Q1 2020 Earnings Call
Ladies and gentlemen, today's conference is scheduled to begin shortly please continue to standby. Thank you for your patience.
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At this time, all participants are in listen only mode.
Later, we will conduct a question and answer session and instructions will follow at that time.
As a reminder, this conference call is being recorded.
I would now like to turn the conference over to your host Mr. Brendon Frey, Sir you may begin.
Thank you Liz good afternoon. Thank you for joining us today to reviews adds first quarter.
I was in 20 financial results.
On the call today, we of course, <unk>, Chief Executive Officer, and Taylor Smith, Chief Financial Officer.
And Chris until his prepared comments, we will open the call great question and answer session.
Our first quarter earnings press release, which was issued today after the market close at a buckling spoil FID PM eastern time.
As a follow onto their countries, we publish the supplemental financial information on our Investor Relations website.
We also purchased this document to the FCC on form 8-K.
You can find all our earnings documents on our Investor Relations web sites that Zach Dot Com quarterly result section under the financials.
We are recording this call in a podcasts are the conference call will be archived at the Zagg Investor Relations Web page under the bunched up for one year.
Before we begin you would like to remind everyone that the paired 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 estimate we're projecting future results of operations or the performance of the company.
These statements about guarantee future performance can speak as of 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 due to the risk factors contained index 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 release more coal.
Please note that on todays call. In addition, discussing the GAAP financial results and the outlook for the company, we will discuss adjusted EBITDA in the gross profit excluding the impact of March 20000, 2020 inventory write Downs book Nongaap financial measures an explanation of that being said these non-GAAP financial measures in this call and the reconciliation from GAAP.
Non-GAAP measures required by FCC regulation G is included in todays press release today would you can can be found on the Investor Relations section of the company's website. The non-GAAP information is not a substitute for any performance measure derived in accordance with gap.
You said such non-GAAP measures has limitations, which are detailed in the company's classrooms.
And I'd now like to turn the call over to Chris or Chris.
Thanks, Brendan and thank you all to everyone for joining us on our call today.
I Hope you and your families are safe and healthy all talks or what everyone who has been affected by cobot 19 and on behalf. The entire Zagg organization I want to express my gratitude to all doors in the frontline backing to buyers and welcome to keep our community say from running.
So obviously volatile situation, we have worked diligently to ensure that we can continue operations, while protecting our employees, which is required significant changes in how we operate including the vast majority of all employees working from home and remote communications with our partners I'm extremely proud of how when does that team responded to the unique set of challenges created by dependent me.
I want to personally thank everyone for their commitment and dedication you've shown as a company joined he is unprecedented times.
Prior to the outbreak we were experiencing a sort of stuck to the new year, especially from a topline perspective, even with the gross margin headwinds we were facing from higher types that went into effect in late 2019, we had a good line of sight and delivering a meaningful improvement in adjusted EBITDA compared to fourth quarter last year.
Our performance is tracking to plan when we outlined our 2020 guidance journal for corporate color on March 11.
On the call that evening the concern the concern around the impact to covert 19 was primarily supply chain orientated and not really its demand as the outbreak in a bias in the U.S. appeared to be still an already stages and actually it's a few areas of the country.
However, the situation change very quickly soon after all called that night, the National Basketball Association suspended this season after Utah, just Joe was diagnosed with the krona virus en masse talking to present, the care to national emergency, which was funded by several states recurring non essential businesses to close on individuals to shut threshold.
As a result of the actions taken to stop the spread at the virus, we experienced a steep drop off in sales over the last few weeks a match with many of our wholesale partners required to close their doors. They took steps to preserve liquidity by pushing out or canceling orders and walking down on had inventory.
We also saw mash demand slowing or direct to consumer trends as consumers shifted up porch sister groceries Phoenix plays I know necessities to whether to prolong period of time at home.
Our management team a board of directors talk to me these actions to reduce our go forward operating cost and photo enhance our financial Flexibilities.
These actions included closing on amendments to our secured revolving credit facility to increase available borrowings.
Causing a small business administration on under the care Zack.
Cementing followers are laying off a portion of our globally walk source temporarily reducing senior management salaries temporarily reducing the cash portion of the board of director's compensation deferring spending on all nonessential projects implemented a host of global cost reduction initiatives and consulting orderly purchase orders to align with just the demand forecast.
Despite a very difficult backdrop over the last few weeks a match fourth quarter sales increased 16%, even as we lost approximately 10 million juices to cope with 19.
Our topline performance was driven by solid growth in only visible she screen protection business, along with year over year gains and handle power and multi wireless charging products.
We continue to long history of introducing innovative new products seven of which advanced our heads and when the strategy and more timely given the current environment. He started in 28% to launch a vision gosh, a screen protection technology. The interest almost half a blue light followed by an introduction of our antibacterial screen protection last fall and that was developed under our partnership would cost us.
Leader in antimicrobial surface protection.
This year, we will incorporate does antimicrobial solution to all Invisibleshield screen protection launches along with all new give full case launches.
We also develop two product lines under all had to win a strategy that launched our Sharkey will launch during early April we launched enter about TV lives for device used you would find this range across our wireless and big box retailers. These device wipes have sold in well and have sold true even stronger, especially as consumers have increased our focus on protecting their heads.
Later this quarter, we will launch you before sanitizers, which can be used in store I want to sanitation on mobile devices.
Already demand signals are encouraging for this product and I look forward seeing in the market.
In addition, late in the fourth quarter as individuals and families been staying at home we saw spike in several products that support welcome home, our remote gardening, such as keyboards wireless charging and audio.
As a result to the accelerated shift to online purchasing debit card as retail stores close a reduced hours, we did see some erosion in our screen protection market share as business. As this business is heavily tied to retail sell through of smartphones, particularly in our wireless child, we anticipate recapturing to share a stores open and consumer traffic, we told us to these retailers.
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As a second quarter got underway the trends we experienced late match carried over into early April but does it from progressed, we saw a whole said central improve each week into stores every mandelson going from down as much as 65% compared to the same period last year to down approximately 20% the last week at the moment.
In early May a few states began to east are locked down restrictions and brick and mortar retail slowly began to reopen.
Today, depending on the retailer carrier to percentage of doors open range from 45% to 90%. We continue see more doors open weekly and we're anticipating that the vast majority of our partner doors will be open ended July timeframe.
In terms of our direct to consumer performance Q2 to date sales have outpaced 2019 by over 50% as we're seeing very effective dot com AD spend and improved conversion rates online.
Overall sales trends for the second quarter slowly improving what quarterly trend to be approximately 50% below our forecast im actually of 120 totaling $25 million.
We're not providing guidance for 2020 at this time due to lack of visibility and on pure timing when consumer demand for our colleagues begin to normalize we're planning our business consistently over the next several quarters, especially as it relates to expenses and future receipts.
With the amount of uncertainty created by covered 19 in the near term I potentially longer term de executive team and I took a deep dive into future profitability of auto brands product lines, including review as Recoverability of inventory on hand shooting client did decline in demand brought on by the pandemic.
To better position the company for sustained profitable growth should we initiated restructuring plan. Thank lose discontinued the braving audio Brian was supporting throughout the remainder of the year.
Zinc the battery case category and simplifying our life drugs audio zagg keyboard and multi power station business, including reducing SKU counts and discontinuing certain product lines.
The focus going forward is on expanding we didn't hire imagine carrying us where we believe we can photo separate ourselves from the competition to innovation either developed internally are to license agreements like we've done with our partners DCIO classes and healthy.
With respect to the battery faces the size of the categories declined over the past several years as consumers continue to shift to wireless charging solutions. In addition, but those are you a who are familiar with our battery cases, we recall to her launches are always a few months after device Dodge dose, we lose out a significant says opportunity as device launched.
Lastly, battery cases are heavily engineered products to have significant lead times, which has contributed to higher product costs and a difficult time, pushing the right amount of inventory for all consumer demand.
Some of the all these factors that contributed to the so this being a category, although it generated $20 million and 2019 did not produce positive operating upfront for the company.
Given the current environment and our need to focus on product categories that we are confident we can profitably grow we made it difficult decision to exit the caring for returned I guess.
In terms of simplifying certain categories. The goal is to reduce in venture is by sourcing finished goods move away from long lead time coupon commitments and significantly reducing our number skews in each of the remaining product categories.
While we called onetime charges this year in association with the restructuring, including inventory write downs, which channel, which we view shortly we expect our actions will result in higher operating margins long term and more nimble company that can better so our retail partners for consumers, while generating increased value for all shareholders.
As we look towards adapting our business and organization to enjoy the near term challenges, we're doing so what our sites in the future.
Evaluating our brands of strategies with the goal of strengthening our category, leading positions positionings strengthening our consumer connections and strengthening our relationships key partners.
I'm confident that the steps were taken out to what are the near term volatility will said cycle for a longer term success are in the best interests. At this company, we will manage the business with a high degree of flexibility this year and be prepared to capitalize on the opportunities that currently exist for our portfolio brands as well as any new opportunities, we anticipate that would be created by the lasting impact from the pandemic.
Thank you all talked shareholders for your continued support and on behalf of the entire Zagg team I Hope I did want to stand safe and healthy.
I'll now hand, the call over to tailor thanks, Chris since many of our quarterly financial since since many details of our quarterly financial performance were included in the supplemental financial information issued earlier today I would just like seek a few minutes to add some additional comments on our first quarter financial performance Q1, net sales increased approximately 16% to 91 million dollar.
Inline with the guidance range, we provided on last earnings call. The year over year increase was driven by increased sales a screen protection products and an increase in sales of the Halo and mostly wireless power product lines. Despite ending in line with guidance, we lost approximately $9 million to $10 million in March sales due to demand reductions from the cobot 19 pandemic.
As Chris mentioned.
Q1 gross profit as a percentage of net sales decreased primarily due to a 45 million dollar noncash inventory write down linked to one the discontinuance of the Braeburn brand to exiting the battery case product category three the simplification of our I frogs audio zagg keyboard and movie power station businesses, including reducing Skus.
[music] counts and discontinuing certain product lines and for decreased demand due to the effects of cobot 19.
Excluding the impact of this noncash inventory write down gross profit as a percentage of sales would've been approximately 20% versus 30% in the prior year period. In addition to the inventory write down during the first quarter, we experienced headwinds compared to last year from increased tariffs and the impact of both increased airfreight and freight rates due to.
Chinese factories coming back online later than planned as a result to covert 19.
Q1, operating expenses increased 55% were approximately $22 million compared to last year. The increase was due primarily to a and 18 million dollar noncash impairment of goodwill linked to the decline in market capitalization at the end of the first quarter $4 million in noncash charges linked to the write off intangibles and equipment.
Tied to the discontinuance of the Brave and brand in the product lines discussed a 500000 dollar charge for severance when two employees terminated the in the first quarter and approximately $1 million linked to an additional investment in expansion across the Latin America region.
These increases were partially offset by the Q1 impact of restructuring activities undertaken last year, excluding the onetime impairment and severance charges operating expenses would have declined by approximately 500000 compared to last year.
Q1, adjusted EBITDA was negative $7 million versus negative 9 million in the prior year period, the improvement versus the prior year was linked to increase sales, but was partially offset by the headwinds to gross profit from airfreight and tariffs that I discussed previously.
Due to the noncash nature of the inventory write down goodwill impairment and the write off of intangibles and equipment. These charges are included as add backs to adjusted EBITDA during the period.
Turning to the balance sheet compared to a year ago accounts receivable decreased 11% to $84 million and Dsos improved significantly from 107 days to more normal level of 84 days the quality of our receivables remains very good inventory was $94 million after the $45 million write down compared to $100 million last year.
And $145 million at the end of 2019.
Excluding the impact of the inventory write down in Q1 inventory decreased by approximately $7 million compared to year end given the significant impact on retail demand from coping 19, we're very carefully monitoring sell through customer forecasts and customer inventory levels to ensure that we're bringing in an appropriate amount of inventory for second half demand, but are being cut.
Serve it up on our assumptions given uncertainty in future retail demand and OEM device launch timing.
Net debt, which is consolidated debt less cash increased $85 million compared to 70 579 million in Q1 last year.
On a gross basis the line of credit balance at the end of the quarter was 100 million versus $93 million in Q1 last year the increased compared to last year was due to cash used to support our newly acquired Halo and gear for brands 2019 inventory purchases and increases in tariff rates.
During April we amended our credit facility to increase the total amount available under the line of credit from 125 million $245 million. This expansion combined with the restructuring cash retention and cost cutting initiatives. We've undertaken gives us confidence that will successfully navigate the headwinds to cope with 19 is put on the business.
Chris I'd like to spend a few minutes discussing our response to covert 19 and actions we've taken to preserve cash focus the business on the most profitable product lines and simplify product offerings. So there were a stronger and more profitable companies. We emerge from this period impacted by covert 19.
As Chris and I left earnings are left the office after the earnings call March 11, which feels like a lifetime ago. We're very confident in the strong Q1 Q2 is shaping up to be well above last year as Chris mentioned that night Regal bear from the you talked you tested positive for Cobot 19 prior to the just under game and by the time to get the night was over the MBS season had been canceled over the next.
Only two hours, we saw the NC doubly basketball tournament cancelled and started to see store closures or reduced hours throughout retail given our significant reliance on sales to retail partners and franchise locations the impact to our business has been significant as you all know to stay at home orders and related retail store closures have followed varied state and local guidelines.
We stay at home orders and retail store closure started in mid to late March those Chris mentioned, we're starting to see some light at the end of the tunnel in various markets throughout the U.S.
As we saw these significant potential headwinds to the business. We quickly mobilize to covert 19 task force. It took the following actions to preserve cash and reduce expenses, we amended our line of credit.
To increase available borrowings by approximately 20 million through March 2021, as I mentioned closed on a small business administration loan under the carriers acts of approximately 9 million implemented furloughs or layoffs of approximately 20% of global employees.
Temporarily reduced salaries, including a 50% 15% reduction for Chris 10% reductions for the rest of the executive team and 5% reductions for senior management temporarily reduce the cash portion of the board of director's compensation by 15% and replaced it with stock based compensation significantly reduced marketing spend throughout the remainder.
The 20 deferred or canceled spending on on that non essential projects delayed or canceled certain purchase orders to align with our adjusted demand forecast and significantly limited traveled employees internationally and domestically throughout the remainder of 2020.
In addition, as Chris mentioned, we critically examined all of our brands and product lines looking at long term growth and profitability. Ultimately we made the decision to discontinue the breakeven brand exit the battery case product category and simplify our I frogs, adios, Zach keyboard and Bofi power station businesses, including reducing SKU counts and discontinue.
Doing discontinuing certain product lines.
These decisions were not made lightly but the ultimate goal is to focus the business on the most profitable product lines and although will sacrifice. Some topline sales. These decisions will drive improved profitability long term during 2019, the breakeven brand and the discontinued product lines accounted for approximately 55 million a net sales however, due to discounting and our.
Since as needed to support these brands they produce negative adjusted EBITDA with everything else held constant we expect these decisions to drive incremental profit dollars long term.
As a result of all of these actions, we expect 2020 year to date gross margins to improve throughout the year, though we'll see some pressure in the next few quarters compared to historical average of mid Thirtys as we sell through our excess inventory.
As we move into next year, we expect improvement compared to our historical average gross margins, which again is in the mid thirtys.
Operating expenses due to the many cost reduction reduction initiatives that have been implemented since the end of March we expect total operating expenses to be in a range of high twentys to approximately $30 million on a quarterly basis for the remaining quarters of 2020.
Due to the impacts stay at home orders are having on retail demand worldwide and the limited visibility of when and where they will be lifted and subsequent customer demand. We would your 2020 annual guidance in April we may reinstate guidance later in the years, we have better visibility, but we will not be providing any further update to guidance at this time with that we will now open up the call for questions.
Ladies and gentlemen, if you'd like to ask a question at this time. Please press. The Star then the number one key on your Touchtone telephone.
To withdraw your question press the pound key.
Again that is star then one he'd like to ask a question at this time.
Our first question comes from the line of.
Thomas Forte with da Davidson. Your line is now open.
Great. Thanks for taking my question. So I think I've a question a follow up and then it might get back in the queue. So can you talk a little more about your direct sales.
To the extent that you're seeing thank you gave some data points underperformance, there, but as a general rule, what's your priority.
We are maintaining inventory for direct sales versus wholesale.
Yes, Tom good Great question on all direct says we.
Initially we do you actually see the decline because obviously Amazon focused heavily on a sequential so we saw a little bit of a date, but coming out of April aside from a match, we're starting to see really good traction in our direct to consumer space.
We were actually focusing more on our spend from digital spend on our own dot com as well as Amazon.
We've obviously you ring fenced key.
In vitro cheap.
Products and categories that were putting on both those platforms. So we've seen really nice traction.
And continue to see so this month and add to forecast is pretty strong. So we're really putting as much fuel on the fires we kind of comes to direct to consumer on the other platforms Qxh, we've seen some nice.
Growth there would be nice forecast coming into the back ended the year as you know very Q3 Q4 full faced.
We feel that we've been some nice momentum with a number of all brands on that channel as well. So overall direct to consumer is strong and we continue to invest dollars in that channel.
All right. So the one follow up and then I'll get back in the queue. So in the follow up side.
How have you been able to develop some of these calls anti bacterial.
Products, so quickly and.
I guess, that's pretty much my question. So I know you had the screen protector that had those properties.
At an early date, but some of the other product launches you're doing that address that very thing.
How is that you've been able to create these products so quickly.
Hey.
Mixture two things Tom a bit fortunate and also I would say very nimble. The team have been very very quickly react but also as we had been walking on one or two products. Prior to this in terms of inline with our wellhead done when this strategy around product and as this.
Unfortunate situation the card we've been talking very closely with our partners in retail and carrier and the opportunity basic chemical very quickly, but we were able to react to it quick enough to be able to meet the requirements of our partners. So I'm very proud of the team in terms of how quickly Dave Dave reacted to it.
Yes.
We were also that bit Fox and as we happen to be started looking at at certain products in that space.
Okay. Thank you, Chris I'll get back into queue for more questions. Thanks. Thanks, Tom.
Our next question comes from Jon Hickman with Ladenburg. Your line is now open.
Hi.
Did you.
I was writing pretty fast and you were talking pretty fast, but so did you say that you expect fails to be down 50% in Q2 from your previous guidance.
Good how are you said.
So we didn't we never guided to Q2, but what Chris said was we were estimating in early March that Q2 sales will be approximately 120 225 million and that yes.
Tracking right now at about 50% of that amount, Okay, and then could you elaborate a little bit on what you mean by exiting breakeven is that that's just can go away are you going to try.
Yes, so ultimately we will be exiting the Brian and John but we will be supporting partners.
As long as Joel throughout the year, because it is range in certain.
Retail partners and we have products for the tooling is already there. So we were able to support the current product sets for the foreseeable future upper sand is where we're not going to go out and develop a whole new set of products on the back of that Brad.
So right now your I mean, but those products will be available at retail indirectly through what the ended the year or.
Yes, yes.
You know what a current lineup that we had if theres any particular product that setting well with a partner we're able to maintain.
Support latter hotness lifestyle product, so you're not putting any like R&D there correct.
Hello into the.
Okay. Thank you that's it for me.
Thanks, John.
As a reminder, ladies and gentlemen, if you'd like to ask a question at this time that is star then one.
We have a follow up question from the lineup Thomas Forte with da Davidson. Your line is now open.
Great. Thanks, I had three I'll go one of the time, so Chris I wanted to ask first and foremost to the extent that we're expecting fiveg to present, the tremendous opportunity for zagg to the extent that it should stimulate.
Growth for smartphones.
Are you seeing anything to suggest that there will be material delays in fiveg rollout later this year.
No not straight off the bat, Tom, but we do expect it to probably take a longer period of time, given obviously the corporate 19, they've had some impact right I think in terms of devices.
Most places coming now will be Fiveg compliant as you've seen with Samsung the let the latest launched stay ahead. So we anticipate that we will see growth around Fiveg. We're planning on business are all.
And we're not looking at a hockey stick roll right off the bat, we expected to be more slower.
Ran plan in terms of growth, but more sustained as well.
Are you seeing anything though that would suggest to you that the long term opportunity on Fiveg is any lost robust.
No I stated I still believe the opportunities there.
Okay, great for two more.
To what extent is it possible that apple offering a $399 iPhone could stimulate unit growth in smartphones and then create a shorter term opportunity for you.
Yes, I do think it will produce an opportunity for us.
Getting some feedback from the field I do believe that they the devices has been except to really well by consumers.
We have full set of products around that be a screen protection and cases. So we're excited that would that product and obviously related to take advantage of any opportunities in the marketplace that brands.
All right, so I apologize to more so to what extent has your success selling on Qxh.
Given you.
That said how you can.
Apply that success to your other distribution channels.
Yes, so I would say our success has been primarily driven by the success of the product right to quality the product and the functionality the product and it has been developed very very closely with Qxh right. So a very strong partnership. So if anything that's what we are taking away and really it's what we're seeing without all of.
A major partners Tom is how we partner with these retailers and carriers very much dictates. How you can bring a good products to market. So for me. It's all around the partnership and continue with the the focus on innovation products, it's always be successful so.
I will tell you we are used that blueprint across all key partners.
Excellent. So last question for me and then best of luck.
The question I have is how should we think of the future role of China for your supply chain.
Has covert 19 changed your thoughts about the long term role.
It hasn't changed our thoughts tolmar on over the long term rollout I think prior to covert 19 as a business with the tariffs with the difficulties that brought all business we'd be looking at how do we diversify our supply chain. So we've already been looking at that and I continue Eva a number of product a product sets for we're already outside of choice.
Right. So I think we'll continue with that strategy and obviously China's did a very key part of our business, but we continue to evaluate and be ready to move as quickly as we can to diversify.
Great. Thank you Chris Thank you Taylor ticker. Thanks, Thanks, Tom.
That concludes today's question and answer session I'd like to turn the call back for closing remarks.
Thank you all for joining our fourth quarter update for 2020.
I hope it all staying safe you and your families and we look forward to speaking to again for our Q2 update thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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