Q3 2020 Zagg Inc Earnings Call
At this time all participants are in listen only about later, we will conduct a question and answer session and instructions will follow at that time, if anyone should have more assistance. During the conference. Please press star zero on your question on telephone as a reminder, this conference call is being recorded. Thank you I would now like to turn the conference over to your host Mr. Brendon Frey. Please go ahead.
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Good afternoon, and thank you for joining us today to review Zaggs third quarter 2020 financial results.
On the call today, we of course are her chief Executive Officer, and Taylor Smith, Chief Financial Officer.
Following Chris can tell 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 closed at approximately four or five P.M. eastern time.
As a follow on to the earnings release, we published the supplemental financial information on our Investor Relations website. We also furnished this document to the FTC and for me.
You can find our earnings documents on our Investor Relations website at <unk> Dot com in the quarterly results section under the financial stuff.
We are recording this call and a broadcast of the conference call will be archived at the Zagg Investor Relations Web page under the events tab for one year.
Before we begin we would like to remind everyone that the prepared remarks contain forward looking statements and management may make additional forward looking statements in response to your questions.
These statements include but are not limited to our outlook for the company and statements that estimate or project future results of operations for the performance of the company. These.
These statements do not guarantee future performance and speak as of the date hereof.
For more detailed discussion on the factors that can cause actual results to differ materially from those projected any forward looking statements. We refer all of you to the risk factors contained in Zaggs 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 mean that may be made in todays release or call.
Please note that on todays call. In addition to discussing the GAAP financial results, we will discuss adjusted EBITDA, a non-GAAP financial measure.
Explanation of Zaggs use of this non-GAAP financial measure in this call and reconciliation between GAAP and non-GAAP measures required by SEC regulation G is included in today's press release today, which again can be found on the Investor Relations website.
The non-GAAP information is not a substitute for any performance measure derived in accordance with GAAP and the use of such non-GAAP measures has limitations, which are detailed in the company's customers.
And now I'd like to turn the call over to Kris Kris.
Thanks Brendan.
Thank you to everyone on today's call. We hope you and your families continue to be safe and healthy Foster.
Firstly, let me start by taking our entire zagg team across the globe I'm extremely proud to see our teams reacted to the quarter and never lost sight of serving our consumers and partners the quality products that protect and enhance our devices.
Over the course of the third quarter. It was pleasing to see our results improved significantly compared with the second quarter and exceeded our expectations. We are encouraged by our recent performance given the challenges we continue to face from the ongoing health pandemic and its impact on the economy.
Our work over the past several months, which has included reducing expenses adapting our operations to the current retail environment and aggressively managing inventories has put the company in a much stronger financial position I provided the business with good momentum as we head into our busiest selling season.
Looking at our talk in more detail as we discussed on our Q2 call in August we saw a significant sequential uptick in sensor wins, you for border protection and Paul categories as several of our larger customers, we opened our doors and resume more normal nice store operations with some central weeks, even exceeding last year's levels.
This trend continued into July and consistently improved throughout August and September quarter online sales growth did temper a bit from an EPS, we experienced during the pandemic, but most of the brick and mortar was closed it was still up nicely from a year ago and expanding this channel continues to be a priority for us.
With respect to overall performance Q2 revenue came in at a $150 million compared to 147 million and a year ago period, a decrease of 21%. This represents a nice improvement from the 28% year over year decrease in revenue we reported in the second quarter. Despite the rough taught to 2 million drop in revenue compared with the third quarter of last year.
Here combined with some gross margin headwinds from higher freight expenses, we delivered adjusted EBITDA of $15 million.
Thanks to cost saving these measures we enacted already independently.
Ted who will go through in greater detail on the balance sheet, but I wanted to get share a few highlights.
Despite significant macro pressure from COVID-19, our accounts receivable dsos improved compared to last year.
Inventories declined compared to where we ended Q2.
We generated positive operating cash flow and we continued to reduce our costs are in net debt balance on a year over year and sequential basis.
By taking quick decisive action back in April and more recently walking closely with our retail partners under store reopening of course, we have been able to successfully navigate truly couldn't be challenging market conditions and show into financial viability as a company and position ourselves to exit this difficult period as a stronger more nimble organization.
I'll now provide some additional color to all categories. So.
Actually what protection, we continue to build on our overall digital when the strategy for a few years now our hero screen protection has been vision got a product to reduce exposure to high energy visible do life that can have damaging effects without changing the screen colors or the peak resolution we.
We have now sold over 10 million units, which is technology. In addition, our invisibleshield screen protectors produced this year and beyond now also include anti microbial technology. This includes our entire lineup for the new I phone trends, which is now available in stores.
This year, we introduced our newest product geared towards our digital when the strategy a UBI UBI phone sanitizer, which walks at all mobile devices and kids up to 99.9% of staffing e. coli surface bacteria.
Our emphasis on protecting devices and their owners is resonating with retailers and our consumers and has led to increasing census, and greater shelf space with many of our accounts.
We've expanded this strategy be on screen protection to protect cases, but good success, starting with the Samsung Galaxy S. 20 launch earlier this year and right through to the recent I phone 12 launch all gear for protective cases, now lots of feature antimicrobial technology.
The combination of this enhancement benefiting gear fours differentiate DCIO impact technology is driving excitement amongst consumers, especially as awareness of the brand of products grow from our efforts to expand distribution.
With the new iPhone Twelves give four is now available on going across all of our carrier partners.
This expanded distribution accelerates the momentum gear for brand and I'm excited to see it continue grow to 2021.
And I'll talk category multi launch many exciting new products during Q3, including the introduction of a new line of wireless charging solutions.
These innovations are focused on providing the ability to conveniently charge multiple devices in one central location.
In addition last month, we launched a new more features pet connect this new product represents an evolution of our popular juice pack, allowing users to easily charger phone on demand using a detachment Bakshi featured is not device specific I use with or without the consumers and all the full case.
Our Halo brand continues to perform well on QVC, which has been a productive partnership in China, particularly give the number of consumer spending more time at home.
Q4 is a busy time for all brands with QVC and HSN, where number of hearings plan during the holiday period.
Looking ahead with the majority of our U.S. partner doors now open and weak. He said so continuing to improve combined with solid direct to consumer trends, we feel optimistic about our prospects to remain Didier.
And there are still a good deal of uncertainty about how device will impact shopping behavior. This holiday season, including the effect on several countries in Europe that have recently implemented Lockdowns. We believe we are well positioned to capitalize on demand, regardless of which 10, how consumers choose engagement to Brian's.
We are currently planning for quarter revenue to increase from third quarter levels and continue improving on a year over year declines we've experienced the past two quarters, even as we're facing tough comparisons to last year's record Q4 cents.
Hi, I'm confident a longtime course you set for the company our efforts around antimicrobial UBI Sanitization, a blue light protection are driven by our belief that consumers are increasingly look for solutions that will change to our digital awareness. We also believe another consumer probably will be increased productivity and comfort from all we will continue our focus on enhancing technology.
In our lives to accomplish these growing needs.
What it remains difficult to know when conditions were fully normalize and what impact COVID-19 would have in the global economy, and our industry I am confident that we have taken the right steps to emerge will depend to make us a stronger company. This.
This includes our decision to discontinue certain lower margin product and categories and simplify our core lines of business as a more nimble companies that can better serve its retail partners and focus on work to capitalize on the tailwinds for the multi year rollout of Fiveg with imagine benefits from our branded calix and consolidation and generate increased value for our shareholders.
I would 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 third quarter financial performance Q3, net sales decreased year over year by approximately 21% to $115 million after exiting a very difficult second quarter.
We saw good momentum throughout the third quarter as retail outlets continued reopened and allow a more normal in store shopping experience that being said the residual effects of COVID-19, combined with the delay of the launch of the new Apple devices, which pushed some which pushed some orders into Q4 made a difficult year over year compare overall, we're pleased with the momentum and sell through.
Improvements, we saw at retail, which enabled us to increase sales by almost 50% on a consecutive quarter basis from $77 million to $115 million.
Q3 gross profit as a percentage of net sales decreased year over year to 33%. There were a number of puts and takes that impacted gross profit during the quarter, including a benefit from net lower duty rates and expected duty refunds, which I'll discuss in more detail in a second this benefit was offset by higher expedited airfreight and increased air freight rates.
Along with the sale of excess inventory at margins that were lower than our historical averages.
On the subject of duty refunds in early August we received an exclusion noticed the duties paid on certain products imported from China. Starting in late 2018 may be subject to refund. We worked closely with our customs broker to begin submitting refund documentation to U.S. customs. This work is ongoing and given about the volume of imports from China. Since late 2018 will continue.
Throughout the fourth quarter based on the work completed to date, we recorded a refund receivable at quarter end of approximately $5.4 million for duties paid that we expect to be refunded. The income statement impact of this receivable offset by the balance sheet reduction from duties previously capitalized in inventory and then sold in Q3 2020 was a net income state.
The benefit of $1.7 million or approximately 140 basis points to gross profit margin during the quarter as I mentioned, there's still quite a bit of work left to do during the fourth quarter to complete our remaining refunds submissions and we'll provide an update on any additional refund upside on our next call.
Q3, operating expenses decreased 29% or approximately $12 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 nine coordinating impacts on demand over the last several months. We've made the conscious decision to bring some individuals back from furlough to support.
Fourth quarter product launches and customer care, but we continue to be focused on all spend to ensure we navigate our way through this difficult time.
Q3, adjusted EBITDA was $15 million versus $21 million in the prior year period.
Decline versus last year is linked to decrease sales and a reduction in overall gross profit margin for the reasons I mentioned these items were offset by the decreases in operating expenses that I just discussed.
Turning to the balance sheet compared to a year ago accounts receivable decreased 33% to $91 million due to the reduction in sales compared to the prior year period. However, our dsos improved significantly from 87 days to 73 days the quality of our receivables remains very good.
Inventory was 80 million compared to $94 million at the end of the first quarter a reduction of approximately $14 million. During the third quarter. We took a conservative approach to inventory as we closely monitor retail sell through customer forecast and customer inventory levels to ensure we didnt overextend on inventory purchasing.
As a result, we did incur some incremental expedited airfreight charges due to increased demand at the end of the third quarter as retail sell through improved at.
At this point, we will continue to closely monitor the factors that influenced our purchasing forecasts, but we'll continue to plan conservatively due to the continued uncertainties related to the COVID-19 pandemic.
Despite the continued headwinds from COVID-19 during the quarter, we generated third quarter operating cash flow of approximately $9 million compared to negative 11 million in cash from operations during the prior year period net.
Net debt, which is consolidated debt less cash decreased to $81 million compared to 97 million in Q3 last year 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 the loan received under the cares Act the Q2 restructuring and cost cutting initiatives. We've undertaken gives us confidence that we will successfully navigate the headwinds.
COVID-19 is put on the business the capital allocation focus throughout the remainder of 2020, we remain on funding working capital needs and continuing to service our line of credit.
As we look to the fourth quarter of 2020, we definitely have better visibility now than we did when we last spoke in August. However, COVID-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 net sales and adjusted EBITDA growth over the third quarter, we expect 2020 year to date gross margins to improve during the fourth quarter. So as I mentioned, we'll see some pressure over the next quarter or next few quarters compared to historical averages of mid Thirtys as we sell through our excess inventory.
We expect total operating expenses to be in the same range of high twentys to low $30 million for the fourth quarter.
No different than from any other companies Koby 19 has been extremely disruptive to our business. However, with the steps we've taken to restructure the business reduced fixed costs and ensure adequate liquidity I'm confident the wuxi. This period impact of October 19, as a much stronger company than when we entered.
With that we will now open up the call the call for questions.
Thank you ladies and gentlemen, if you have a question at this time. Please press Star then the number one key on your thoughts on telephone again that is star Jim The number one key Arbitron telephone. Your first question comes from the line of Elliot Alper from D.A. Davidson. Your line is open.
Great. Thank you.
Thanks for the info on just the sequential sales in the fourth quarter I guess could you talk about any trends quarter to date, specifically and specifically.
Graphic sales mix are you seeing any material changes with sales and geography that have lost restrictions compared to those that mark.
Yes, just.
Just couple of notes.
With that Apple launch happening a little bit later than we had experienced previously there was maybe $5 million of sales a shift from Q3 into Q4, which obviously benefited kind of the the sequential.
The sequential look at revenue.
Overall, though we're seeing really good sell through of.
The phones that seem to be doing very successful and market and and obviously, we're benefiting that benefiting from that so Q4, starting off really really well.
Terms of Geos and no material change in Geo expansion, Chris mentioned or Geo mix, Chris mentioned on his in his prepared remarks that we're definitely seeing some headwinds I'm at least in terms of shutdowns in some of our international locations. However, the.
The wireless dealers in those locations have been deemed as essential and so those have remained open and so and it remains to be seen as to how that's going to impact did.
Demand, but I think overall, we're definitely seeing some strong signs that that were kind of getting back to a more normal.
Q4 experience, though obviously coven remains a bit of a bit of a cloud over everything.
Okay, Great and then.
Aside from the Apple launched shifting into the fourth quarter.
Talk about the holiday season, and kind of what may be different this year versus historically and kind of any implications that may have on the December quarter.
Yes, the one thing that we are starting to see is obviously the black Friday seems to be more some retailers are taking strategy were spreading it out over a number of days over the over them on so thats something thats going to be different I think were still going to see a pretty strong online.
Attachments from both sides I'll comment obviously to Amazon.
But we were very I.
I would say.
Optimistic about essentially already central on our screen protection and cases.
Are quite strong and thats given that we still have a number of other devices to teach the market actually this week. So overall I think we have.
Some good runway for the holiday season.
Okay, great. Thank you.
Thank you to fix it.
And once again artists asked a question. Please press Star then the number one on your Touchstone telephone.
Your next question comes from the line of Matt from Titan Capital Management. Your line is open.
Great. Thank you I was hoping you could put a number on the expedited shipping costs that you have that you incurred in the third quarter just to give us some a better idea how it's helping them can those work.
You know between two and $3 million and.
Mentioned.
My prepared remarks.
We really do it was a bit of a balancing act with inventory, where we're trying to run it down and sell through picked up at the end.
We did have to move quickly to unfortunately resulted in some some expedited airfreight charges.
And for the fourth quarter are you expecting that to reoccur or is that have you caught up and you feel like you're in a better place now.
Yes, it's a great question you know.
I think we're still probably chasing a little bit of demand.
One thing that's also kind of impacted us no different than every other company. That's importing from overseas is just generally freight rates have increased kind of globally and so that's that's also impacted us I think is probably going to be a little bit of that.
Which is a bit of a balancing act we definitely wanted to be careful.
Given the pandemic and how much inventory, we are planning and fortunately or unfortunately, we've seen some some upsides, which is great, but we've had to chase those and so I think we're probably still chasing a little bit which will impact some of our Q4.
Q4 sales and then also obviously the spend on freight.
Great also wanted to ask if I could really quickly about the tariff situation now what the Biden credit presidency, I know you've been moving.
Some production out of China does that change your view on moving production out of China or how are you thinking about that.
New regime.
Yes, I think it doesn't change our strategy ultimately, we're looking to diversify across our cm base and make sure that we're setting the company helpful.
Tenured business. So we are still falling to strategy and we've had a very good quarter, where we've now successfully apply to both screen protection and wireless power outside of China. So it gives us that ability to be able to shift our our supply chain when needed.
Obviously, China is still a big part of our strategy, but what I like is we're not just looking at it from a timing perspective now we're really looking at it from a business continuity perspective.
Great. Thank you both.
Thanks, Mike Thanks, Matt.
Thank you once again in order to ask a question. Please press Star then the number one on your Touchstone telephone.
Gentlemen, I'm showing no further question at this time I would now like to turn the conference back to Mr., Chris <unk> from my closing remarks. Thank.
Thank you and thank everybody for joining our Q3 earnings reports, we look forward to updating you again on Q4.
Have a good evening, everyone and stay safe.
Ladies and gentlemen, this concludes today's conference call. Thank you all for joining all disconnect.
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