By Lisa Johnston
New products on display at the American International Toy Fair, held in N
Audiovox Corp., one of the first companies to market cellular phones in the U.S., will drop out of the business after a run of 20 years.
In about 90 days, Audiovox expects to close the $165.1 million cash sale of its cellular subsidiary to wireless-handset and telecom-infrastructure supplier UTStarcom of Alameda, Calif. Before then, Audiovox will pay Toshiba $15 million, including the repayment of an $8.1 million subordinated note, for Toshiba's minority stake in ACC.
After the sale, Audiovox Corp. said it will emerge as a much smaller but more profitable company focused on mobile and home electronics. For the 2003 fiscal year ending last November 30, Audiovox Communications Corp.'s (ACC) $806 million volume accounted for 61 percent of total Audiovox sales. Cellular margins hit 4.1 percent in the December-February period, compared with Audiovox's 15.6 percent consumer electronics margin, a spokesman said.
The cellular business "is really the province of very large players," said Audiovox Corp.'s chairman and CEO John Shalam in a conference call. The industry is "very volatile" and "carries substantial inventory risk," he continued. The sale will combine "the aggressive sales team" of the company's ACC subsidiary with the cost advantages and financial resources of UTStarcom, he said.
UTStarcom designs and assembles its own wireless phones and wireless infrastructure in low-cost Chinese factories, whereas ACC imports, packages and markets Audiovox-brand handsets made mainly by Curitel and Toshiba for sale in North and South America.
Audiovox's manufacturers, a UTStarcom spokesperson noted, "got most of the margin."
Under the sale agreement, UTStarcom will continue to market Audiovox-brand phones for at least five years, and the cellular subsidiary's three facilities and 269 employees will become UTStarcom's North and South American handset sales, service and support division. The division will be headed by current subsidiary president/CEO Phil Christopher.
UTStarcom claims to be the largest wireless-handset supplier to the China market, where it sells wireless handsets and infrastructure based on the Personal Handyphone System (PHS) standard. The company's calendar 2003 sales hit $1.96 billion, split almost evenly between handsets and infrastructure, the latter for wireless and land-line networks. The company's unit handset sales exceeded more than 16.5 million in 2003.
Audiovox cellular sales, by comparison, dropped to 4.7 million for the fiscal year ended November 2003, down from the subsidiary's peak unit sales of 8.9 million units in 2000. The subsidiary's peak revenue year was in 2001, when sales hit $979 million and cellular accounted for 77 percent of total company volume. During the 2001-2003 fiscal years, "some quarters were very unprofitable," in part because of asset write-downs, "and other quarters, if they were profitable, the profits were not very large," said John Bucher, an analyst with institutional equity research company Harris Nesbitt.
Its North American CDMA unit share dropped to seventh place at 6 percent in 2003, according to Strategy Analytics. In 1999, in contrast, Audiovox was the fourth largest seller of wireless phones in the U.S. and the second largest provider of digital phones based on the CDMA standard, research reports showed at the time.
When CDMA was launched in the U.S., Bucher noted, "Audiovox was one of the few suppliers with products in quantity," thanks to OEM supplier Toshiba's early lead in CDMA manufacturing. As more companies began delivering CDMA handsets, Audiovox's profits tumbled, he said.
Shalam admitted, "We believe we no longer have the capabilities to be a major player in that market."
That decision marks a reversal from plans announced earlier in the year, when Audiovox Corp. signed a non-binding letter of intent to sell a majority stake in its majority-owned subsidiary to South Korean handset supplier Curitel after Curitel made an unsolicited bid. When the tentative agreement was announced, however, "other players came into the picture," and Audiovox decided to quit the business entirely, a spokesman said.
Analysts attributed Audiovox's wireless setback to Asian companies that began to sell directly to the U.S. CDMA market, and to the North American entry of Nokia with carrier-approved CDMA handsets.
For its part, UTStarcom said the acquisition will enable it to become an end-to-end supplier to North and South American CDMA carriers, build its fledgling CDMA handset business, and increase Audiovox's cellular margins.
UTStarcom is already an infrastructure supplier to most U.S. CDMA carriers, mainly through the second-quarter acquisitions of infrastructure makers Hyundai Syscom and Canada's Telos.
UTStarcom will begin marketing CDMA handsets of its own design in coming months in the Americas and hopes to make its first models available to carriers in the fourth quarter to augment current Audiovox handsets. "For the foreseeable future, [Audiovox's current OEM] relationships will continue," a spokesperson said.
UTStarcom's CDMA handsets, like the company's PHS handsets, are designed by the company, which contracts the manufacturing of components to Chinese factories. UTStarcom then assembles the final products in its own factory in Hangzhou, China, where it also assembles land-line and wireless infrastructure from outsourced components built to its own design.
CDMA isn't the only handset standard in UTStarcom's future. The company is planning 3G devices and infrastructure based on the TD-CDMA and W-CDMA standards. The new products will contribute to the company's goal of breaking the $10 billion mark in five years.
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