When previewing the earnings report due out from Audiovox (NASDAQ:VOXX) a few days ago, I posed the question: "After reporting two consecutive 'earnings misses' in its last two quarters, will consumer electronics (CE) firm Audiovox make it three in a row when it reports its fiscal Q3 2006 numbers Tuesday afternoon?"

Turns out, the mobile electronics designer failed to win its game of tic-tac-toe -- to the great delight of shareholders, who have since bid the firm's shares up 9% in response. To the contrary, Audiovox's:

  • Quarterly sales declined 3% year over year.
  • Profits emerged from last year's black hole, as the firm netted $0.17 per share.
  • Gross margins nearly tripled to 16.7%, no longer weighed down by last year's inventory write-down.

The quarter's results compare mostly favorably to year-to-date trends, where sales remain 15% lower than through last year's first three quarters, the firm netted $0.18 per share, and the gross margin was slightly higher at 17%. Also pleasing to see is that CEO Patrick Lavelle is standing by his commitment to streamline the business. While accounts receivable outpaced sales growth in the third quarter (up 5% versus down 3%), the firm continued to draw down inventories in comparison to last year's levels. At last report, the shelves bear 31% less merchandise than in November 2005.

Not there yet
Wherever you look, things are improving at Audiovox -- but "improving" isn't the same as "perfected." There's still work to be done and, I'd venture to say, still room for the stock to move higher as more improvements are made. First and foremost, I'd highlight a fact that management played down itself, when it deliberately declined to include a cash flow statement in its earnings release (which came out the same day the company filed the cash flow statement with the SEC in its 10-Q submission).

Turning to the 10-Q, we see that the business continues to burn cash, with negative free cash flow reaching $23.3 million over the last three quarters. That's a big improvement over the $47.3 million that Audiovox burned through this time last year.

But as we've pointed out before on your computer screen, the company competes in a tough space. Heavyweights like Garmin (NASDAQ:GRMN), Philips (NYSE:PHG), and Sony (NYSE:SNE) are also designing XM (NASDAQ:XMSR) and Sirius (NASDAQ:SIRI) satellite radio receivers. Clearly, Audiovox has much more work ahead of it.

For related Foolishness, read "Audiovox More Bark Than Bite."

Garmin is a Stock Advisor pick. XM is a former Rule Breakers selection. Try out these or any of our other Foolish newsletters for yourself, free for 30 days.

Fool contributor Rich Smith does not own shares of any company named above.