A few days ago VocalTec (parent of magicJack and other subsidiaries) released it's financial results for the first 9 months of 2010 (comparing performance to the same 9 months a year earlier).
As a ratio to retail sales,
direct sales of magicJack are down 27%. This has resulted in a significant loss of revenue due to 1) wholesale pricing, and 2) shipping/handling add-ons, which is a huge source of profitable mark-up:
quote:
These increases in operating revenue were items [sic] were partially offset by the following:
• a $9.1 million decrease in revenues recognized for the sale of magicJack® units as a result of lower sales of magicJack® units, which resulted in the recognition of revenues for a lower number of units and a decrease in the average price of units sold a due to an increasing percentage of magicJack® units being sold to retailers and distributors at wholesale prices as opposed to direct sales to customers at retail prices; and
• a $6.8 million decrease in shipping and handling revenues primarily as a result of an increasing percentage of magicJack® units being sold to retailers and distributors as opposed to direct sales to customers.
In the nine months ended September 30, 2010 and 2009, sales of the magicJack® through retail outlets represented approximately 73% and 63%, respectively, of sales of the magicJack®. For the same periods, direct sales represented approximately 27% and 37%, respectively [27% reduction], of sales of the magicJack®.
For the nine months ended September 30, 2010, two customers, RadioShack and Best Buy, each accounted for accounted approximately 11% and 10%, respectively, of our total operating revenue. For the nine months ended September 30, 2009, no customer accounted for greater than 10% of our total operating revenue.
-- »www.sec.gov/Archives/edg ··· 99wb.htm
That might be ok if higher-markup direct sales is replaced with high-volume, low-margin sales to retailers. But,
revenues from magicJack sales were down 15%:quote:
Substantially all of the Companys revenues were derived from domestic sales. Revenues from sales of the magicJack® to customers were $50.6 million and $59.7 million [down 15%] for the nine months ended September 30, 2010 and 2009, respectively.
-- »ir.vocaltec.com/phoenix. ··· bA%3d%3d
Obviously, direct sales have costs which wholesaling to retailers doesn't. A decline in revenue wouldn't be too bad if costs dropped proportionally. But, that doesn't seem to be the case:
quote:
Total [decrease in] cost of revenues was ... primarily attributable to the following:
...
• a $3.2 million decrease in cost of magicJacks® sold as a result of the decrease in units sold;
lower shipping and handling costs primarily as a result of lower shipping and handling costs primarily as a result of an increasing percentage of magicJack® units being sold to retailers and distributors as opposed to direct sales to customers;
-- »www.sec.gov/Archives/edg ··· 99wb.htm
Shifting sales to retail resulted in $16 million decline in of revenue? But, only a $3 million decrease in costs?
magicJack merged with a conglomerate which makes it difficult to decipher the consolidated balance sheet. Plus, the company sells new devices, additional years, prepaid years. This revenue is reported as overall income (along with the other business units), deferred income (current) and deferred income (non current).
But, from what has been called out as attributable to magicJack, it doesn't look good.
Finally, the company doesn't doesn't disclose total units sold, nor renewal rates, nor amount of pre-purchased years (nor international minutes).
The above says unequivocally there was a
decrease in units sold, making no distinction of only fewer direct-sales of units.
However, regarding growth, there is one item which says costs of MJ revenues rose due to:
quote:
• switches and carrier charges increase by $3.2 million resulting from: (i) a higher number of active magicJack® units, which resulted in higher number of calls made by our customers, and (ii) increased use of prepaid international minutes which resulted in higher international minutes-related charges; and
• a $0.6 million increase in credit card processing fees as a result of a significant increase in sale of prepaid international minutes and renewals, offset in part by lower direct sales of the magicJack®.
-- ibid.
Growth in active MJ users sounds like good news. Larger market share?
But, growth of active users doesn't mean higher sales (year-over-year). It appears to mean more people using service they purchased the past 3 years. The cost of servicing users rose just as much as the reduced costs of servicing declining direct sales.
If Dan bet on current (higher-margin) sales subsidizing the service of past sales, his model isn't working. He's now having to provide service for $20 a year, not the marked-up (device-bundled) $40 per year.
Summary:This doesn't sound like terrific news.
• Fewer units sold, which is a source of higher markup than selling additional years to existing unit owners.
• Of those units, more sold through retailers. Which is even lower markup on wholesale and add-on shipping/handling. This is an upside-down position. Revenue falling faster than costs.
• Existing users adding to the costs of providing service. I.e., pre-purchased time previously reported as deferred revenue is brought forward to current revenue. It's not new sales. And, as noted above, not subsidized by higher-margin sales of new units.
For MJ users, this could be a reason to pre-purchase 5 years. It looks like prices will have to rise.
Or, it could be a reason to avoid pre-purchasing anything since this doesn't look like a sustainable condition.
I guess it depends on what you consider the likliehood is of MJ closing shop. I don't think that's very likely now that it's part of a larger conglomerate.
However, there's something else to consider when pre-purchasing time. Dan may reduce service to keep ahead of reduced profit margin (decreasing revenue outpacing decreasing costs). For example:
These numbers may explain why MJ began blocking calls to high-cost rural areas last August.
Dan may have seen how things were turning upside down. The only way to stem revenues declining faster than costs would be to stop cannibalizing sales through retailers, increase prices, or
cut the cost of providing service to people who are no longer subsidized by the higher profit margins of sales to new customers.In other words, can you imagine how bad
cost of revenues would have been if Dan hadn't blocked high-cost rural areas?
That's something to consider when pre-purchasing 5 years hoping to avoid price increases. Dan may chance the service you thought you bought.
IMO: This is looking like a
Ponzi Scheme. Revenues falling far faster than costs. Costs which include serving all the people whose high-profit sales of new units was already booked. To make it work, Dan had to reduce service to that base.
That's a lot like what Bernie Madhoff did when there were more people expected above-market returns than there were new people pouring money into his fund.
FYI: Page 23 (
Legal Proceedings) discuss legal disputes over MJ's termination fees and perhaps call-blocking practice. It refers to AT&T's formal complaint with the FCC. (Recall AT&T informally complained to FCC over Google's call-blocking.).