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ZAGG (NASDAQ:ZAGG)

Q4 2012 Earnings Call

February 26, 2013 5:00 pm ET

Executives

Kimberly Rogers-Carrete

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

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

Analysts

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

Paul Coster - JP Morgan Chase & Co, Research Division

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

Michael Latimore - Northland Capital Markets, Research Division

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

David S. Strasser - Janney Montgomery Scott LLC, Research Division

Operator

Good day, ladies and gentlemen, and welcome to ZAGG's Fourth Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded is being recorded. I would now like to hand the conference over to Ms. Kim Rogers-Carrete, Genesis Select, Investor Relations firm for ZAGG Inc. Ma'am, you may begin.

Kimberly Rogers-Carrete

Good afternoon, ladies and gentlemen, and thank you for joining us today for the ZAGG Inc. fourth quarter 2012 conference call. On the call today from the company are Randy Hales, President and Chief Executive Officer; along with ZAGG's Chief Financial Officer, Brandon O'Brien.

By now, everyone should have access to the fourth quarter 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 one 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 Form 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 the outlook for the company, the following pro forma financial measures will be discussed: EBITDA, adjusted EBITDA and pro forma 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 required by SEC Regulation G is included in ZAGG's press release today, 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 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, my first in the CEO role. As many of you are aware, the Board of Directors engaged Heidrick & Struggles to conduct an outside third-party CEO search last year. After an exhaustive search that included over 70 candidates and 6 finalists, I was asked to serve as the CEO of ZAGG in early December. It's an honor to serve in this capacity at such a fantastic company. I have been engaged with ZAGG since I joined the board in October of 2010 and had the opportunity to work closely with management on the acquisition and integration of iFrogz in June of 2011. Later that year, discussions began about my joining the company in the role of COO and President, which I did in December of 2011. At that time, it was obvious that the company needed to establish operational and product disciplines. With the support of senior management and the Board of Directors, we set about to unify the company and employees around 3 corporate objectives: product, brand and distribution. With the support and buy-in of the leadership team, we began organizing and aligning ZAGG to build a business that could scale and provide a solid foundation for continued growth. I am pleased to say that today, we are seeing the benefits of those efforts that we have been working on for over a year.

One of the most evident benefits of the unified strategic objectives has been the establishment of product management as a ZAGG discipline. At CES last month, the company introduced over 70 new SKUs, including several Hero products, as well as announced 2 new product categories for 2013. The response from our retail partners to the new ZAGG products has been fantastic. The media reaction to the new products was also very strong, with dozens of favorable product reviews in a multitude of widely distributed publications.

While we introduced a number of great products at CES, 2 products that we are very excited about are the iFrogz Caliber Advantage game controller and the ZAGG Origin desktop speaker system, both of which will launch in the first half of 2013. The Caliber Advantage is the first analog gaming case designed to provide a console gaming experience for mobile devices and was developed in cooperation with industry-leading software developers. It also represents the company's first product introduction that does not fall squarely into the definition of an accessory. The ZAGG Origin is a premium 2-in-1 desktop speaker, which won Got To Be Mobile's Best Accessory award at CES and features a Bluetooth-enabled portable speaker combined with a high-quality desktop system all in one unit. At $249, the Origin is posed to compete with higher-priced offerings that do not deliver the functionality and sound performance.

We are also pleased with the reception of another product category expansion under the iFrogz brand, the Animatones line of accessories designed for children. The line includes decibel-limiting headphones and 2 plush toys that amplify sound from a mobile device.

While CES was a great launch platform for us in January, we have a full calendar of exciting new product introductions planned for this year. In the second quarter, the company will introduce an addition to our tablet keyboard line that we believe will further strengthen ZAGG as the category leader. All of the products mentioned above as well as our planned 2013 introductions are supported by the product management discipline I mentioned previously. Our product managers have been charged to ensure that new products be gross margin-neutral or accretive to their respective category. Obviously, new product introductions must also provide a competitive advantage over the competition and our previous best.

It's the adherence to these and other product disciplines that will allow us to successfully broaden our product offering over time while maintaining our leadership position in the various categories in which we participate. I will discuss later how this will be an important component to our revenue growth.

As a new board member back in 2010, I realized that ZAGG's rapidly growing business and broadening shareholder base needed the support of more qualified independent board members. I introduced Cheryl Larabee to ZAGG, and she joined our board in March of 2011. Today, Cheryl serves as our Chairperson. In 2012, I worked closely with the Board Nominating Committee, along with Heidrick & Struggles, to successfully recruit 3 additional independent board members. Our board now consists of 5 independent directors, with each one bringing a unique set of expertise and experience, which greatly strengthens the company's strategic vision and oversight.

In addition to developing the ZAGG board, I was also focused on deepening the ZAGG management strength. Fortunately, we were able to utilize in-house talents supplemented by leadership that accompanied the iFrogz acquisition. Kent Wuthrich was promoted to the executive team as the Executive Vice President of Marketing. He now oversees our global marketing efforts for both brands. Ben Godfrey was promoted to Vice President of Product Management, with oversight of our product management and product development efforts. Both gentlemen have brought innovation and insight to our product and marketing strategies.

I'd now like to take a few minutes to highlight our financial results. The fourth quarter was another record quarter for revenue, driven by brisk sales of keyboards and invisibleSHIELDs. Fourth quarter revenue came in at $87.5 million, up 30% from last year's fourth quarter. Our tablet keyboard line performed extremely well and grew to represent 28% of sales in the quarter. The line has been expanded and improved with better ergonomics, more features and is available in more configurations. InvisibleSHIELD sales for the quarter were $37.7 million, an increase of 6% from last year and up 22% from the previous quarter, primarily driven by strong demand for smartphones, particularly the iPhone 5 and Samsung Galaxy, during the holiday season. It's interesting to note that although invisibleSHIELD continues to grow in real dollars, it declined as a percentage of revenues to 43% this quarter compared to 53% of sales in the fourth quarter of last year. We believe this is a healthy trend in our business as we continue to diversify our product offering.

Gross margins came in at 44.1%, down from the previous quarter and last year. Several factors contributed to the gross margin decrease, including a shift in our overall product mix, with less dependence on the invisibleSHIELD; airfreight incurred to support the iPhone 5 and Apple iPad Mini products; and continued marketing investment with some of our key retail partners.

Adjusted EBITDA for the quarter was $20.9 million, 12% higher than last year. As mentioned in our press release earlier today, the company incurred a noncash charge of $11.5 million in the quarter as a result of lower stock price and an important fourth quarter brand strategy adjustment that places greater emphasis on the promotion of our core brands, ZAGG and iFrogz.

In 2013, there will be 3 primary drivers of our growth, with the majority coming from the domestic market. The largest contributor to forecasted revenue growth will be driven by SKU expansion at existing retail partners, which we estimate will represent 50% to 60% of 2013 revenue growth. New products, which tend to carry higher ASPs, will also be a key contributor, representing approximately 20% to 30% of this year's revenue growth. It is strategically important that ZAGG continue to lead with creative products to further build brand awareness with consumers.

The third component to our 2013 revenue growth is expected to come from adding new distribution, both domestic and, later this year, international, which we are forecasting to contribute around 20% to 30% of growth. Domestically, we are evaluating opportunities in education, government, travel, recreation, business-to-business, discount clubs, grocery and pharmacy. Internationally, we've recently initiated our strategic plan for Western Europe with a focus on Germany, England and France. While we don't anticipate this initiative to generate meaningful revenue until 2014, we should realize some benefit going into the holiday season. Brandon will provide specifics on our 2013 guidance in his prepared comments.

With that, I'd like to turn the call over to Brandon for a detailed discussion of the financial results. Brandon?

Brandon T. O'Brien

Thank you, Randy, and thank you for joining us today to review our fourth 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 consolidated Q4 2012 financial details, so you may refer to them for further clarifications.

Revenue for the quarter was $87.5 million versus $67.5 million in the quarter from the prior year, representing year-over-year growth of 30%. The current quarter revenue includes $21.6 million from our iFrogz segment. This compares to $19.2 million in the prior year period, an increase of 13%.

Growth for the fourth quarter of 2012 was achieved primarily through expanded SKU count in our current customers and continued strong demand for our products. The breakdown for the sources of revenues is as follows: for the quarter, 82% of sales came from our retail channel versus 82% in the same period last year; 13% of sales were from zagg.com and iFrogz.com versus 13% in the same quarter last year; and 5% was from the kiosk and stand-alone stores versus 5% in the same quarter last year.

International sales accounted for 13% of total revenues in the quarter versus 12% in the same quarter last year. We continue to see diversification in our product revenues, with 43% of revenues coming from the invisibleSHIELD product line versus 53% in the same quarter of last year.

Gross profit for the quarter was $38.6 million versus $31.4 million in the same quarter of last year, which translates into gross margins for the quarter of 44.1% versus 46.5% for the same period last year, right in the gross margin range that we have guided to.

As a result of an adjustment in brand focus during the fourth quarter of 2012 and due to a lower market cap for ZAGG, we performed an impairment analysis of our goodwill and intangibles, as required under Accounting Standards Codification No. 350, Intangibles-Goodwill and Other. As a result of the analysis, we were required to record an $11.5 million noncash impairment charge, $6.1 million related to the EarPollution trademark and other intangibles and $5.4 million related to goodwill. When we acquired iFrogz, we ascribed values to various trademarks and other intangibles based on projected future cash flows from those assets.

During the fourth quarter of 2012, we made an important brand strategy adjustment to place greater emphasis on the promotion of our core brands, ZAGG and iFrogz. As a result of this decision, we determined that future cash flows under the EarPollution trademark will be less than previously estimated, which resulted in an impairment of that particular trademark. We did not completely impair the EarPollution trademark as we expect to continue to generate meaningful cash flows from that trademark, but we determined that at December 31, 2012 that carrying value was an excess of the fair value, which caused us to take the charge during the fourth quarter.

Operating income in the quarter was $5.3 million versus $14.4 million in the same period last year. Operating margins for the quarter were 6% compared to 21.3% for the same period last year. We also incurred $1.1 million in stock compensation expense during the quarter compared to $0.6 million in the same quarter of last year. Operating income net of the noncash impairment charge was $16.8 million or 19.2%.

The effective tax rate for the quarter was 78.6% compared to 34.6% for the same period last year. Due to the significant reduction in income before tax during the fourth quarter, which was primarily related to $11.5 million noncash impairment charge, the impact of nondeductible expenses, such as the loss on equity method investment in HzO, were much more pronounced during the quarter than they would have otherwise been. The effective tax rate for the year was 39.3%.

Net income attributable to stockholders in the quarter came in at $0.2 million versus $9.9 million in the same quarter in the prior year. Our fully diluted share count for the quarter was 31.7 million shares. Total shares issued and outstanding at December 31, 2012 were 31,214,570 shares. At December 31, 2012, we had 0.7 million outstanding options, 0.4 million outstanding warrants and 0.5 million outstanding restricted stock grants. We used 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.

Our fully diluted earnings per share were $0.01 for the quarter versus $0.32 in the same period last year. During the fourth quarter, we incurred the following noncash charges, which we have tax-affected in the calculation of pro forma EPS, assuming a statutory rate of 38.5%: $11.5 million or $0.22 related to the impairment of goodwill and intangibles; $1.5 million or $0.03 relating to expensing the remaining deferred loan costs on the debt that was refinanced; $1.1 million or $0.02 related to stock-based compensation; $2.4 million or $0.05 related to amortization of intangible assets; $1.4 million or $0.04 related to our equity method investment in HzO. These losses are not tax-deductible, so the loss has not been tax-affected. Total noncash charges for the quarter totaled $18.1 million or $0.36 per share. Of the noncash charges recorded in the quarter, $13 million or $0.25 per diluted share were nonrecurring charges. Adjusted EBITDA for the quarter came in at $20.9 million compared to $18.8 million for the fourth quarter of 2011, an increase of 12%.

Turning to the balance sheet, working capital at the end of the quarter was $90.3 million compared to working capital of $74.5 million at December 31, 2011. We reported a cash balance of $20.2 million. For the fourth quarter, we were cash flow positive, with over $2 million in operating cash flow. During the fourth quarter, we were able to successfully refinance our outstanding debt. We were able to secure an $84 million facility with Wells Fargo Bank. Under the facility, we fixed $24 million, with required quarterly payments of $2 million starting in April 2013, and drew down $22.2 million on the line of credit. Both tranches of debt are at a variable rate of LIBOR plus 1.25%, which was 1.625% at December 31, 2012, representing a 562.5 basis point savings in interest expense or over $2.6 million annually. The balance on the line of credit was $22.2 million, and the term loan balance was $24 million at the end of the year.

Accounts receivable for the quarter were $54.6 million as compared to $45.5 million at December 31, 2011. DSOs in the quarter were 57 compared to 62 for the quarter ended December 31, 2011. We continue to be very comfortable with the quality of our accounts receivable.

Inventories for the quarter were $40 million, an increase of $10.4 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.

As noted in the press release that went out this afternoon, we are establishing guidance for 2013 for net sales in the range of $313 million to $318 million. We continue to forecast annual gross margins in the low to mid-40s and have established our forecasted adjusted EBITDA in the range of $69 million to $71 million.

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

Randall L. Hales

In summary, 2012 has been a year of growth and maturity for ZAGG. We have successfully executed on all 3 of our corporate objectives: creative product solutions, the preferred brand and targeted global distribution. This company-wide focus on product, brand and distribution allows us to build a robust platform from which to continue to build and expand ZAGG. We are entering 2013 from a strong financial position that will further enable our business to grow as we execute on our corporate objectives.

The outlook for this year is bright, and we are excited about the opportunities that lie ahead for ZAGG. Our strong product development efforts have resulted in a subtle strategic shift at ZAGG, and we anticipate in 2013, you will see our new product categories take ZAGG beyond the mobile device accessory segment, with products that serve large addressable markets, where we feel we can be a significant competitor, such as gaming and desktop audio.

We would now like to turn the time over for question and answers.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Dave King from Roth Capital.

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

I guess first off, looking at the guidance you provided for 2013, I appreciate that, Brandon, the breakout in terms of -- or I can't actually -- it may have been you, Randy. But the breakout in terms of SKU expansion, new products, all that kind of stuff. But as we look into that further or dig into that a bit further, how should we think about your new gaming product that we saw recently? Is that incorporated in that 20% to 30%, or is it still too early to tell? And then in terms of the SKU expansion stuff and new distribution, have you looked into or thought about, by product, on what's the invisibleSHIELD, how we should think about the growth there, things of that nature?

Randall L. Hales

Yes, let me address your first one, Dave -- your first question, rather. Some of the lift for the new products that we've announced recently is included in the guidance but not a lot. Like any new product, you've got to get into the market and try to understand market acceptance before we get a good read on it. Historically, we have adjusted guidance throughout the year as it made sense to do so. So the gaming controller and the Origin desktop audio system, we'll really know a lot more about those later in the year, and we'll come back and adjust if necessary. Secondly, your question about the invisibleSHIELD, we believe that will continue to be strong for the company. We anticipate it will grow and expand both as we pick up additional SKUs at existing retailers with new device launches and with new distribution coming on. We're going to be aggressive in that category to protect the market lead that we have, and we're looking at new products and new technologies. So we'll continue to strengthen our position in that product line.

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

That's helpful. And then maybe as we think about the EBITDA guidance that you put out there, it looks to me like if I take the midpoints of the guidance on both revenues and EBITDA, it looks like you're expecting kind of a contraction in the EBITDA margin from 24% to 22%. Can you talk about maybe what's going on there? Is that mainly on the gross margin line? Is some of that SG&A? How should we think about that?

Brandon T. O'Brien

Yes, Dave, I mean, if you look at our gross margins, we came in for the quarter at 44.1%. As we build our business, as you have less reliance on the invisibleSHIELD because we've got diversification with other products, the gross margin is coming down a little bit. This year, we're seeing gross margins low to mid-40s. That has impact on the EBITDA margins. But we feel like we've still got some good growth potential with leveraging the operating margins, which will help to offset that. So again, this is our first cut out of the gate. We have that history of updating guidance throughout the year, and as we have more visibility, see the commercial success of some of our new product launches and then follow along the new device launches as they come throughout the year, we'll make those adjustments as we move forward.

Operator

Our next question comes from Paul Coster from JPMorgan.

Paul Coster - JP Morgan Chase & Co, Research Division

My question, just going into that EBITDA line a bit, obviously, it doesn't allow as much leverage, but isn't part of that because depreciation and amortization probably comes down a bit year-on-year?

Brandon T. O'Brien

The depreciation is relatively static, Paul. Amortization, with the acquisition of the iFrogz assets, we have accelerated amortization in the early years, and so we would expect that amortization for this next year will be in line with what we had during the past year. So those particular line items should be relatively static for the year.

Paul Coster - JP Morgan Chase & Co, Research Division

That's notwithstanding the write-off which you've just done?

Brandon T. O'Brien

That write-off was for an indefinite-life intangible, so it was not being amortized. The remaining balance on that will -- we will amortize that. We've transitioned that from an indefinite life to a definite life, but we shouldn't see much of an impact from that through the remainder of its useful life.

Paul Coster - JP Morgan Chase & Co, Research Division

I got it. As for the year, shaping out revenues, presumably, the second quarter's going to be -- the first quarter is going to be down sequentially. Second quarter should not just benefit seasonally from dads and grads but also from the product introductions, and then another flat or down quarter, and then finally, a big fourth quarter. Same kind of seasonality this year?

Brandon T. O'Brien

Yes, that's typically what we see as far as seasonality. I mean, always, the X factor there is new product launches, speaking to our new products and also to the OEMs as they launch new devices. And their ultimate commercial success can be very impactful on how we see our revenues flow throughout the year. So it can be lumpy, but we do tend to follow the traditional retail seasonality model.

Paul Coster - JP Morgan Chase & Co, Research Division

All right. Last question, I know HzO is a little bit outside of your scope, but I do know from Mobile World Congress that they've entered into what looks like a pretty interesting relationship with Brightstar, which is obviously a very sizable distributor. Can you talk about that at all and what it might mean with this?

Randall L. Hales

Yes, we're excited about what HzO is able to do. Brightstar has the potential to be a great partner for them to really give them the real first foot in the door as far as proving the viability of the technology. So I mean, what we're looking forward to is not having a drag on our earnings, but if they start to turn to generating positive revenue, seeing some contribution to the positive or at least neutral on our income statement, we're looking forward to that. And based on the projections that they're putting out there that we're reviewing, we think that there's a good possibility by the end the year, we could be to a breakeven scenario with HzO. It still remains to be seen, but we're very excited about the trajectory that they're moving forward on.

Paul Coster - JP Morgan Chase & Co, Research Division

I'm sorry, one last question. Earlier, you said just in passing, you said that you intend to "meet and beat." Is that kind of like the philosophy when you're issuing the guidance now, that your issuing somewhat conservative guidance with the intention of, as the year progresses, tilting the risk towards the upside?

Randall L. Hales

We want to be able to put guidance out there that we're comfortable with. That's definitely a mantra that we have strived to follow here at ZAGG. And so the guidance we've provided here would not be an exception to that policy.

Operator

Our next question comes from Mike Malouf from Craig-Hallum.

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

Can you talk a little bit more about the gaming products, sort of where you are in the development of that with regards to the partners? Which partners are you working with now, and has that expanded at all recently? And when will be the big coming-out party for that?

Randall L. Hales

Yes, Mike, so we are still on target to release the gaming handset in the second quarter of this year. We are -- as far as where we are in the progress of that, Chinese New Year just ended, so we're back working hard with our production facilities in Asia, finalizing tooling. We'll have our first final product back here in the States in mid-March. That will be distributed to the software development team, so they can have a hands-on device to work with. And we have picked up some more software development support as a result of our announcement at CES. We've had several gaming companies come to us, so that seems to be moving forward quite nicely.

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

Okay, great. And then, maybe a question for Brandon, on the tax rate, where are we expected to be on the tax rate over the next couple of years? Where do you still think that can go to?

Brandon T. O'Brien

A lot of that, Mike, depends on the growth that we see with our international operations. I think Randy kind of laid it out in his comments that we anticipate growth overseas. It's coming slower than we had originally anticipated on the outset, but I think we've got a good strategic plan in place that will help us to leverage those, the operations outside of the United States, which will really drive the effective tax rate. We're still looking at the models that we see based off of our projected growth overseas. We think we've got the possibility of getting that tax rate down to the low to mid-30s over the next couple of years and even past that in the out years. We have completed our tax planning. We have got our IP shifted to an offshore entity, where we're starting to initiate those royalty payments from Ireland, which helps in that. So we'll start to see the benefit of that in this current year. This can take some time to really get it meaningfully down to the lower 30s.

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

Okay, great. And then one final question with regards to CapEx. What level do you think that would trend out over the next year or so, and what are the initiatives behind those?

Brandon T. O'Brien

Yes, I mean, fortunately, CapEx is not a big issue that we have to face here at ZAGG. Most of the capitally intensive pieces of our business, we have outsourced to third-party vendors, where they bear the burden of buying those capital expenditures. Last year, we were right around $2 million in CapEx. We budgeted for this year to be under that range, and I think that's a safe level to assume for the foreseeable future for us.

Operator

Our next question comes from Mike Latimore from Northland Capital.

Michael Latimore - Northland Capital Markets, Research Division

I guess on the tablet percent of revenue, did you have the percent for the full year at this point?

Brandon T. O'Brien

Yes, we haven't broken that out specifically as far as tablets versus other. We have -- we've got keyboard, so we...

Michael Latimore - Northland Capital Markets, Research Division

I mean, keyboard.

Brandon T. O'Brien

Oh, okay. Yes, so keyboard for the year -- I mean, for the quarter, we were at 28% of revenues. Let me just check my numbers here quickly, Mike, and I can get that piece for you. So it's 24% for the year, 24%.

Michael Latimore - Northland Capital Markets, Research Division

Okay. Great. And when you talked about SKU expansion, it seems like that's the biggest revenue driver for 2013. I assume the keyboard sales are the biggest factor within the SKU expansion category. Is that right?

Randall L. Hales

We're still, as we said, very early in our distribution relationships with a lot of our customers, so I wouldn't limit it just to keyboards, Mike. I think that there's opportunity across most of our product lines for SKU expansion.

Michael Latimore - Northland Capital Markets, Research Division

And I don't know if you track it separately. What was iFrogz as a percent of revenue?

Brandon T. O'Brien

Yes, for the quarter, we did disclose that iFrogz as a percentage of revenue was 25% in the quarter.

Michael Latimore - Northland Capital Markets, Research Division

And then I know you have normal seasonality, the seasonal trend in the first quarter, kind of normal for the overall retail industry. But I guess outside of sort of the normal seasonality in the first quarter, is there anything that is a sort of positive influence or headwind that you see in the first quarter, whether it's around product launches or new devices or stocking orders or anything like that? I mean, how should we think about some of the gives and takes in the first quarter here outside of the normal seasonality?

Randall L. Hales

Mike, there tends to be a little bit of a lull on the retail side of our business in the first quarter because the large retailers are getting ready for spring sets. They come early in the second quarter. So there isn't anything on our radar that would be unusual in the first quarter. It's kind of business as usual.

Operator

Our next question comes from Jon Hickman from Ladenburg.

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

The interest rate or the interest expense write-off that you mentioned, the $1.5 million, was that included in your $2.8 million expense?

Brandon T. O'Brien

Yes, it's a subset of the interest expense. We broke that out separately.

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

Out of the $2.8 million, $1.5 million is noncash.

Brandon T. O'Brien

Correct.

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

Okay. So that would mean that for 2012, your cash interest expense was about $4.8 million.

Brandon T. O'Brien

Yes, that's about right.

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

Okay. So then the savings that you talked about, because of the lower interest rate with the Wells Fargo credit line, you said that was going to be about $2 million a year?

Brandon T. O'Brien

It has the potential to be -- if you assume that there was no payment down on any of the debt and so you're just comparing static numbers with static numbers, it would be $2.6 million, right? So it'd be $2.6 million as compared to the roughly $4.8 million. We think interest expense will be lower than that because we do have required payments on the term note, and also, we're generating some strong cash flow from operations. Our first quarter is always our strongest collection quarter as far as cash goes. And so we'll utilize some of that cash to pay down on debt and also take the opportunity to be opportunistic on the stock repurchase as well.

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

But that's also subject to changes in the LIBOR rate, right?

Brandon T. O'Brien

It is.

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

Okay. So now since you brought up the stock repurchase, can you elaborate on -- I think you were waiting for this quarter to get out of the way before you could start that.

Brandon T. O'Brien

Yes, when we had -- when the board approved the stock repurchase in December, we were in a blackout period, so we could not initiate the 10b-5 to start purchasing shares of stock. Now that we have announced our numbers, after the blackout period ends, we'll be able to start executing on that stock repurchase program.

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

So you could start tomorrow if you wanted?

Brandon T. O'Brien

We have to wait a little bit. The blackout period extends to 48 hours after we announce our call, so it's later this week.

Operator

And our next question comes from David Strasser from Janney Capital.

David S. Strasser - Janney Montgomery Scott LLC, Research Division

I wanted to step back and ask a bigger picture question. As you're kind of going through this mix shift in product, as you look out 5 years, as you write your 5-year plan, I'm just trying to understand where you see the mix of business, where you see gross margin. Not to the exact extent, but we're in the mid-40s now, where that can go. And just as you're thinking about the business over a 5-year period as opposed to 6 months, 12 months, product-wise, and I know obviously, you don't have to go with -- as the product cycles change and so on, but just bigger picture as you try and put it on paper.

Randall L. Hales

I think, David, as we try to get our heads around what the business is going to look like, 3 years is about as far as we dare venture out there. But with our emphasis on keeping the product line fresh and really driving first with product and the charge to the product managers to add products into the categories they manage that are either gross margin or neutral, we hope to minimize some of the gross margin compression that we would suffer otherwise. So just know that we're very focused on trying to maintain gross margin at the levels that we've seen. I think that it's inevitable over time as invisibleSHIELD, again, becomes a smaller percent of our overall mix that we'll see a little bit of compression. But guessing where we're going to be a couple of years out, I would -- it's tough to say, but we're trying very hard to maintain those gross margins in the low 40s, which is kind of what we're saying this year.

David S. Strasser - Janney Montgomery Scott LLC, Research Division

I mean, I guess a little bit different way to ask it, I mean, where do you think the invisibleSHIELD -- I'm not asking you in 5 years, if 3 years is your comfort zone. I'm just trying to get a sense of where you think that could be in the mix as you continue. You probably see your product line -- your backlog of products coming on. I mean, I just -- where could it -- and I'm not asking for definitive numbers. I'm just trying to think as we kind of look at our longer-term model here. And how much further you think -- I guess as the shift in the mix accelerates the decline of invisibleSHIELD, it moderates closer to here?

Randall L. Hales

I think a good place for us to be would have to be invisibleSHIELD accounting for 1/3 of our revenues or slightly less long term and see our product line and assortment become more diverse so that we've got less dependence on any one given product line. Through that process, as we've mentioned, when invisibleSHIELD becomes a smaller part of our sales, we'll see a little bit of margin compression. But we are always looking to protect and strengthen that category. It's our driver. And we're looking for categories that we can enter, where we can harvest strong gross margin. If you look at this gaming category we're getting into, we're very much pioneering there, and if we emerge as the market leader like we have with keyboards and invisibleSHIELD, we should have some margin strength. So again, we're not fearful that gross margin's going to have some kind of steep fall-off in the coming years, but we're going to have to be very diligent to make sure that's not the case.

Operator

I'm showing no further questions at this time. I'd like to hand the conference back over for any closing remarks.

Randall L. Hales

Yes, thank you for joining us today for a discussion of our fourth quarter and the year-end results for 2012, and we're looking forward to your participation at our upcoming first quarter call. And thank you for your continued interest in ZAGG.

Operator

Ladies and gentlemen, thanks for participating in today's conference. This concludes the program for today. You may all disconnect, and have a wonderful day.

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