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D&M Revenue Slides, Rio Shut; Boston Acoustics Bought

Tokyo — D&M Holdings, which owns the Denon, Marantz, McIntosh Laboratory, ReplayTV, Rio and Escient brands, reported a 2.5 percent decrease in consolidated revenue to $169.8 million for the company’s fiscal first quarter, ended June 30.

The company also announced that, by Sept. 30, it will leave the portable MP3 player market, where it marketed under the Rio brand, and announced that it completed the acquisition of home speaker and electronics supplier Boston Acoustics, which also owns the Snell brand of speakers.

D&M cited the Rio business as the cause of a majority of its first-quarter operating loss of $9.4 million and net loss of $6.5 million in the same period. The Rio business reported an operating loss of $8.7 million for the quarter.

Key reasons for the decline in consolidated revenue were the spin-off of D&M’s two-way communication business and product shipment delays during the ramp-up phase of a new China factory, said the company. Although demand for D&M’s core premium A/V business remained healthy, the company said, revenue was 3 percent lower compared with the year-ago quarter. Revenue for the digital network segment was slightly higher in the first quarter year-on-year, said D&M.

Largely because of the Rio shutdown, the company projects it will record an extraordinary loss of about $47.2 million during its second quarter. The loss will consist of operating losses of $21.8 million from discontinued operations at Rio in the United States and $25.4 million in shut-down related costs for global Rio operations.

With the Rio decision and a plan to establish a reserve for any shut-down costs, it is expected that Rio operations will not have a negative financial impact on the company’s financials beyond the first half of this year, the company said.

The company said it shut down Rio, the first brand to ever market a headphone MP3 player in the U.S. in 1998, after determining that the mass-market portable digital audio player market was not a strong enough strategic fit with the company’s core and profitable premium home A/V brands to warrant additional investment, the company said. “The original goal of strategic advantage with wholly owned and branded portable client devices was reconsidered in the context of the costs required to effectively scale and compete in this sector, where competition has grown intense,” the company continued. “Exiting this mass-market segment will enable D&M management to focus all of its resources on the core premium AV business and advanced content server products.”

Soon after D&M’s 2003 purchase of SONICblue’s ReplayTV and Rio business units, the MP3 market “developed quickly into a high-volume, scale-based, capital-intensive business with no premium niche,” Bernie Sepaniak, president of the D&M division that includes Rio, previously told TWICE. In contrast, the rest of D&M’s brands, all in the home entertainment market, are “premium-position, higher-average-gross-margin” brands with “significant value adds,” he noted.

Adding to MP3 suppliers’ margin pressures are Apple’s dominance, he had also said. “iPods are priced higher [than other brands] because of their dominant position and captive iTunes site,” he said.

In the MP3 market, if you’re not Apple, “a good place to be” is a service provider or internal-component manufacturer, he said.

Rio suffered an operating loss in fiscal 2004 ending March 31, 2005, and the loss was higher than the previous year’s. In addition, Rio sales slowed during the final months of fiscal 2004 because new suppliers entered the market seeking initial market penetration and because of Apple’s continued dominance in the category, the company’s annual report said.

Although Rio lost money for D&M, Rio sold 800 to 1 million units for the 12 months ending July, the company said.

In announcing that it completed the acquisition of the Boston Acoustics, D&M said it expects to benefit from the co-marketing potential between the Boston Acoustics brand and the Snell brand also owned by Boston Acoustics. D&M plans to operate Boston Acoustics as a distinct brand but with the benefit of D&M’s sales, technology and cost synergies. It will leverage product distribution channels, product development and back-office integration.

The acquisition also puts D&M into OEM and aftermarket car audio on a larger scale. D&M brand McIntosh also markets car audio.

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