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ZAGG (NASDAQ:ZAGG)

Q3 2012 Earnings Call

November 01, 2012 5:30 pm ET

Executives

Kimberly Rogers-Carrete

Randall L. Hales - Interim Chief Executive Officer, President, Chief Operating Officer and Director

Brandon T. O'Brien - Chief Financial Officer, Principal Accounting Officer and Corporate Secretary

Analysts

Paul Coster - JP Morgan Chase & Co, Research Division

David M. King - Roth Capital Partners, LLC, Research Division

Michael Latimore - Northland Capital Markets, Research Division

Michael Fawzy Malouf - Craig-Hallum Capital Group LLC, Research Division

Jon R. Hickman - Ladenburg Thalmann & Co. Inc., Research Division

Jonathan Jacob Green - Luxor Capital Group, LP

Operator

Good day, ladies and gentlemen, and welcome to the ZAGG Third Quarter Earnings Call. [Operator Instructions] And as a reminder, this conference is being recorded.

And now I'll turn the conference over to Kim Rogers-Carrete of an investor relations firm, Genesis Select. Please begin.

Kimberly Rogers-Carrete

Good afternoon, ladies and gentlemen, and thank you for joining us today for the ZAGG Inc. Third Quarter 2012 Conference Call. On the call today from the company are Randy Hales, President and Interim Chief Executive Officer, along with the ZAGG's Chief Financial Officer, Brandon O'Brien. By now, everyone should have access to the third quarter 2012 earnings press release. If you have not received a copy of the release, it can be found on the Investor Relations portion of the ZAGG website. This call is being recorded, and a podcast of the conference call will also be archived on the ZAGG Investor Relations web page under events for 1 year.

Before we begin, we'd 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 questions. These statements include, but are not limited to, our outlook for the company and statements that estimate or project future results of operations or the performance of the company.

These statements do not guarantee future performance and speak only as of the date hereof. We refer all of you to the risk factors contained in ZAGG's annual report on Form 10-K and quarterly reports on forms 10-Q, filed with the Securities and Exchange Commission, for a more detailed discussion on the factors that can cause actual results to differ materially from those projected in any forward-looking statements. ZAGG assumes no obligation to revise any forward-looking statements that may be made in today's release or call.

Please note that on today's call, in addition to discussing the GAAP financial results and outlook for the company, the following non-GAAP financial measures will be discussed: EBITDA, adjusted EBITDA, and non-GAAP net income attributable to shareholders. An explanation of ZAGG's use of these non-GAAP financial measures in this call and the reconciliation between GAAP and non-GAAP measures, as required by SEC Regulation G, is included in ZAGG's press release today, again, which can be found on the Investor Relations section of the company's website. The non-GAAP information is not a substitute for any performance measures derived in accordance with GAAP, and the use of such non-GAAP measures has limitations, which are detailed in the company's press release.

And with that, I'd now like to turn the call over to Randy Hales. Randy?

Randall L. Hales

Thank you, Kim. Thank you for joining us on the call today. Before we get into the specifics of the third quarter, I want to start by telling you what a busy time it has been for me personally and ZAGG. Brandon and I had the opportunity to participate in nearly 50 calls and leading the conferences with many of you over the past couple of months.

The company went through the most detailed planning cycle in its history. The end result of this process was the building of a detailed budget for fiscal '13, the development of a strategic plan for Western Europe and a review and refresh of our strategic plan for the domestic market. Additionally, I had the opportunity to meet with nearly all of our key customers and suppliers to share our strategic vision going forward. We launched a number of significant new products in both brands. We also held our first official board meeting with our newly constituted board. As I mentioned, it has been an extremely busy quarter, with great progress being made along the way.

Okay. Let's get into the third quarter results. Revenue in the quarter was $59.8 million compared to $45.9 million in the same period last year, for a year-over-year growth of 30%. Our top line was down 3% from the previous quarter, where we experienced record keyboard sales with Apple's introduction of the new iPad in March. As a result, the revenue breakout for our top 2 product categories vary greatly in the second and third quarters.

Keyboard sales in Q3 represented 19% of our revenue versus 28% in the second quarter. invisibleSHIELD showed an inverse relationship, at 51% of sales in Q3 as compared to 41% in the previous quarter. Early in Q3, invisibleSHIELD sales slowed as a result of consumers anticipating the introduction of the iPhone 5. However, we experienced the nice late-quarter surge in September when the device was announced. Year-over-year, both of these categories, invisibleSHIELD and keyboards, saw very solid growth with the invisibleSHIELD up 14% year-over-year and keyboards up over 300% from the same period last year.

Gross margin for the quarter is in line with our guidance at 44.5%, up from 42.4% in the same quarter last year, but down slightly from the previous quarter at 46.1%. The gross margin decline from Q2 was due to several factors. We incurred additional air freight expense associated with our keyboard products as we replenish the depleted stocking levels, following the period of strong demand in Q2 that I mentioned earlier.

Additionally, we realized significant program fees for fixtures and co-op advertising with a couple of our key retailers. The program fees are an investment that will serve the company well going forward, as our in-store presence will increase with ZAGG products being featured more prominently. Together, the impact of these additional expenses diminished the benefit of higher-gross margin invisibleSHIELD sales in the quarter. Going into the fourth quarter, we anticipate strong invisibleSHIELD sales related to brisk demand for smartphones, particularly the iPhone 5 and for our tablet products, such as those we recently announced for the iPad mini, which, by the way, hit store shelves tomorrow. Our 2 largest wireless retail partners both stated on their recent conference call that they expect strong smartphone sales going into the fourth quarter, and our initial indications of demand for our accessories would confirm this expectation.

Net income attributable to shareholders in the quarter was up 51% to $3.3 million versus $2.2 million last year. It was down 43% from Q2 due to higher expenses previously discussed and the Q3 charge of $1.4 million related to the departure of Robert Pedersen, our previous CEO. We expensed the entire amount at the 1-year executive consulting agreement that we entered into with Robert, as well as the cost associated with remeasuring and accelerating the expense recognition of his stock options and restricted stock. No further expenses are expected to be incurred in future periods related to the departure of Robert.

I'd like to take a few minutes now and walk you through some of the key developments from our third quarter related to our 3 corporate operating objectives. To reiterate those objectives, they are: Creative Product Solutions, The Preferred Brand and Targeted Global Distribution.

During the quarter, we continued the establishment of our product teams. We tasked them with 4 key areas of focus: number one, fill any holes in our current product assortment that exist from both a price and feature benefit perspective; number two, develop, get approval and implement a 3-year product roadmap; number three, ensure that all new products are either gross-margin neutral or accretive to their respective product categories; and number 4, refresh the -- our product line frequently with the goal of staying ahead of competition. As a result from this focus, we have entered the fourth quarter with a pipeline of new products that is broader and deeper than it has been in the history of the company.

Since the beginning of September, we've had a number of ZAGG product releases, including the invisibleSHIELD EXTREME; the ZAGGkeys PRO and the PROplus, our newest tablet keyboards; Caliber gaming headsets, a new family of lighter, sleeker, mobile power solutions; a number of invisibleSHIELD products and cases to complement the iPhone 5; the Boost Plus, our second-generation wireless portable audio product; and several SKUs to support the new iPad mini, including keyboards, invisibleSHIELD and cases. Later this month, we will be introducing Animatones, a children's audio line of lightweight headphones and earbuds with decibel-limiting features.

We have also begun to distinguish some of our product introductions as hero launches. Hero launches are supported with a mix of media that can include online video support, a demand sampling to customers and media and a greater trade show exposure. A good example would be the online video campaign we created for the introduction of the invisibleSHIELD EXTREME. This one video has had over 1.2 million views on YouTube.

As stated in our late-August update call, the CES trade show in January will be the biggest in ZAGG's history from a new product perspective. We are introducing a number of creative new product solutions and enter in 2 new product categories that leverage our existing product brand and distribution strengths. We are excited about our plans for CES this year, and I hope you are able to join us.

We've made great progress in the quarter on further tightening our strategy around our second corporate operating objective, The Preferred Brands. We have recently positioned all of our products around our 2 brands: ZAGG and iFrogz. ZAGG is our premium brand defined by long-life product categories and a professional look and feel. It includes our flagship invisibleSHIELD product line, as well as our rapidly expanding keyboard family products. We often referred to ZAGG as our tech accessory's brand, where technology and accessories come together to support great consumer products. iFrogz, on the other hand, is our youth-oriented, playful, value brand. It is nimble and quick to respond to market trends and changing fashion preferences.

Today, both brands enjoy a lot of brand equity in our retailers' buying offices. We are in the early stages of executing on a strategy to increase our brand equity with the end consumer.

Going into fiscal '13, we have increased the budget in some key areas to better support our brand-awareness initiatives, as well as our product development and product management efforts. Rather than increasing our total expenses, we are funding these key areas by becoming more efficient with our current marketing spend and shifting dollars from operations where we are realizing efficiencies through better organization. One of the most effective ways for us to build consumer brand awareness is to increase our product assortment with our existing retail customers while continuing to expand our domestic distribution.

That brings me to our third corporate operating objective, Targeted Global Distribution. We have identified several high-profile retailers that we are currently either in negotiations or working through strategies for ZAGG and iFrogz's product placement in 2013. We are also evaluating opportunities in education, government, travel, outdoor recreations, sporting goods, business-to-business, discount clubs, grocery and pharmacy.

With regard to international expansion, we will be implementing our board-approved strategic plan for Western Europe in the first quarter of 2013. While we don't anticipate this initiative to generate meaningful revenue until 2014, we should realize some lift going into holiday next year.

One of the priorities for ZAGG at the beginning of 2012 was to expand and strengthen our board. Since the beginning of the year, we have added 3 new board members, with our most recent joining at the beginning of the fourth quarter. We are pleased to welcome Brad Holiday, Senior Executive, Vice President and Chief Financial Officer of Callaway Golf, as our newest Independent Board Member. Brad brings over 36 years of experience as a Financial Executive at leading global consumer brands, such as Nike, Pizza Hut and Callaway Golf.

In summary, we are on track to grow over 40% into 2012 based on our current guidance. We have successfully executed on all 3 of our corporate objectives, Creative Product Solutions, The Preferred Brand and Targeted Global Distribution, allowing us to build a robust platform from which to continue to grow our company. We are preparing to enter 2013 from a strong financial position that will enable our business to expand as we execute on our corporate objectives.

With that, I'd like to turn the call over to Brandon, who will go through the financial results in detail. Brandon?

Brandon T. O'Brien

Thank you, Randy, and thank you for joining us today to review our third quarter 2012 financial results. As stated in today's release, we will be disclosing consolidated financial results, reflecting our main business unit, ZAGG Inc.; and the results of our subsidiaries, iFrogz Inc. and ZAGG International. In the call today, I will speak only to consolidated results, unless otherwise stated.

The financial statements provided in today's release reflect Q3 2012 financial details for our subsidiaries as well as consolidated results. So you may refer to them for further clarifications. Quarter -- I am referring Q for the purposes of today's call as Q3 2012.

Revenue for the quarter was $59.8 million versus $45.9 million in the same quarter from the prior year, representing year-over-year growth of 30% and in line with our internal forecasts. The current quarter revenue includes $15 million from our iFrogz segment. This compares to $14.5 million in the prior year period. Growth for the third quarter of 2012 was achieved through our continued expansion with our indirect channel, as we began selling through additional customers and expanded our SKU count in our current customers.

The breakdown for the sources of revenue is as follows: for the quarter, 84% of sales came from our retail channel versus 82% in the same period last year; 10% of sales were from zagg.com and ifrogz.com versus 13% in the same quarter last year; and 6% was from the kiosks and stand-alone stores versus 5% in the same quarter last year.

International sales accounted for 9% of total revenues in the quarter compared to 12% during the same period last year. We continue to see diversification in our product revenues with 51% of revenues coming from the invisibleSHIELD product line versus 59% in the third quarter of last year.

Gross profit for the quarter was $26.6 million versus $19.5 million in the third quarter of 2011, which translates into gross margins for the quarter of 44.5% versus 42.5% for the prior year period, again, in line with our internal forecasts.

Operating income in the quarter was $7.1 million versus $4.6 million in the same period last year. Operating margins for the quarter were 12% compared to 10% for the same period last year. We also incurred $2.1 million from stock compensation expense during the quarter compared to $0.4 million in the third quarter of 2011 and a charge of $0.9 million related to our former CEO's departure.

The effective tax rate for the quarter was 36.6% compared to 37.1% for the same period last year. We are making progress on our global tax reorganization and anticipate tax savings starting the back half of 2013, as we implement the strategy and can see -- and see growth in our foreign sales.

Net income attributable to stockholders in the quarter came in at $3.4 million or $0.11 per share versus $2.2 million or $0.07 per share in the same quarter in the prior year. Our fully diluted share count for the quarter was 31.7 million shares. Total shares issued outstanding as of September 2012 were 30.4 million. At September 30, 2012, we had 1 million outstanding options, 0.8 million outstanding warrants and 0.7 million outstanding restricted stock grants. We use the treasury method in calculating our diluted shares outstanding, which assumes that proceeds received from the exercise of warrants and options are used to purchase shares in the open market before new shares are issued. On a prospective basis, for the remainder of 2012, our diluted shares outstanding will be approximately 33 million shares. Our fully diluted earnings per share were $0.11 for the quarter versus $0.07 in the same period last year.

Adjusted EBITDA for the quarter came in at $12 million compared to $11.7 million for the third quarter 2011, an increase of 3% in adjusted EBITDA as compared to the third quarter of 2011.

This quarter, we are reporting a new non-GAAP metric to help give a better view of the operational performance of the company: non-GAAP net income attributable to stockholders and non-GAAP income per share. Non-GAAP net income and non-GAAP net income per share are calculated by adding back interest, depreciation, amortization, other expense and non-recurring charges to GAAP net income and applying the effective tax rate for the reported period.

Non-GAAP net income attributable to stockholders for the third quarter of 2012 was $8.2 million or $0.26 per diluted share as compared to non-GAAP net income attributable to stockholders of $7.3 million or $0.23 per diluted share in the third quarter of 2011 and $9.2 million or $0.29 per diluted share in the prior quarter. Please refer to the financial tables in today's press release for further detail on the adjustments used to calculate non-GAAP net income.

Turning to the balance sheet. Working capital at the end of the quarter was $82 million compared to working capital of $74.5 million on December 31, 2011. We reported a cash balance of $16.3 million. For the third quarter, we generated operating cash flow of $3.3 million. The balance on the line of credit at the end of the quarter was $3.5 million, representing accrued interest on the outstanding term loan and a term loan balance of $41 million at the end of the third quarter.

Accounts receivable for the quarter were $45 million as compared to $45.5 million on December 31, 2011. DSOs in the quarter were 68 compared to 59 for the quarter ended December 31, 2011. We continue to be comfortable with the quality of our accounts receivable.

Inventories for the quarter were $34.4 million, an increase of $4.8 million from the December 31, 2011 balance. We continue to evaluate inventory on a monthly basis and reserve against slow-moving inventory as needed. We feel our current inventories are in great shape worldwide for the anticipated demand going into our strongest selling season, along with the recent release of several new devices that require us to build inventory to meet demand from our distribution partners.

As noted in the press release that went out this afternoon, we are increasing our revenue guidance for the remainder of 2012 to $259 million to $262 million, up from our previous guidance of $256 million. The midpoint of our new revenue guidance puts us slightly above the current consensus estimate on First Call. We continue to forecast annual gross margins in the mid-40s and have increased our forecasted adjusted EBITDA to a range of $59 million to $62 million, up from our previous range of $56 million to $61 million. The midpoint of our new adjusted EBITDA guidance puts us slightly ahead of First Call Consensus. The increase in revenue and adjusted EBITDA is due to increased demand for our accessory products related to recent new device launches. This forecast is based on the anticipated continued presence of ZAGG- and iFrogz-branded products in the existing channel.

With that, I'd like to turn the call back over to Randy.

Randall L. Hales

Thank you, Brandon. And I'd like to turn the call back over to the operator to facilitate the question-and-answer session. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] First question is from Paul Coster of JPMorgan.

Paul Coster - JP Morgan Chase & Co, Research Division

Randy, it sounds like you've done quite a lot of thinking about 2013. What can you say about the year ahead at this time, maybe by reference to your budget process? Or alternatively -- or in addition, can you think -- talk about growth in terms of channel versus products, ASPs versus product range versus international growth? Which are the most important growth drivers looking out to 2013?

Randall L. Hales

Yes. Paul, thanks for joining today. So what I can tell you about our 2013 plan is that we really have gone through a very detailed process over the last month, building up from the ground up. We're very comfortable with what we've developed and where we're going. As we look at the business going forward, your question about where that growth is going to come from, I think, is best answered in telling you, maybe reiterating a little bit what we said that, when we're out on the road recently, that the majority of our growth for 2013 is going to come from the domestic market from 3 different drivers. Number one, better penetration with our existing customers. We have customers today that carry both brands in a wide assortment of our product offerings. If we can replicate that across the rest of our customers, both in the CE channels as well as wireless, there's a lot of growth potential for the company. Secondly, we have a tremendous opportunity with the new products that are in the pipeline now, many of which will be released at CES, several of which have been released since September. And then lastly, there is some key retail distribution still in the domestic market that we have targeted for fiscal '13 that represents a significant growth opportunity. So we're excited about the plan. We feel like we've got a solid plan. We believe those 3 areas will be where the growth comes from now. And I'll also say, and we mentioned in the call, that we developed a strategic plan for Western Europe that the board approved in our meeting earlier this week. We'll see some revenue from that late in the year. But again, the majority of our growth in '13 will be -- it will come from the domestic market.

Paul Coster - JP Morgan Chase & Co, Research Division

You haven't given us much room on 4Q in terms of revenues. So you obviously have quite good visibility. Can you talk about the channel sell-in, where we stand? And by what point in the quarter you believe you'll have your numbers?

Brandon T. O'Brien

Yes. So that one, Paul -- I mean, we do get some good visibility. One of the big X factors still, is going to be the success of the iPad mini. We do have some baked in there for the iPad mini, because we have initial demand. But that demand is getting stronger. And so we'll know whether we hit that guidance here fairly shortly because we see a lot of that early ordering coming in. So mid to late November, we'll have a pretty good feel. And again, we're very confident with the guidance that we've provided at this point

Paul Coster - JP Morgan Chase & Co, Research Division

Yes, got it. Finally, Randy, you've done a lot of very decisive things very quickly. You're not behaving like the typical Interim CEO. What is the status of the search?

Randall L. Hales

Yes. Let me answer that 2 ways, and I'll let Brandon address the status of the search. But I think why you're sensing that, Paul, is essentially, having operated as the President for almost 1 year now, we're just executing against the strategic plan that we put in place last January. So I think you're hearing a little more detail about that plan than you may have in the past, which feels like there's a lot of decisive moves taking place. But it's really just the continuation of what we started earlier in the year. I'll let Brandon address the status of the search.

Brandon T. O'Brien

Yes. We're making great progress on that search status. We've narrowed it down to just a handful of candidates. Currently, the board is interviewing those candidates, and we hope to be able to get that process completed here over the next few weeks.

Operator

And next question is from Dave King of Roth Capital.

David M. King - Roth Capital Partners, LLC, Research Division

I guess, just first off, so in terms of the guidance that you said you feel comfortable about for the year, I guess, maybe just -- can you help us get a sense of how that breaks out by bucket in terms of -- I mean, I would assume that a lot of that is invisibleSHIELD heading into the fourth quarter with iPhone 5, et cetera. But any color on the growth rates, et cetera, or anything along those lines around keyboard products? What's baked into your guidance, I guess, at this point?

Randall L. Hales

Yes. David, I think what you'll find is that the fourth quarter will match the year-to-date numbers that we shared in September and that we've put out recently. We don't expect any big mix changes going to the fourth quarter. Obviously, invisibleSHIELD should perform well with the launch of the iPhone 5 and the momentum behind that still and certainly, with the iPad mini. But we anticipate that mix will be about what it's been year-to-date.

David M. King - Roth Capital Partners, LLC, Research Division

Year-to-date. So not necessarily even 51% to 51% or higher in the fourth quarter for that.

Brandon T. O'Brien

Well, we do have -- we see a strong demand for the invisibleSHIELD and the iPhone 5. We only had that for a couple of weeks in the third quarter. That demand is still going strong, but we have -- I mean, we announced the keyboards for the iPad mini. We anticipate that to be a big seller for us as well. And the other keyboard products that we've launched, particularly this holiday season, we anticipate those will be big contributors as well, David.

David M. King - Roth Capital Partners, LLC, Research Division

Okay, that's helpful. And then in terms of the gross margin impact this quarter, the air freighting had some impact. It also looks like there might have been some mix impact too just with, I think, less Internet sales. Maybe Brandon, can you quantify just where that -- those changes kind of fell into the decline?

Randall L. Hales

Yes. That'd be -- with the decline in the gross margin, a lot of that was due to selling the keyboards, which had the air freight built into it. So that was about half of the decline that we saw from the prior quarter. We also had some impact. I mean, we have -- the website sales were down slightly, sequentially. That's due to -- the second quarter was very strong with the sale of keyboards with the launch of the iPad 3. And we have -- so there was some impact there as well. And we also had some program, that Randy referred to in his comments, so some investments into some of our channel partners for some displays.

David M. King - Roth Capital Partners, LLC, Research Division

Okay, that's helpful. And then lastly, the tax rate for next year. It sounds like you're expecting some of that savings to start to kick in, in 2013, if I'm correct.

Brandon T. O'Brien

Yes, a lot of that depends on how fast our overseas development happens. So a lot of that's driven by overseas, and we've -- as Randy alluded to, we just had that planned. It was just adopted by the board, just approved. Were going to focus on -- it's a change for us in strategy. Instead of being opportunistic with the foreign markets, we're going to take a more tactical approach in executing on our strategic plans, which is going to -- it's going to be a little bit longer. And so the growth overseas impact the tax rate, and we would anticipate the tax rate is going to be still going to maintain 36%, 37%. Hopefully, we can see some savings throughout the latter part of the year. The real tax savings are going to come in the out-years once we have that big transition to a more robust sales outside of the U.S.

Operator

And next question is from Mike Latimore of Northland Capital.

Michael Latimore - Northland Capital Markets, Research Division

The -- you have this iPad mini products coming out and -- have you seen any either slower purchasing or delayed purchasing of products related to the iPad ahead of the iPad mini? Or is that kind of normal flow there?

Randall L. Hales

Yes. Mike, this has been business as usual. We didn't see any slowing ahead of it. Because I think the end consumer for those 2 products is a very different consumer. We see it as principally a net add.

Michael Latimore - Northland Capital Markets, Research Division

Okay. And can you compare maybe the first months of sales, what you're seeing after the iPhone 5 launch here versus the iPhone 4S perhaps? Any way to quantify kind of the first period here versus the iPhone 4S when that came out?

Randall L. Hales

It's probably a little early for that yet, Mike. Our initial load-in, obviously, has gone out. We haven't seen a lot of movement yet for reorder, and we wouldn't anticipate that for a few weeks yet. But the initial load-in was not insignificant.

Michael Latimore - Northland Capital Markets, Research Division

Okay. And how many keyboards can you guys manufacturer per week now?

Randall L. Hales

Well, total keyboard capacity, I don't know off the top of my head. I can tell you this. We had stronger-than-anticipated demand for the mini, and we just increased our tooling quite significantly on Monday morning this week. So demand is strong. We are pulling capacity up. We're not demand-constrained on our keyboards for the original iPad. But the mini demand has come in stronger than anticipated.

Michael Latimore - Northland Capital Markets, Research Division

I agree. Can you talk about using air freight in the September quarter. I guess, what gave rise to that? I thought there was kind of a concerted effort last quarter to do everything over the CES?

Randall L. Hales

Yes. And I think you probably just nailed it in, say, in last quarter. It's a discipline that's new to the organization, and we're learning our way through that. Candidly, as we organize into product teams, that -- one of the goals is to get further ahead of these product launches, so that we've got more time to move freight. But that's going to be a process not an event, and I think you'll see us get better and better at that. But my anticipation is that until those products teams are up and running at 100%, we'll have air freight situations from time to time. Much of what we saw in the last quarter was a result of responding not to new product launches but rather higher-than-anticipated demand in Q2 that depleted our stocking levels beyond a point we were comfortable. And we wanted to respond quickly and not miss sales opportunities. So occasionally, we'll have that. I think that's just going to be normal operating. And then, again, as our product teams get better and we plan out a little further in advance, we will become ahead of the curve far enough to move more by ocean. But the replenishment going forward should move primarily by ocean.

Operator

And next question is from Mike Malouf of Craig-Hallum.

Michael Fawzy Malouf - Craig-Hallum Capital Group LLC, Research Division

Just expanding on the last question a little bit. If you take a look at, I guess, the 3 impacts to gross margin that you talked about, really the air freight, the lower sales on the Internet site and then some of the programs, are -- to what extent will those carry over into the fourth quarter? I mean, obviously, zagg.com sales should go up in the fourth quarter. They always seem to do that seasonally, and you talked a little bit about air freight. Is it sort of -- safe to assume that those will kind of drop off in the fourth quarter as impacts?

Randall L. Hales

Yes, in part, Mike. I think what we'll find, again, because the demand for the iPad mini keyboard has been stronger than anticipated, that product will probably end up moving by air, at least, initially, as we continue to set. Most of the programming fees that Brandon referenced and that I referred to in my remarks are set at this point in time. So we won't see a repeat of that. So it's going to be a little bit of a mixed bag in there.

Michael Fawzy Malouf - Craig-Hallum Capital Group LLC, Research Division

Okay, great. And then with regards to the debt on the balance sheet, maybe, Brandon, you could talk a little bit about the plans for that. I know that you maybe had thought originally that maybe you could refinance that.

Brandon T. O'Brien

Yes, we are still working to those ends, Mike. And we're having great discussions with a few of the banks. I think it's highly likely that we'll be able to get that refinanced before year end. We're moving to those ends, and that would be a big win for us on the interest rate savings.

Michael Fawzy Malouf - Craig-Hallum Capital Group LLC, Research Division

Great. And would that be a larger line or just a replacement?

Brandon T. O'Brien

Yes, it is -- it'll be a larger line. And so we're looking at over an $80 million facility. Part of that, we will fix. So right now, we have $41 million in term. We'll probably fix, and just over half of that, and the rest we'll have on a revolver. And we'll pay that when we have excess cash. I mean, our -- right now, with the direction we're going, we're going into our -- the first quarter is our strongest cash quarter. And at this point, we feel like our best place to put that cash is to pay down debt. So we'll continue to those ends and then still have the flexibility of having over a $60 million revolver that we could utilize as we continue to grow.

Michael Fawzy Malouf - Craig-Hallum Capital Group LLC, Research Division

Okay. And then would you be -- at that time, would you have the ability to buy back stock, if you so desired, at that point?

Brandon T. O'Brien

Yes. Currently, we have a prohibition on doing that. Once we refinance this debt, that's one of the factors that I have focused on. We're talking with the banks and saying this is something that we will look to put in place. And so we do have that carve-out feature, and we'll be able to implement that once we refinance the debt.

Michael Fawzy Malouf - Craig-Hallum Capital Group LLC, Research Division

Okay, that's great. And then one other question. I know that there's obviously been a rash of announcements or, let's call them press releases, from a lot of law firms out there regarding the departure of the -- of Robert. Can you talk a little bit about what kind of impact these suits can have? I'm sure you've talked to outside counsel with regards to what kind of impact you're going to have and then with regards to sort of timing on all these.

Brandon T. O'Brien

Yes, you bet. I mean, the first point -- unfortunately, this is kind of a cost of doing business. We've feel like these lawsuits are frivolous. But that being said, we're still going to defend ourselves. And so we've hired a counsel who is well versed in this area. We do have a D&O policy in place. So we have to cover the retention before it goes into the D&O policy. So we'll be -- we'll have to incur the first $250,000 of the debt, that pretty well limits our exposure. We've talked with our attorneys. We're comfortable with the coverage amount that we have. The unfortunate part of this is these cases move very slowly. So we wouldn't anticipate a resolution of this case to come for -- they're telling us we would expect probably not until next fall. So they'll be here for a while. We'll get through that first retention, that first $250,000, but that's really going to be the extent of the exposure that we expect to see.

Operator

And next question is from Jon Hickman of Ladenburg Thalmann.

Jon R. Hickman - Ladenburg Thalmann & Co. Inc., Research Division

Could you discuss the new products that you've announced to date, the new earphones, the new keyboards, are any of those making any meaningful impact yet or surprising you with their demand, et cetera?

Randall L. Hales

Yes. Jon, thank you for the question. It's probably -- it is still early for most of those. The rash of products that you've seen introduced since September are just hitting store shelves. We're starting to see some pull-through. The surprise, from our perspective, has been the demand for the iPad mini keyboards. We took a little bit of risk early in the summer as a result of the product teams developing their 3-year roadmaps and decided to start designing ahead, anticipating that, that would come. As the rumors became more intense, we were certainly glad that we did so. And we had some early retail partners who agreed to pull those in. But now that we've had samples in hand, and we've been out visiting with those products to more retailers, we've had significant adoption that we've not anticipated. So that's been the surprise.

Jon R. Hickman - Ladenburg Thalmann & Co. Inc., Research Division

And then could you give us the name of the -- those headphones for kids again?

Randall L. Hales

Yes, it's called -- the line is called Animatones, like animal and tones combined. And it will be a brand, or a product line rather, that we'll continue to expand. So the headphones will hit later this month, as we mentioned in the call. And you'll see more additions into that line in the CES. And really, what we're trying to do, we're finding that our target demographic age is moving down. It's not uncommon now to see grade schoolers with certainly iPod touches, iPads or even iPhones. So smartphones, in general. As the technology moves to a younger age, we want to be able to address that demographic.

Jon R. Hickman - Ladenburg Thalmann & Co. Inc., Research Division

Okay. And then just so I've got this straight, the expense for Robert's departure was $0.9 million?

Brandon T. O'Brien

The total expense, Jon, is 1 -- it's just under $1.5 million. So the $0.9 million is the consulting contract, and then we had to accelerate some options and restricted stock brands, which the cost on that was about another $500,000.

Jon R. Hickman - Ladenburg Thalmann & Co. Inc., Research Division

Okay. And so how much of that went into your expense line and was covered by stock-based compensation?

Brandon T. O'Brien

The $500,000 will be included on that.

Jon R. Hickman - Ladenburg Thalmann & Co. Inc., Research Division

On the stock-based compensation?

Brandon T. O'Brien

Yes. So stock-based compensation for the quarter was at about $1.5 million. We anticipate, next quarter, it would be closer to $900,000.

Jon R. Hickman - Ladenburg Thalmann & Co. Inc., Research Division

Okay. Could you talk a little bit about, in announcing last quarter that you were going to have these new products coming, you talked about some TV advertising and more aggressive advertising for some of your newer products. And I think Randy mentioned the video about the EXTREME invisibleSHIELD. So have you done -- can you comment a little bit more about this extra advertising that you haven't really done in the past?

Randall L. Hales

Yes. And I'm glad you mentioned that. The invisibleSHIELD EXTREME video that we put out there, it's become the most-viewed video that we've ever put out as a company. And we've really leveraged social media quite aggressively over the years. But for an online video campaign, we consider that to be a huge success, with nearly 1.3 million views. And we were up over 1 million in the first 3 weeks that we put that out there. And that generated all kinds of spin-off activity and Internet searches. So we feel like that was very successful. We were on television also. We've allocated a small amount of money to go out on Google TV and hit some target demographics that the invisibleSHIELD really speaks to. And we're still gathering some of the data back on the effectiveness of this -- of that campaign. But we know that we are better than breakeven, and it certainly created some nice awareness in the marketplace for that product launch. Will we repeat that again? More than likely, we'll have a continued focus on the online, kind of the viral video campaign. I don't see us doing a lot of nationwide television advertising.

Jon R. Hickman - Ladenburg Thalmann & Co. Inc., Research Division

So the -- and one last question, the EXTREME, how is it doing?

Randall L. Hales

Very well. We've launched with just one SKU essentially in that, and we had a pick up in desire from our retailers to broaden that assortment very quickly. And it's been a very positive launch for us.

Operator

Our next question is from Paul Coster of JPMorgan.

Paul Coster - JP Morgan Chase & Co, Research Division

You've been pretty specific about your objectives when introducing new products for them to be margin -- gross margin accretive or non-dilutive, anyway. But you've also talked about opening up new channels and marketing programs. Could you give us some sense of what your sort of philosophy is there regarding operating margins and accretion when opening up these new channels? Obviously, it's been a concern that maybe you'll be paying a price for going into some of the newer channels.

Randall L. Hales

Yes. As we've looked at it, Paul, it's really our goal to stay out of those channels or those categories rather, where it's fiercely competitive, and that they're established brand leaders and are market leaders. So when we look at going into a new category, we're primarily entering because we believe that nobody has emerged as a brand leader and that there's a lot of opportunity in there to establish ourselves as such, similarly to the way we've become the market leader with keyboards and certainly, screen protection. So those are the kind of opportunities that we're looking for. Generally speaking, if I step back at a corporate level, those are the kind of categories that are going to be gross margin accretive as a category, because we're early in the market in defining it.

Operator

And next question is from Jonathan Green of Luxor Capital.

Jonathan Jacob Green - Luxor Capital Group, LP

Yes. I just wanted to ask about the ZAGG -- the PROplus keyboards. Just curious when you would expect us to see those more widely available online or in stores, both in North America and in Europe.

Randall L. Hales

Yes. They will hit on a pretty broad spectrum towards the end of November.

Jonathan Jacob Green - Luxor Capital Group, LP

Got you. And I guess, any color on -- I think you've mentioned that you've seen this demand pull forward for the keyboard for the mini, but maybe lesser for this, just any extra color would be helpful.

Randall L. Hales

Okay. I'm actually glad that you asked that question because our demand for the PRO and the PROplus has been off the charts. I hope you've had an opportunity to read some of the reviews that have been out there in the marketplace. It's been received very, very well. It is our best keyboard product we've ever put out and certainly, our flagship at the moment. So we are selling and setting as much as we can manufacture right now. That it isn't to say that we're capacity-constrained. But we're certainly pushing the envelope there. The mini just surprised us, and the demand was much stronger than we'd anticipated.

Jonathan Jacob Green - Luxor Capital Group, LP

And that's helpful. And then, I guess, just lastly, I mean, is there anything you can help us use to frame the capacity or -- in terms of shipments or some way to gauge what your ability is to service that market?

Randall L. Hales

Well, we haven't provided any of that kind of detail in the past. I guess, as we look at it historically, if you look at the growth from 2011, which is our first full year in keyboards, to 2012, our second -- coming up on our second full year, it's become not quite 1/3 of our total revenues. And we see that growing right now, very quickly again. So where that will settle in and ultimately play out, it's hard to guess. We are ramping capacity to keep up with demand. We certainly are hesitant to share what those numbers look like because we are in a market leadership position, and we don't want to invite others to come join us.

Operator

[Operator Instructions] Next question is from Daniel Pike [ph].

Unknown Attendee

I'm trying to figure out, and you've got a lot -- you're doing a lot of -- making a lot of efforts and progress getting this company ready for its future. But as an investor, you want to figure out what the true picture of the quarter is. And I'm just trying to get a sense of all the onetime stuff. So I want to run through them and see if I'm kind of right and maybe give me a dollar amount. So it sounds like for Robert's entire expense, everything in the quarter, it sounded like that was $1.5 million. It sounds like your goal is to eventually get everything on the ocean away from freights. It sounds like half the gross margin decline was freight. It sounds like you did commercials that you're not going to do again. It sounds like you had a onetime thing where you did some store displays. Are there any other areas that you consider onetime in nature, expenses you had in the quarter that aren't going to be recurring going forward? Any write-offs of inventory, anything else?

Randall L. Hales

No, I think that's pretty descriptive of what we had in the quarter, Dan.

Unknown Attendee

Okay. So if I were to roll all that together, and I'm sorry you may not have already done this, but what kind of a dollar amount are we looking at? So we got the $1.5 million for Robert. Can you give me a ballpark? Because I'm trying to -- when you build the model and you do a DCF, you're trying to figure out what the true number is. So all that onetime, together, what would you say it is?

Randall L. Hales

Yes. Robert is the $1.5 million. With everything else in there, you're talking close to $4 million.

Unknown Attendee

Okay. So second question, can you give us any other color for CES? You guys have mentioned in the past you're excited about it. Can you give us any other color on what you're planning? What types of products we can look for at CES, in addition to the Animatones you just talked about?

Randall L. Hales

So for the extension of the Animatones line, you're going to see extension into the power category for us, Dan, which is one of those categories that I described is a great one for ZAGG to enter because we don't see anybody who has emerged as the brand leader there yet. So you'll see more power products. You'll see more audio products, desktop audio, than we've had in the past. And then the new category, we really are not commenting on at this point in time. But I hope that you can join us at CES and be a part of that introduction.

Unknown Attendee

Okay. I was a guy living without power in Manhattan, and power products are great. My third question is the Animatones, do you have doors already that you've got lined up to take the product?

Randall L. Hales

We do. Yes, it's...

Unknown Attendee

Okay. Any large retailers or...

Randall L. Hales

Yes.

Unknown Attendee

Okay. And then the last question, I guess, as much a comment as a question, I hate to sound promotional. But with the way your stock price is at, I'm delighted to hear Brandon is working on getting the debt refinanced and he's going to carve out the opportunity to do repurchase program. You have less than -- I'm just doing quick numbers in the dark, but it's less than a half turn of debt when compared to EBITDA. So you're nowhere near sort of an optimal capital structure, so I hope as you produce cash and you get the flexibility, just buy in your stock at less than 7x your non-GAAP EPS numbers. Just buy in all day long, so I hope that you'll do it.

Operator

This ends the Q&A portion of today's conference. I'd like to turn the call over to management for any closing remarks.

Randall L. Hales

Yes. Thank you again for joining us, and we hope to be able to see many of you and visit with you at the CES show. I think that will be our next opportunity. But we want to especially thank those of you who have been impacted by Hurricane Sandy over the last week. And I want you to know that our thoughts are with you and your families. Thanks again, and we look forward to the next opportunity to visit.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect, and have a wonderful day.

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