Franklin Wireless (OTC BB:FKWL)

For the second quarter of 20111, the company reported:

• Net sales of $15.6 million for the quarter, compared with $25.2 million in net sales for the corresponding period of 2009.
• Despite the decrease in revenue, gross profit increased by 110% to $6.1 million compared to $2.9 million for the same quarter last year. 
• In addition, net income increased to $2.0 million for the three month period ending December 31, 2010, compared with $821,546 for the same period in 2009, which represents a 147% increase year-over-year.

"Despite operating in a very competitive environment during this past quarter, Franklin Wireless posted solid financial results including substantial increases in gross margin and net income," said OC Kim, president of Franklin Wireless. "During the quarter, we continued to ship a greater mix of FTI supplied products, which was the primary reason for the improved results and we feel this further validates our strategic investment in FTI which took place in fiscal 2010."

• Diluted earnings per share improved to $0.17 for the quarter compared to $0.06 for same period last year. 

The increase was due to higher net income as well as the lower share count resulting from the recent repurchase of approximately 1.8 million shares from C-Motech. The Company expects to repurchase C-Motech's remaining 1.6 million shares by March 31, 2011, which will further reduce the number of shares outstanding.

Franklin Wireless issued a release this morning:

"Based upon the company's preliminary estimates, total revenue is expected to be approximately $100 million for the full 2010 fiscal year, which represents more than a 300% increase over the fiscal 2009 period. In addition, the company announced that it was profitable in each quarter of the 2010 fiscal year."

This guidance implies fourth quarter revenues of about $40.0 million which compares to $9.8 million reported in FKWL fiscal 2009 comparable period. However, reading between the lines one may surmise that fourth quarter EPS growth may not be in the cards since the company only commented that it would be profitable.  Weakened margins in lieu of increasing sales has been the the one sticky issue this year. Investors will likely require more clarity on EPS growth going forward. We will provide an update upon the release of year end results.

Added to the GeoSpecial list on February 17, 2010 @ $1.90 

Catalyst: anticipation of a dramatic revenue break out.

Peak performance: Reached a high of  $2.50 on 4/7/09.
Current road block: Margin pressure; No financial guidance.
Current Price: $2.00

While revenues have exploded due to an overall increase in demand for the Company's dual-mode (3G and 4G) wireless USB modems...

• Fiscal 2nd.quarter sales; 2010 vs 2009: $25.18 vs. $4.62 million
• Fiscal 3rd. quarter sales; 2010 vs 2009: $31.63 vs. $3.31 million
  
• Fiscal 2nd.quarter EPS; 2010 vs 2009: $0.06 vs. $0.04
• Fiscal 3rd. quarter EPS; 2010 vs 2009: $0.10 vs. $0.00

The company has experienced a significant reduction in margins: 

"The gross profit decrease in terms of net sales percentage was primarily due to the significant increase in sales to carrier customers in the United States, whose gross profit in terms of net sales percentage was 13.4% and accounted for 99.1% of total net sales for the three months ended March 31, 2010. The decrease in sales in the South America and Caribbean regions also negatively affected the gross profit in terms of net sales percentage."

Investing in Franklin Wireless in the short-term is a challenging call for us. FKWL is going up against a tough Fiscal 2009 fourth quarter where it reported EPS $0.18. Without any guidance or an interview, we are inclined to wait and see where fourth quarter numbers come in at before making an additional commitment to FKWL shares.

Note:

Today's announcement that FKWL has reached an agreement with C-Motech Co. Ltd. to repurchase all of C-Motech's Franklin Wireless shares  should help EPS. 

"The company will complete the repurchase of the shares by December 31, 2010. C-Motech currently holds 3,370,356 shares of Franklin's common stock, which represent approximately 24% of Franklin's outstanding shares."