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Cobra Electronics Corporation (COBR)

Q2 2008 Earnings Call

July 23, 2008 11:00 am ET


James Bazet – President and Chief Executive Officer

Michael Smith – Senior Vice President and Chief Financial Officer

Tony Mirabelli – Senior Vice President of Marketing and Sales


Steve Denault - Northland Securities Inc.

Sam Bergman - Bayberry Capital Management

Bruce Baughman - Franklin Templeton Investments

Scott Hodgson - Midsouth Investor Fund LP



Welcome to the Cobra Electronics Corporation second quarter 2008 earnings conference call. (Operator Instructions) At this time, I would now like to turn the conference over to our host, Jim Bazet, who is President and Chief Executive Officer.

James Bazet

Thank you very much and welcome to our second quarter investor conference call. With me today is our Senior Vice President of Marketing and Sales, Tony Mirabelli, and our Senior Vice President and CFO, Michael Smith. Before we begin I am going to turn it over to Michael to read the Safe Harbor Statements. Michael?

Michael Smith

Good morning. Before we begin, please keep in mind that our call today will include certain forward-looking statements and that actual results could differ materially from the results projected in the forward-looking statements. We refer you to our form 10-K and 10-Q especially the risk factors for information that could cause actual results to differ materially from the results projected in the forward-looking statements.

Please also keep in mind that this conference call is being simultaneously broadcasted over the Internet and a replay will be available on the Cobra website for 30 days. Now, I would like to turn the call back to Jim to cover highlights from the second quarter and share his thoughts on the strategic context for our performance.

James Bazet

Thanks, Michael. This morning, we were pleased to report to our shareholders, profitable results for the second quarter as continued support for the success of the strategic restructuring and turn around that was initiated late last year. Cobra had net earnings in the second quarter of $1.7 million or $0.26 per share. Cobra was profitable in spite of a nearly 12.5% decline in sales for the quarter as compared to one year earlier as gross margins improved and operating expenses declined.

The consolidated gross margin increased to more than 33% as compared to 21.4% last year and operating expenses declined by more than 8%. A closer examination of our results provides insight to the strategic performance of our businesses. Sales for performance products or PPL segment increased by more than 40% as compared to last year, driven by an increase in mobile navigation sales and sales of encrypted SD cards for smart phones that include their proprietary speed camera and golf course databases.

The increase in mobile navigation reflected the availability of a broad array of products as our management teams worked together to overcome the development and production difficulties that hampered sales last year. The sale of a key database information on SD cards for use in smart phones may open the door to a new delivery mechanism and distribution channel for PPL and their intellectual property that Cobra acquired in late 2006. And we are working with management to address the full potential of this opportunity.

As we view this channel to date, there will be promotional sales rather than regular inline sales, and that they are large, long lead term opportunities that provide a tremendous sales and earnings potential although not as predictable a schedule as one might see in inline product placements. Sales for the Cobra segment declined by $6.5 million or 18.4% as compared to last year.

A significant element of the sales decline was mobile navigation with a $4 million decline in net sales that reflects the change in our North American mobile navigation strategy that was announced in December. Sales in other product lines also declined as compared to last year and we are clearly seeing the impact of reduced consumer spending, lower store traffic and signs of hesitancy among our retailers to build inventory.

Two-way radio sales and radar detection sales both declined as compared to last year due to a combination of reduced store traffic and competitive pressures. Citizen's band radio sales increased for the quarter as the launch of our Bluetooth enabled radio led to substantial placement and generated strong worldwide consumer interest. Additionally, Cobra's European sales increased reflecting a significant broadening of their distribution network.

Later in this call, Tony will discuss some of our product and promotional initiatives that addresses these challenges and the current economic climate to the extent possible. We are also encouraged by improvement in gross margins in the second quarter, with an increase on a consolidated basis to 33.3% from 21.4% for the second quarter of last year.

Our margin improvement which Michael will address in greater details shortly was driven by a greater contribution to sales by PPL with their higher margin product lines. A mix of higher margin products for the Cobra segment and substantial improvement in the Cobra segment mobile navigation margins due to the sale of products at higher prices than anticipated when reserves were established in the fourth quarter of last year.

SG&A expenses declined by more than 8% in this quarter as compared to last year. In addition to a decline in variable selling expenses that accompanied the decline in sales, management has made concerted efforts to contain fixed selling and marketing, and general and administrative expenses. These efforts will continue through the year.

The containment of fixed expenses in this quarter reflects in part, the elimination of certain positions as we have evaluated our needs in light of current conditions. In addition, where possible, we have curtailed outside professional fees.

Looking at our year to date results, Cobra has generated net earnings of $1.8 million or $0.28 per share as compared to a loss of $1.2 million or $0.18 per share for the six months ending of 2007. Although sales have declined on a year to date basis to $63.2 million from $71.3 million, gross margins have improved to 32.2% from 23.1% and operating expenses have declined by nearly $1.6 million.

Turning to our third quarter outlook, we are forecasting substantially improved bottom line performance in the third quarter as compared to last year, in spite of somewhat lower revenues. Efforts to contain operating expenses will continue and we anticipate higher gross margin than in last year's third quarter. Similarly, we are forecasting a significant improvement in financial performance for the year. We anticipate that Cobra sales will decline from 2007 levels, but that our Company will be profitable in 2008. As far as the economy, we have attempted to temper the forecast and outlooks to take into consideration the weakened state of the economy today.

Before I turn the call over to Michael to discuss our results in detail, I want to emphasize our ongoing confidence in Cobra and our enthusiasm for our prospects. Our decision to modify our mobile navigation strategy, although difficult and painful, clearly was the right decision for Cobra and in light of the current industry turmoil and the continued exit from the category of other companies, it was well-timed.

We continue to experience success in our legacy categories, providing brand equity, strong distribution and marketing channels, and positive cash flow. We are pleased with the performance of PPL in the second quarter and on a year to date basis. It is clear that we have acquired a company with substantial brand equity, intellectual property, and a top notch management team.

While the performance of the second quarter reflects in part a promotional opportunity that might not be counted on as a quarter to quarter line as opposed to an inline sale, it clearly points the way towards future opportunities to exploit the assets we have acquired and build the business accordingly. At this point, let me hand the call over to Michael, Tony will then update you on markets and product initiatives and we will open the call for questions. Michael?

Michael Smith

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