to now a holding company model with the responsibility of managing, funding and growing to very different businesses. As a result, we intend to share a new vision and direction for the company to get back to growth and creating value. Before we discuss these other initiatives, I would like to ask our Chief Financial Officer, Richard Perez, to walk us through the details of our results for operations for the second quarter. Go ahead, Rich.
Richard Perez: Thank you, Gary. I appreciate everyone for taking the time out of their busy schedules to listen in today. I'm going to walk through the specifics of our results of operations and try to add a little color and insight into how our business is evolving in the near term from my perspective. Net sales for the three months ended June 30, 2024, decreased to approximately $2,440,000 million from approximately $2,625,000, representing a decrease of approximately $185,000 as compared to the three months ended June 30, 2023. The 7% decrease was primarily due to lower overall sell-through results during the past holiday season, mostly with our largest customer Walmart (NYSE:WMT), which, in turn, diminished inventory restocking requirements during the first six months of the calendar year, which is historically off peak shipping season. Retail, particularly traditional brick-and-mortar retail sales have been challenging for almost two years. We have experienced this consistently across all of our major retail relationships and has challenged us to be extremely focused on product mix, product placement and leveraging shelf space to optimize every opportunity to sell efficiently at scale with these best-in-class retailers. Gross profit for the three months ended June 30, 2024 decreased to approximately $324,000 from approximately $529,000, representing a decrease of approximately $205,000, 38.8% and as compared to the three months ended June 30, 2023. Gross margins for the three months ended June 30, 2024, or 13.3% as compared to 20.2% for the three months ended June 30, 2023. Approximately $260,000 of the decrease in gross profit was primarily due to increased sales in excess inventory, which yielded significantly lower margin than current models sold and was offset by a decrease in expenses of approximately $57,000 associated with the miscellaneous logistics costs related to the timing of receipt of new goods. Our focus here has been to aggressively clear older, slower moving inventory to optimize our working capital. We were very successful in converting a meaningful component of our older inventory to cash for other purposes, and that has been a focus in the early third quarter as we look to clear virtually all our stagnant inventory during the current retail buying season. During the three months ended June 30, 2024, total operating expenses increased to approximately $6,478,000 million compared to approximately $2,960,000 during the three months ended June 30, 2023. This represents an increase in total operating expenses of approximately $3,518,000 million from the three months ended June 30, 2023. The increase in operating expenses can be somewhat misleading. Of the overall increase, the vast majority was due to a non-cash write-off of impaired operating lease assets of approximately $3,878,000 million related to the hospitality lease we exited in New York City. Excluding this one-time event, we actually saw all other operating expenses decreased. In fact, we saw a decrease in seasonal debt reserves of approximately $156,000 a decrease in logistics costs of approximately $124,000 associated with the closing of the warehouse operation and outsourcing and logistics to a third-party logistics company acceleration of depreciation expense of approximately $130,000 recognized in the prior year on impaired fixed assets associated with the closing of the warehouse. Our focus has been and continues to be on running a very tight discretionary operating budget. The effect of these results yielded a net loss for the quarter of $6,119,000 million or a loss of $0.95 per share for the second quarter of 2024. This is compared to a loss of $2,460,000 million or a loss of $0.64 per share for the same period in 2023. In summary, sales were very much in line with our expectations. Our efforts to closely manage costs were very positive. We improved our balance sheet dramatically, clearing almost $7 million in short-term liabilities. We are now in our normal busy season period and we are very focused on rebuilding liquidity as we push out our seasonal sales orders. With this, I will turn the call over to our Chief Revenue Officer, Bernardo Melo.
Bernardo Melo: Thanks Richard. I appreciate. Thanks for turning over the call. Thank you, everybody, for listening today. I just wanted to go through some of the highlights coming up with the holiday season. As Richard has mentioned, there has been some redefining of shelf space at retail. Some of our major partners are looking to consolidate some of the shelf space. Fortunately, for us, we are still players with each of those retailers. But we -- towards the end of my conversation, I'll highlight some of the changes that we're making internally to capitalize on some of the retail changes. But for us, moving forward, we are -- as I mentioned before in previous calls, we are looking to continue to grow our WiFi enabled models, our digital offerings, which have immediate back-end revenue through our app and our partnership with Stingray Music. This year, we are introducing a brand-new WiFi model, which we will find at Sam's Club. They partnered with us in the electronic department, Normally, we were in the toy department. We're still in the toy department with two different SKUs, but now we are also entering the electronic department at a higher price point with a WiFi offering. This model is brand new. It's going to be directly tied in with our app. We've also included other music services as well with Apple (NASDAQ:AAPL) Music, Spotify (NYSE:SPOT), Pandora (OTC:PANDY) and Amazon (NASDAQ:AMZN) Prime along with YouTube, making the item that much more attractive to consumers. Now they're able to interact with our product, with our digital product app. And also if they have their subscription already currently, they're also able to interact with that as well. Costco (NASDAQ:COST) is carrying it for the second year and then we're also deploying it to the rest of com, whether it's target.com, Amazon, Best Buy (NYSE:BBY) and then our partners in Canada with Best Buy, Walmart and others and we're also rolling this out to Costco U.K., Costco Australia. So our offering for the WiFi model is definitely expanding, and we're looking for that to be the future going forward. For our traditional model, do you still see them in most retailers, you still have section in Walmart, where you will find about four feet of space with product that's continuing through the holidays. The season, Sam's Club is also carrying some of our traditional, not going away is becoming a more promotional, more aggressive price points, but that's still going to continue during this holiday season. We also are continuing our foray into the direct-to-consumer model. We just launched -- we just recently launched our TikTok store shop with four concentrated items in there that has gone very well so far. We're starting to allocate some of our marketing dollars more towards the TikTok shop and also with the meta platforms, resulting in higher sales in those platforms and also online in our own singingmachine.com. We also successfully launched our Sesame Street Karaoke plus line. That's going to be launching with Amazon and all the dot com. You could go online now and see them. We have three items coming out, Elmo, Abby and Cookie Monster under that line, and we'll be looking to expand it in 2025. And then finally, one of the things I want to emphasize is moving forward, we've identified that retail shelf is always a challenge. We want to create -- we want to reduce the number of offerings that we're going to be doing. So come 2025, we're going to be introducing mostly strictly WiFi enabled models. Those have been working very well for us. We've been receiving a lot of good feedback for us from consumers on those models. And with our partnership with Stingray, we're going to be launching some new technologies that I'm sure Gary will get into in the near future. But we will be definitely aligned with that strategy moving forward. So with that being said, Gary, I'll turn it back over to you.
Gary Atkinson: Perfect. Thanks, Bernardo. That's actually a perfect segue into the next part of the call, where I want to focus on some of the new emerging automotive and connected TV opportunities that we have within Singing Machine. So as many of you may not know, there is a rapidly growing interest in bringing Karaoke microphone devices to the in-car entertainment offering. So we had previously debuted this technology at the consumer electronics show earlier this year, and we did see tremendous interest from many major OEM automotive brands for this type of a microphone integration. And I'll remind everyone, Singing Machine was the first company to bring Karaoke microphones to the car. This is through our successful Karaoke collaboration that we launched back in 2017. And as further proof of the market demand for Karaoke microphones in the car, earlier this month, Tesla just announced that they are introducing Karaoke microphones to all of their Tesla models in the North American market. And I think as most people see as Tesla moves, the industry tends to follow and through our strategic relationship with the Stingray Group, we are now at the forefront of partnering with many major automotive brands that are seeking to bring Karaoke mics into the car embedded directly into the in-vehicle infotainment system, which is where they're currently now accessing Stingray's Karaoke content services. So we see the connected microphone as a quickly growing segment, it's nice because it doesn't cannibalize our existing retail business and it takes advantage of the growing demand to provide different forms of entertainment within the car. Secondly, for the TV market, OEMs have been actively seeking to grow their TV app services offerings and to aggregate and unify multiple devices throughout the house into one single touch point. So for Karaoke, this means the opportunity to take advantage of the big screen TV and the sound systems that most people have in their homes and converting them into a fully featured Karaoke experience. Integral to this entire experience is the Karaoke microphone. So moving forward, we see our business model shifting rapidly more towards integrated microphone devices as opposed to being so heavily reliant on standalone Karaoke systems. We're excited about this shift because we believe we can transform our legacy business into a more technology-driven predictable year-round business. This new model is very asset light, very human capital light but yields much higher margins. This should enable us to drive costs down throughout our legacy Karaoke business, while boosting growth and bottom line profitability. So at this point of the call, I would like to introduce Vivek Sehgal, SemiCab’s Chief Product Officer. Vivek is one of the two key visionaries, along with Ajesh Kapoor its Founder and President, together were instrumental in identifying the opportunity in creating a core technology that has become SemiCab’s artificial intelligence-driven platform. At this time, I'd like to turn the call over to Vivek.
Vivek Sehgal: Thank you, Gary. I appreciate the opportunity to speak with everyone today. I want to take a minute and share why we started SemiCab. The transportation industry is very fragmented and pretty slow in adopting technology to solve with efficiency challenges. On average, one in every three miles run is empty. That creates unnecessary costs and carbon emissions that the whole industry has to bear. At SemiCab, we are tackling this inefficiency heads on. We are an award-winning technology company and we are solving freight at scale using dynamic AI technology that optimizes transportation on demand and in real time. Next, I want to share a little on the rationale adjacent I had for pursuing the transaction that led to our joining the Singing Machine team in early July. For Ajesh and myself, we have worked together for many years, developing critical software for some of the largest players in the logistics space. In 2018, we launched SemiCab to address the inefficiencies that we saw going on addressed for many years in the logistics industry in general. From 2018 to late 2021, we devoted most of our resource to building the technology and getting early versions of our solutions into live pilot environments, where we could test our models and gain critical empirical data as well. Our models were very encouraging and client adoption begin to ramp up in the U.S. after COVID. During one of the industry events that we were attending in India, we were unexpectedly presented an opportunity to help launch the National Digital Freight Exchange in India. This was in my mind a once in a lifetime opportunity, roughly 35 out of the Fortune 1,000 global industry leaders came together, pooling almost $1.5 billion worth in shipping spend annually into one common network of data. [Sam] was involved from day one. And now we are an exclusive partner for this organization. We launched a pilot in India that went extremely well, beginning in the second quarter of 2023. And we quickly realized that the scale of this opportunity was huge. We knew that there was almost no easy way for us to financially support our financial growth expanding into India. As a U.S. based startup, adjacent I explored many possible avenues. We talked to the VCs. We saw the SPAC market improved and the process for the reverse merger is very expensive, time-consuming and uncertain. The opportunity to seamlessly join a NASDAQ listed company and gain access to the efficient capital, as we execute our business model, just made tremendous sense. Today, we are 100% focused on moving forward. we see excellent growth opportunities in both the U.S. and the India markets. Our clients are eager to see us expand our relationships, and we anticipate strong growth. We are also being asked to expand our service model into additional geographies, including the Middle East, North Africa, East Asia. Our growth opportunities are exciting and we believe SemiCab has the great potential to grow for many years. Both Ajesh and I are pleased to be a part of the Single Machine team as it rebrands and expand its business model. We look forward to sharing periodic updates as we focus on driving growth within this part of the company's future growth. Gary, back to you.
Gary Atkinson: Perfect. Thank you, Vivek. I appreciate the updates on that. So in closing, I just wanted to address, I think what is most likely the most common question that I get from investors since we announced the SemiCab acquisition back in July. And the number one question I've been receiving is, why would a Karaoke company buy an AI software company? And I've heard it time and time again, people say, well, there's no synergies there. And so my response is relatively simple. I see my job is to create shareholder value. And as a CEO, I need to be creative. I need to uncover value and I need to look for ways to grow the business. And I think for a lot of our long-time shareholders for the last few years, I think you've all seen, we've seen that the legacy Karaoke business has watched its retail presence come under a significant amount of pressure. And I don't see these challenges going away any time in the short-term. As a result, we are actively reinventing ourselves and our core business. We're pivoting into new markets that integrate Karaoke into the automotive space and into the smart TV category, which requires a lot more innovative technology and fortunately has much deeper moats around both of those businesses. But with that being said, SemiCab has presented a very compelling opportunity to potentially disrupts almost $1 trillion global freight industry. and I'll touch on something Vivek said earlier. Today, traditional freight transportation and in particular, digital freight brokers, they operate in a broken industry that is highly siloed and very inefficient where, on average, one out of every three miles that a truck is on the road, it's empty. And this massive inefficiency leads to annually over $900 billion in wasted freight expenses. Over 140 billion empty miles that a truck is on the road leading to increased road congestion and unnecessary CO2 emissions. SemiCab has the technology to solve that inefficiency in the market. And they've shown us that they have successfully attained 90% efficiency, which is to say they have shown that they can reduce the number of empty miles from one out of every three miles empty to only one out of every 10 miles act. So as we embark to change the company's narrative and to tell this story through a broader audience, we see SemiCab as having an opportunity to create much higher floor value for our company very quickly and at levels that are meaningfully higher than where we are today. As such, we felt compelled to add SemiCab into our corporate portfolio and we will continue to openly evaluate opportunities to grow the business moving forward. I do understand and realize that this is not a standard approach, particularly in the small-cap investment space. I believe that with the general headwinds that are facing small companies today, taking a bold innovative approach in the face of diversity should hopefully give us a better chance to unlock value for everyone. So I thank everybody for your time today. We look forward to providing updates soon on the progress of both business segments. I want to thank everybody for your time and interest today. That concludes my prepared statements. I'll turn it back over to the moderator.
Operator:
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