Q2 2020 Zagg Inc Earnings Call
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Ladies and gentlemen, thank you for standing by welcome to say second quarter 2020, <unk> earnings Conference call.
This time, all participants on in listen only mode.
After the speakers presentation, there would be a question and answer session to ask a question. During the session you need to press Star then one your telephone.
Please be advised that today's conference is being recorded if you acquire any further assistance. Please press star then there right.
I'd now like to hand, the call for someone to your speaker for today Brendan Fraser I T are you may begin.
Thank you.
Good afternoon, and thank you for joining us today to review Sags second quarter 2020 financial results.
The call today, we preserve Chief Executive Officer, and Taylor Smith, Chief Financial Officer.
Following Kristen telling superpower.
You open the calls for a question answer session.
Our second quarter earnings press release mix issue today after the market close at approximately four or five P.M. eastern stuff.
As a follow on to the earnings.
We publish the supplemental financial information on our Investor Relations Web sites and we also furnaces document the FCC on form 8-K.
You can find all have already documents on our Investor relations website that Zagg dot com and the quarterly results section under the financial stuff.
We are recording this call into podcast public conference call will be archived that's exact investor alleged violations web page funded events after 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 included or not limited to use our outlook for the company and statement that estimate or projects future results of operations for the performance of the company.
These statements do not guarantee future performance in speak as of the date Europe's.
For more detailed discussion on their factors that can cause actual results could differ materially from those projected any forward looking statements. We refer all of you get a risk factors can paid exactly annual report on form 10-K in quarterly reports on form 10-Q filed with Securities and Exchange Commission.
Dags assumes no obligation to revise any forward looking statements that may be made in todays press release on calls.
Please note. This is on today's call. In addition to discussing the GAAP financial results, we will discuss adjusted EBITDA and non-GAAP financial measure.
An explanation of that use of this non-GAAP financial measures on this call and the reconciliation to GAAP and non-GAAP measures requires I guess you see regulation G is included in todays press release, which again 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.
And the use of such non-GAAP measures has limitations, which are detailed in the company's country.
Now I'd like to turn the call over to Chris Chris.
Thanks Brendan.
Thank you to everyone on today's call, we hope to continue to be safe and healthy as you walk to get up to get Trued as pandemic walking to get it was essential to the between defeating despite this however, despite that shouldn't be limited to the current had crisis, we should all strikes to walk together and Dan and dealt to be the strongest communities that promote to quality and inclusion hearing.
For people, who is one of our core values that sag stepping up our efforts to be better leaders in corporate citizens and the communities, where we operate I want to tank going quite a bit employees worldwide, who continue to demonstrate dedication and unfunded commitment truck company success I'm. So proud of our team as everybody together and worked tirelessly in the midst of high personal demands. This is.
So it just applying for our partners and I'm grateful to collaborate more kudos to ultimately served the needs of our consumers.
Moving to our results the second quarter was a tale of two halves April. She made me was incredibly challenging as most states wonder enough don't restrictions and many non essential business were temporary close.
This meant that the majority of our retail partner doors were not open.
It's always a whopping, we're operating unlimited capacity either with reduced hours by appointment curbside pickup only.
In response to these challenging conditions, our retail accounts quickie, adjusted forecasts and reduce future receipts to language a reduction in demand.
At the same time, we start to see an acceleration in our direct to consumer business as consumer shifted a greater portion of their purchasing online due to the stay at home measures in place.
In the second quarter on nine cents, which include sales of our own branded websites plus Amazon increased by almost 20% over last year and overseas, 70% compared to Q1.
Unfortunately, this growth was enough to offset the decline in wholesale due to the difference due to the size difference between the two channels.
Under pressure over 19, we moved quickly to reduce expenses to mitigate the impact on profitability and preserve liquidity, which we detailed in our Q1 call in May Taylor again, we'll take a true in some detail.
The second quarter progress state and local governments began lifting to initial restrictions as stores began to steadily real controlled may and June in many regions of U.S. and the work.
Seven of our larger customers opened we saw a significant uptick in central for bought a prediction and Paul categories with some central weeks exceeding last years levels.
This is a great indication that there is pent up demand for our brands and products. Our overall June central performance exceeded our expectations, which allowed many of our channel partners to walk down on hand inventory to more normalized level.
Importantly, our direct to consumer sense remained robust throughout the quarter, even as brick and mortar reopened.
With respect to our overall performance Q2 revenue came in at $77 million, which is roughly $50 million higher than we anticipated under first quarter called.
Despite the talk to me in daughter drop in revenue compared with second quarter last year adjusted EBITDA decreased by only 2 million to breakeven as a result at the cost saving measures reenacted early independently.
Tatum bicultural in greater detail on the balance sheet, but I wanted to share a few highlights.
Despite significant market pressure from covert 19 accounts receivables dsos improved compared to last year inventory declined compared to where we were ended in Q1, we generated positive operating cash flow and we continue to reduce our quarter in net debt balance on a sequential basis.
Well I take a quick decisive action in April we were able to successfully navigate through an incredibly challenging market conditions and show the financial viability of the company and position ourselves to exit this difficult period as a stronger more nimble organization.
I'll provide some additional color on all categories.
Starting with prediction, we continue to focus on expanding distribution of our antibacterial and blue light blocking Invisibleshield screen protection technology protect your phone, but also helped.
Building on our head to win the strategy. We recently launched an invisible shield branded you beat phone Sanitizer would you say fraud mobile device and kids up to 99.99% of common surface bacteria like keeping devices clean.
Going forward all new gear for protective cases will also feature antibacterial protection, starting with the recent Samsung Galaxy S 20.
Gear for came into 2020 with great momentum. Unlike over 19 has temporarily impacted demand. We believe the brand is poised to accelerate your into second half Dear aided by some additional distribution. We went ahead of the upcoming launches.
Shifting to power like Invisibleshield morphine launch the you'd be sanitizer product was especially in combining health and wellness and wireless charging using UBI see like technology to Mafia Vistanas like she was 99.9% of common surface bacteria bound and household items and about five minutes. The 10 watching enabled wireless charging it gives users of freedom to charges.
Vice fund sanitizing other person items, such as credit cards remote controls airborne and wallet simultaneously.
For handle power and only frogs audio bull continue well performed well on QVC and HSN, which has been a productive partnership and channel, particularly given the number of consumers impacted by to stay at home ours.
Our efforts around antibacterial, you'll be standardization and Blue light protection are driven by our belief that consumers are increasingly look for solutions that will enhance enhanced or health and wellness. We also believe another consumer power he will be increased productivity and comfort from home. We will continue to focus on enhancing technology in our lives and accomplish these growing.
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Looking ahead the momentum we experienced in June has carried into the start of the third quarter, even with the resurgence of retail we're still seeing strong direct consumer demand would you like says well above last years level and ahead of plan.
At this point most of our retail partner doors are now open and were seeing steady increases steady increases in central from week to week.
Based on current wholesale trends, we anticipate our in China Vinci back to normal levels when the next month or so.
Assuming all the cadence of Oems my phone launches and barring any major sit back with the state of local reopening fans. We feel we feel good about our ability to deliver toward portal revenue well above what we experienced in Q2.
With regard to the full quarter were being more cautious given the lack of visibility beyond a couple of months combined with the fact, we're facing tougher comparisons to last year's record Q4 cents of $190 million.
Well it remains difficult I know when conditions will normalize and what impact covert 19 would have in the global economy in our industry I'm confident that we've taken the right steps to emerge from the pandemic as a stronger company. This includes our decisions to discontinue certain lower margin product and calories and simplify our core lines of business as a more nimble companies I can see better so.
If it's key retail partners in core consumers capitalize on Tailwinds from multi year roll off from the Fiveg technology, along with margin benefits from our brand and calories and consolidations and ultimately generate increased value for our shareholders.
I'll now hand, the call over to Taylor.
Thanks, Chris since many details of our quarterly financial performance were included in the supplemental financial information issued earlier today I would just like to take a few minutes to add some additional comments on our second quarter financial performance given the impact Coven 19 had on her business during the quarter I'll focus my remarks on Q2 operations future net sales decreased approximately.
28% to $77 million as Chris mentioned, the first half of the quarter was very difficult due to retail closures globally. However, once retail began opening in mid to late May we saw good momentum and an increasing sell through which resulted in significantly more orders than we were anticipating at the time of our last call.
It looks like there was definitely some pent up demand and in many instances, we're seeing sell through rates above what we experienced at same time last year.
In addition to the ended the quarter up tick in retail the online channel grew by almost 20% compared to Q2 last year.
Q2 gross profit as a percentage of net sales decreased year over year to 30%, primarily due to increase tariff rates compared to last year and the impact of higher freight rates. In addition, as I mentioned on the last call. We expect some margin pressure in 2020 due to sales of excess inventory of margins below historical averages of mid Thirtys, which also.
[music] impacted us during the second quarter, excluding the impact from the inventory write down in Q1 gross margins improved approximately 200 basis points on a sequential basis.
Q2, operating expenses decreased 33% or approximately $14 million compared to last year. The decrease was due primarily to the various cost cutting measures. We implemented as a result of the expected covert 19 impacts on demand. These cost reduction measures included furloughs of approximately 20% of the workforce in Europe and the America.
His salary reductions for executives and senior management, the elimination of the bonus plan reductions in in channel marketing and the elimination of travel and all discretionary spend although there may be some areas that might make sense to invest in during the second half. We will continue the laser focused on spend to ensure we navigate our way through this difficult time.
Q2, adjusted EBITDA was breakeven versus $2 million in the prior year period, despite generating $30 million less than revenue compared to last year and the margin headwinds I discussed the restructuring actions. We quickly took in April we are critical to driving this bottom line result.
Turning to the balance sheet compared to a year ago accounts receivable decreased 38% to $63 million due to the reduction in sales compared to the prior year period. However, our dsos improved significantly from 87 days to 74 days the quality of our receivables remains very good.
Inventory was $91 million compared to 94 million at the end of the first quarter reduction of approximately $3 million.
We're very carefully monitoring retail sell through customer forecasts and customer inventory levels to ensure we're bringing in an appropriate amount of inventory for second half demand due to the uncertainties around future retail demand and OEM device launch timing as a result of the pandemic, we continue to be conservative in our assumptions and are planning accordingly.
Despite the significant headwinds from koeppen 19 during the quarter, we generated second quarter operating cash flow of $3 million compared to negative 2 million in cash from operations during the prior year period.
Net debt, which is consolidated debt less cash increased to $84 million compared to $82 million last year. However, our second quarter net debt was lower than the 89 million at year end and 85 million at the end of the first quarter of 2020.
As we discussed on the last call during April we amended our credit facility to increase the total amount available under the line of credit from $125 million to 145 million. This expansion combined with alone received under the carriers Act the Q2 restructuring and cost cutting initiatives. We've undertaken gives us confidence that will successfully now.
I get the headwinds to cope with 19 is put on the business.
The capital allocation focus throughout the remainder of 2020 will remain on funding working capital needs and continuing to service our line of credit.
As we looked at the second half of 2020, we definitely have better visibility now than we did when we last spoke at the end of May.
However, kobin 19 continues to create uncertainty around worldwide retail demand given this market uncertainty, we will not be providing annual guidance. At this time, however, given our current view of customer orders and positive retail sell through trends, we expect strong sequential revenue growth over the second quarter, we expect 2020 year to date gross margins to him.
Proved throughout the year those I mentioned, we'll see some pressure in the next few quarters compared to the historical average of mid Thirtys as we sell through our excess inventory. We expect total operating expenses to be in same range of high 20 million to low 30 million on a quarterly basis for the remaining quarters of 2020.
We may reinstate guidance later in the years, we have better visibility, but we will not be providing any further update at this time.
No different from many other companies Cobot 19 has been extremely disruptive to our business. However, with the steps we've taken during the second quarter to restructure the business reduced fixed costs and ensure adequate liquidity I'm confident that will exit this period impacted by Copel 19, as a much stronger company than when we entered with that we will now open the call for questions.
Thank you.
Ladies and gentlemen, as a reminder to ask the question you would need to press Star then one on your telephone.
To withdraw your question press the pound cake.
Well again, so I wanted to ask the question. Please stand by weaker path acuity roster.
Our first question comes from a lot of Jon Hickman with Landenburg. Your line is open.
Hi can you hear me okay.
Hi, John Major area, yes.
Can you go.
Little bit about what you're seeing internationally versus fear in the states.
Our kind of reopening.
Returned to normal if there is a normal.
Yes, sure so what we're seeing something similar John I think.
Maybe Europe, maybe being a little bit behind the opening here in the U.S., but we are seeing retail stat to return to more normalized levels as you say what the new normal is.
Well I would say is there still some areas.
Have locked down wouldn't put in a region, but ultimately we're seeing said to come back strong and our ISO di business continues to be very strong in Europe. In fact, we're seeing some of that.
Data actually a bulk prequaled at times, so we're starting see the momentum come back into the international markets.
And then could you provide a little more.
Or let your view is of product launches false.
In terms of all product launches, our OEM product launches unscarred OEM product launches devices.
Yeah, I guess you know we don't we don't comment on that in any particular OEM launch, but ill from from our perspective, we still.
We're still fully and to be able to supply of consumers with with the right products to ensure that we're making their experience better with any of the device launches that happens so somewhat from what you heard.
Last week or this week is basically what we understand as well.
Okay.
Thanks, that's it for me.
Thanks, John.
Thank you.
Thank you, ladies and gentlemen that star once asked the question.
I'm not showing any further questions.
Just on the call back over to management for closing remarks.
Thank you, yes. So we just got a message from Tom Forte out one of our other analysts who and partially isn't there to make the call, but we will follow up after this meeting so thank you very much for joining us.
Quaffed recall and we look forward to update you next quarter.
Stay safe.
Ladies and gentlemen, this concludes todays conference. Thank you for your participation you may now disconnect everyone have a wonderful.
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