Q3 2019 Earnings Call

Conference call at this time, all participants are intelligent older though.

We will conduct a question answer session and instructions will follow at that site.

That's a reminder, this conference call is being recorded.

I don't like to turn the call this older ticket or Whos, Mr bed frame, Sir you may begin.

Thank you.

Good afternoon, and thank you for joining us today to review that third quarter 2019 financial results.

The call today, we have Christa Hearn, Chief Executive Officer, and Taylor Smith, Chief Financial Officer.

Following Chris until his prepared comments, we will open the call for a question and answer session.

Our third quarter earnings press release was issued today after the market close at approximately four PM eastern time.

As a follow on to the earnings release, we publish the supplemental financial information on our Investor Relations website. We also furnace. This document to the FCC on form 8-K.

You can find all of our earnings documents on our Investor Relations website at <unk> Dot Com and the quarterly result section under the financial stuff.

We are recorded as calling a podcasts are the conference call will be archived at the Zagg Investor Relations page under the events tough for one year.

Before we begin we would like to remind everyone that the prepared remarks contain certain forward looking statements and management may make additional forward looking statements in response to your question.

These statements include but are not limited to our outlook for the company and statements that are the estimate or project future results of operations or the performance of the company.

These statements do not guarantee future performance can speak has the date hereof.

For more detailed discussion on the factors that can cause actual results could differ materially from those projected any forward looking statements. We refer all that you do the risk factors contained exact annual report on Form 10-K , and quarterly reports on Form 10-Q filed with Securities and Exchange Commission.

Zagg assumes no obligation to revise any forward looking statements that may be made in today's press release for call.

Please note that on todays call. In addition, discussing the GAAP financial results and the outlook for the company, we will discuss adult adjusted EBITDA and diluted operating earnings per share both non-GAAP financial measures.

Explanation of Zaggs use of these non-GAAP financial measures in this call and the reconciliation between GAAP and non-GAAP measures required by SEC regulation G is included in the press release today, which again can be found on the Investor Relations section of the company's website, but non-GAAP information is not a substitute for any performance measure derived in accordance with gap and they used to such non-GAAP measures hassle.

Limitations, which are detailed in the company's pressures.

I'd now like to turn the call over to Christa hurt Chris.

Thank you Brenda.

Good afternoon, and thank you all for taking the time to join us today.

The toward Quartermaster I'll return to growth as we start to realize the benefits of our recent acquisitions and it much more meaningful way I continue to experience strong gains across our international markets. The contributions from say as a gear for cases handle Paul products embracing audio combined with increases for bought Invisibleshield morphine our international markets.

Have a 4% increase in next is 246 million daughters, and adjusted EBITDA of $21 million, what I'll call domestic business continues to face magnetation pressures during the third quarter, we did see year over year decline stabilized compared to the first half of the here as we launched several new innovative products that performed when altogether.

I'm going to walk you through to Q3 highlights from each these product categories. Taylor will then review the financials in more detail and discuss guidance will then be happy to take questions.

Starting with protection or large our largest category, which includes screen protection and cases Invisibleshield expanded its popular vision guard collection with the introduction of a new antimicrobial technology, which eliminates 99% of self respect area on device screens. This is a full service kind combination of vision got pretty nice penetration technology and this new.

Sure Mike will be a feature strengthens invisible she's position as an innovator fleet or not only in device protection, but also in protecting your heads. This focus on innovation that that was the brand to continue to drive higher s. piece, but over 60% premium versus rest of my guess.

We introduced a version of this exciting new products, along with the brands entire glass elite line a screen protection breath. His most recent smashed forced the iPhone 11, 11 pro 11, Promacta as well as Google the new picks the for fixing for et cetera.

Screen protection market share appears to have stabilized at approximately 45% over the last two quarters, although inline with expectations. We were pleased to see multimarket share increased 46% joined them want to September .

As you mentioned on the last call our strategy to stabilize and go on market share. This category continues to be centered around one launching innovative products into the market and to segmenting our portfolio to address retail Evan MSRP price points.

We're executing this strategy and its watching what.

On gear for we had a very productive productive quarter as it launched new case designs compatible with several new OEM devices from Apple Samsung and Google.

Consumer response to your brand and its differentiated did feel technology has been very encouraging I just had been drive new doors and distribution expansion.

During the quarter, we continued to make good progress in expanding to Brian the cost our U.S. retail network I didn't doors at Verizon 18, T sprint target as well as several others.

Turning over to power starting with power management this business experienced a healthy year over year improvement. Thanks to the addition of our handle brand, which we acquired in January during the third quarter, we began noting I'll handle both products into QVC ahead of several fourth quarter sands events.

In addition, we launched seven new multi products at after stores, where they have expanded offering would have full line of came as a new wireless charging for losing solutions, including two multi device why this charge peds designed to walk with a variety of devices within the Apple ecosystem.

We've also launched questions on these new wireless charging solutions across most of all retail partners and we're very pleased with the central were seeing.

With respect to Paul cases in October we announced just recently <unk> in October we announced we just recently shipped multi juice pack axis batteries, but the latest signup happened I phones. These devices are now he thinks doors the speed at which we were able to bring to next irritation or this industry, leading product line to markets was our fastest ever.

Just extra battery life and seemed lightweight yet protective design the juice pack axis delivers a wireless charge I feel like any parts. So users can listen to music or take cause of standpoint.

Market share in this category dip to 25% joined the fourth quarter Threenineteen, but we're happy to report continued steady share going and finished the third quarter at 42% market share.

We expect our share gains to continue during the fourth quarter from the launch of juice pack access for the new I thought of devices.

In audio we launched brave his new role that portable speaker line, featuring do have a shock proof and waterproof construction, while delivering exceptional sound quality. These products have been very well received than we expect a nice contribution during the fourth quarter and as we head into the 2020.

In our international business the team often productive new doors across various carrier retail stores, both Europe and Latin America.

We continue to see strong international goal in fact compared to last year third quarter International sales are up 47%.

Internationally, we continue to be an area of growing investment for the business and a key strain in achieving our long term side.

All in all the top quartile played out as we expect as well we have seen some stabilization India into smartphone market fueled in part by the initial launch of the active devices. Overall unit sales are tracking slightly below our expectations terrible goksu to guidance in more detail shortly but we still expect full year revenue to be within the 525.

50 million range that we communicated I don't last earnings call.

Looking out beyond 2019, we expect positive year over year comparisons during the first half a 22 need you to one task audience that we pull saves from first half between 19 into the fourth quarter 2018, and two new OEM, New OEM handsets expected to be launched during the fourth quarter of 2020. In addition, we expect innovate Dan.

Evasion of Fiveg technology to reverse the recent downward trend that smartphone sales as consumers adopt this new technology. We expect is to be a two to see your upward trend for sands.

With me. This will also be strong driver of our core business as we continue to bring new products and innovation to them I guess.

Before I turn the call over to Taylor I want to emphasize that the board of directors are deeply committed to the what we're doing at bank of America Merrill Lynch as we go through the process of strategic alternatives to maximize shareholder value. However, as I said, when we announced this process. Our last earnings call. We're not in a position to comment until we have made a decision I'm prepared to now.

This outcome and this includes responding to bearish rumors in the media.

With that I'll hand, the call over to tailor.

Thanks, Chris since many details of our quarterly financial performance were included in the supplemental financial information issued earlier today I would just like stick a few minutes to add some initial comments on our third quarter financial performance.

Net sales increased approximately 4% to $146 million driven by increased sales of our protective cases under our gear for brand and increased power management sales driven primarily by Halo product sales and new Bofi products launched during the quarter. This was partially offset by lower sales of screen protection products within the U.S. market.

Gross profit as a percentage of net sales remained flat at approximately 37%. Despite the impact from increased tariffs and a decrease in sell the screen protection are highest margin category as we mentioned on the last earnings call. Our turf mitigation tariff mitigation efforts that included the following one that negotiating price reductions and manufacturers to passing on care.

If increases to customers three purchasing inventory in advance of tariff increases and four four exploring the movement of manufacturing out of China. You for these efforts have been largely successful in mitigating the vast majority of the tariff impacts to margin in 29 team in terms of product mix. The decline in screen protection was offset by an increase in so.

Sales of gear for brand the cases, and Halo branded power products, which both carried gross margins above company average. These were combined also with higher sales of Invisibleshield vision guard products.

Operating expenses increased 26% were approximately $9 million compared to last year due primarily to the impact of gear for Halo and breakeven operating expenses. This includes the amortization of intangible assets and and a third quarter purchase accounting adjustment. These two items alone resulted in a 2 million dollar operating expense increase compared to.

The third quarter last year. In addition, as we mentioned on the last call. We implemented a restructuring plan during June and July this year, which resulted in a $2 million severance charge that impacted the third quarter, we expect the restructuring to drive gross annual savings of approximately $8 million.

Last we saw increased marketing investment to support new third quarter product launches as well as to support a growing portfolio of brands products and channels.

Adjusted EBITDA was $21 million versus 24 million in the prior year period, which is consistent with our expectations when compared with the first half 2019, we're pleased with improvement in adjusted EBITDA and expect our restructuring efforts combined with better leverage of fixed costs. During 2020 to drive further improvements in operating results going forward.

Turning to the balance sheet compared to a year ago accounts receivable increased 17% 235 million and Dsos increased from 76 days to 87 days increasing they are in Dsos is primarily driven by two factors first direct sales to Verizon increased significantly during the third quarter, which are on 90 day payment terms ryzen direct.

They are currently represents approximately 30% of outstanding a our second.

We saw an increase sales mix in our international business, which are generally on at 90 day payment terms the quality of our receivables remains very good.

Inventory increased from 79 million to 138 million compared to the same period last year over half of the increase was due to incremental inventory associated with our recent acquisitions, which sales are largely backend weighted this is particularly true for halo, which carried a significant inventory balance at quarter end to support QVC load ins During October November in addition.

We saw an increase in inventoried international to support its 2019 growth, which is projected to be approximately 40% year over year and some additional inventory on hand due to the slowing of OEM handset sales during 2019.

Despite the increased inventory position the excess inventory skews or current product that has helped mitigate some of the tariff impacts during 2019 Anvil and we'll continue to be sold down throughout the fourth quarter and into 2020.

Consolidated inventory turns were approximately four times, excluding acquisitions down from seven times in the prior year period, we expect to get back to between five to six turns by the time, we exit the year.

Net debt, which is consolidated debt less cash increased to $97 million compared to 10 million last year. The increase was due to cash used for the gear for and Halo acquisitions of approximately $50 million $10 million for share repurchase and the remaining to fund ongoing operations, particularly with our newly acquired brands.

As Chris mentioned OEM handset sales are slightly behind our estimates for the second half of the year. However, we're still confident in the guidance range provided which is net sales in a range of 520 to 550 million gross profit margin in the mid Thirtys as a percent of sales operating earnings per share in a range of 75 cents to one dollar on approximately 20.

9.7 million shares outstanding as a reminder, we use operating earnings per share, which excludes the tax effected impact of restructuring and transaction related expenses, including amortization from the gear for Halo and braeburn acquisitions to help provide an easier apples to apples comparison with the prior year.

We continue to estimate or annual tax rate to be approximately 25% last adjusted EBITDA for 2019 is estimated at 52 to $60 million to $62 million with that we'll now open up the call for questions.

Okay.

Ladies and gentlemen, peekaboo, what's your name at this time. Please press Star then the number one on your touched on telephone. If your question. That's been answered all your wish to move yourself from the can you. Please press the pound.

Your first question is from Mike from Craig Hallum.

Hi, Mike.

Excuse me Mike Your line is now open.

Hi, guys. This is a clock murphy on for on for Mike.

I just want hi.

At the start off.

Our first question.

We noticed that your invisibleshield market share was down to 45% in the quarter and your letter you talk about kind of increased competition in this space and we were just wondering.

What what you guys are doing to combat this.

Yes, so in terms of 45 per se that it stabilize the data like the last quarter in terms of our our update so what we've done is to make sure that.

Maintain doesn't grow it is we put a segmentation in place whereby we're able to address some of the competitive natures be at around owned brand are what we would consider entry level price points. So we've implemented that strategy this quarter or last quarter for that for the new device launches.

Starting to play offs.

To our expectation so on the month of September we've seen an increase of share my market share by one point already and we would anticipate that we continue to get some share back debt you won't see all of the market share back because a lot of data from the NPD would be into suppressed markets, which obviously wholesale in the house brands, where we are also.

Things path to the segmentation process. So overall, we feel that we've got a good plan to be able to a stabilized maintain an even broader market share again.

Okay, Great I, just one more quickly I don't know if you guys have any additional color on any device sale expectations for that kind of the nexgen or fiveg devices kind of for the next next year. So if you guys any color on that.

Obviously, we can't comment on an OEM launches, but we would expect that we'd have similar timing of launches in Q1, and obviously the back into next year and the Big thing for US is the you know the rollout of Fiveg infrastructure for the for the marketplace and we really see dies.

A technology that will be adopted by consumers and really bids us growth plan over the next two to three years.

So yeah. We're excited about 2020 in terms of what new devices are coming down.

Okay. Thanks, guys.

Thank you thanks Clark.

Thank you. The next question is from Dave King from Roth capital markets.

As apologies.

Thanks afternoon guys.

Hey, David I guess.

So I guess first off on Halo and gear for do you have what they contributed in revenue.

In the quarter and then what are your current expectations in terms of how much they should be contributing.

To the business in Q4.

Yes, so the number that they contributed during the third quarter was about $24 million. So as we look at the kind of the full year. We originally talked about the three brands did approximately $69 million in revenue last year. When we originally guided we thought that they could do you know, 5% to 10% above and beyond the 69.

You know given what we talked about Q2 and some of the real headway, we've been able to make with with the brands.

Here's sense than we expected to be quite a bit above that so you know probably wouldn't guide to a specific number on just one of our brands, but but rest assured it's what well above the 10% that we had originally projected.

Okay. Yeah, that's fast for next year to date, we did see the acquisitions is a really area of growth first or step forward or doors that we can open in terms of some good retail partners that we have relationships, which so we're excited about the acquisitions for Nextshares why we're really happy with the execution this year.

Then for the runway for growth next year is that.

Okay. Okay, that's good color and good here.

Switching gears a little bit the.

I think it was on an earlier question on the product segmentation strategy for with the new screen protectors, Howard what are the margins like on those versus your typical margins and then I realize you also have some other stuff that's higher margin vision garden, So what's sort of the expectation for scream for.

Sector margins as we as we move forward here in the Q4 and beyond.

Yes, so I would I would look at at the in terms of actually maintaining to match. The margin do we have a screen protection if not growing as so on the innovation side, you know with anti microbial vision, new like protection, we're increasing our margin and on the segmentation, we're actually maintaining or matches. So we're not diluting the margin percent.

That was the whole reason for our strategy around making sure we segmented correctly without impacting margin. So from a an overall perspective look into that stabilizing if not increasing imagines.

Okay, Okay, and then I guess one more for me on the on the new Jude juice pack access congrats on getting that out.

As early as you did for the cycle.

Did you ship any of that in Q3 or was that all sort of Q4, and then how much of a load and benefit do you expect to get in Q4 or how should we be modeling the contribution from that is it is it similar to other sort of.

Juice pack launches that you had in previous years, how would you contextualize that.

Yes. Thanks.

So I would say, it's going to be all Q4 revenue, but you'll hit stores et cetera.

If you want to give a bit of color on the revenue. So yeah. I think if you look back a couple of years you know the best we'd ever get into Q4 was get that product launched in December .

I believe those 2017.

As we look at this year, we certainly don't think we're going to get back to probably that level, but we expect definitely incremental sales.

From a.

From the juice pack access so I, probably would you know as I mentioned on the on the previous question you know probably wouldn't be in a position where we want to guide for particular product category, but we definitely would expect to be above and beyond what we were able to do last year yeah.

Okay. That's great color. Thanks for taking my questions and a good luck for us there.

Thanks, Dave I expect.

Thank you. The next question is from Jon Hickman from Ladenburg.

Thanks for taking my questions appealing could you elaborate a little bit on.

Operating expenses, you said something about.

Inventory charge.

Related to the acquisition.

Does that.

Purchase accounting charge.

Of about 400000 to hit during the period as well as amortization from the from the acquired brands just for me. The intangibles that we acquired in addition to that I mentioned, there was about a 1.8 million dollar.

Restructuring charge the hit during the quarter related to the severance charges for the for the restructure.

So help us out in the fourth quarter.

That 1.8 million will hit again 400000 won't be there.

So.

Operating expenses will come down by well maybe $3 million.

Yeah, we should we should definitely see an incremental.

Reduction or consecutive reduction from Q3 to Q4, and yeah, I think they'll both of those come right off right. There's at least $2.2 million that shouldn't recur as a result of those onetime charges.

And would you say, an 8 billion dollar annual saving that like into 2020.

I have to me in a quarter.

Yeah. The wed look at it is like this you know with the with the head count reductions that we were able to execute on as part of the restructure there's gross annual savings of about $8 million. So if we didn't do anything we'd be able to take that into next year of course, you know there's going to be as other areas of the business, where we're going to invest and maybe some other head count.

That are going to need to be added as we grow and so I wouldn't bring the entire 8 million into savings. That's the gross amount adjusted for some head count that we made it as we grow the business into 2020.

That makes sense.

Yeah coverage.

And one more thing I got cut off for a minute.

Do you have seen thing about the on demand product and how that's going.

Sure the states.

No. So we did make a comment on a John but I'm happy to give you. Some color. So we continue to see growth an invisible shield on demand both internationally and we're starting to make some headway here in North America. So we couldn't be any more piece would that service. It continues to lead the way in both Europe , and Latin America opening new doors as well as given enough.

You need to get a lot of brands in conjunction with that that surface.

In North America, Yes, we are starting to make some headways earlier this quarter. We know we havent done all public you had mentioned to partner, but we will be in a position but ended the year already next year, where they have to give some more color on sort of patents that were what went on that service in North America.

Okay. Thank you.

Thanks, John Thanks, John .

Thank you for your final question is from Sean Henderson from D.A. Davidson.

Hi, guys. Thanks for taking my question just real quick if you could provide some kind of just an updated timeline on.

Moving some of your sourcing outside of China.

Just kinda updated outlook on that.

And how we should think about.

Yeah sure timeframe basis.

Yeah sure. So we're not looking at just added solution, Sean So those three areas of focus for US and one is obviously you know walking with all corners set of partners in China in terms of cost negotiations and obviously as we bring new products to market, we take all of that tariff into the into accounted for we actually a knowledge to price.

Okay. So that's one area, where we're looking at.

Second these obviously where current products, while we don't have leeway to actually take more cost out of the deal in the entire process. We would have you wanted we had had negotiations with some of our retail UN carrier pockets, where we would pass on that cost I mean part is obviously as you mentioned, we timelines at all moving some of our production out of China.

We have started the process in civil about key categories.

Obviously I can't go into too much detail, but we would expect.

A significant amount of all Paul or category will be outside of China.

In 2020 light, particularly to wireless charging a arena so.

That's how we look at as we obviously have a a plan for the entire business in terms of you know we do have to go out of China, and despite category, but I'm not going to go into too much detail here, but we're pretty well pretty happy with the overall plan. It takes us out to you know the back end of 2021.

Okay, great. Thank you very much of the color.

Thank you Sean sanction.

Thank you that concludes today's session.

Well that gets here to conference back to the speakers for closing comments.

Thank you for joining us on todays call. We appreciate you given the time to join US and we look forward to our next call update you on our financial performance. Thank you.

Ladies and gentlemen, this concludes todays conference. Thank you for your participation and have a wonderful day you may disconnect.