ZAGG Management Discusses Q1 2013 Results - Earnings Call Transcript

May. 3.13 | About: ZAGG Inc (ZAGG)

ZAGG (NASDAQ:ZAGG)

Q1 2013 Earnings Call

May 02, 2013 5:00 pm ET

Executives

Kimberly Rogers-Carrete

Randall L. Hales - Chief Executive Officer, President, Chief Operating Officer, Director, Ex-Officio Member of Audit Committee, Ex-Officio Member of Nominating & Corporate Governance Committee and Ex-Officio Member of Compensation & Stock Option Committee

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

Analysts

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

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

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

Paul Coster - JP Morgan Chase & Co, Research Division

Ryan Macdonald

Operator

Good day, ladies and gentlemen, and thank you for your patience. You have joined the ZAGG Inc. First Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference may be recorded. I would now like to turn the call over to your host, Kim Rogers with Genesis Select, the Investor Relations firm for ZAGG Inc. Ma'am, you may begin.

Kimberly Rogers-Carrete

Thank you, Latis. Good afternoon, ladies and gentlemen, and thank you for joining us today for the ZAGG Inc. first quarter 2013 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 first 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 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 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 GAAP financial results and the outlook for the company, the following pro forma financial measures will be discussed, adjusted EBITDA and pro forma net income attributable shareholders. An explanation of ZAGG's use of these non-GAAP financial numbers 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 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. As I'm sure you can imagine, I would have much preferred to be releasing very different results for the first quarter in my new role. When I accepted the CEO position at ZAGG, I was empowered by the board to make the necessary changes to build a stronger company and increase shareholder value over the long term. It became apparent in the first quarter that there were some important changes that needed to be made at the company. While the pain associated with the consequences of these changes in the near-term is not pleasant, the long-term promise of a company with a stronger foundation for growth and shareholder return is what we are building towards. I will explain some of these changes that we have made in more detail as I go through my remarks.

First of all, it should come as no surprise that the revenue for the quarter at $51.5 million fell short of our internal goal, causing us to experience a year-over-year decline in first quarter revenues. The quarter was influenced by a few unique events that negatively affected both our top line and gross margin.

During the quarter, we consolidated our account management team and transitioned from a brand to customer focus. During this transition, we missed sales opportunities with regard to the iFrogz audio line. Secondly, we made a decision to change our distribution strategy. We've discussed on previous calls that as part of our targeted global distribution objective, we would align ourselves with a limited number of key distributors in an effort to better manage channel pricing. As a result, this has caused us to end our relationship with some of our distributors who we did not believe were aligned with our pricing strategy. As a reminder, for those of you who may be new to ZAGG, our products were being steeply discounted by certain distributors through various channels, causing large retail price discrepancies throughout our distribution network. This caused significant concern for key customers already aligned with our pricing strategy. Consequently, we have established relationships with 3 new master distributors. The new master distributors contract support our pricing initiatives and prevent the discounting we've experienced in the past. We have now discontinued all shipments to our former distributors, and we anticipate the residual inventory will work itself through the system later this year.

Another contributor to our revenue shortfall was lost opportunity associated with 2 of the products we launched late last year, our 9-inch mini keyboard and the invisibleSHIELD EXTREME. Despite great product reviews, the 9-inch keyboard turned out to be a retail disappointment as it became clear that consumers prefer keyboards that match the smaller form factor of the iPad Mini as opposed to our larger 9-inch keyboard. The 9-inch keyboard case was also very tight-fitting and made it cumbersome for consumers to install and remove their iPads. Ultimately, this product did not meet the market acceptance we had originally forecast. Consequently, in addition to the lower sales volume, we recorded an inventory reserve for excess inventory, which negatively impacted our gross margin. The second product setback for us during the quarter was the invisibleSHIELD EXTREME, which performed as advertised, but was subject to a very long cure period, in which tiny air bubbles remained trapped between the invisibleSHIELD EXTREME and the phone display for several days after installation. Due to the customer concerns with the slow cure process caused during the installation, we lost sales opportunities.

The last significant contributors to the revenue shortfall was a strategic decision made during the quarter to streamline operations and consolidate selling and administrative functions between ZAGG and iFrogz, including the consolidation of our account management team. This included a shift from account managers being primarily brand-focused to being customer-focused, that is a customer now has a single point of contact for both brands. As a result of this transition during the quarter, we saw lower-than-expected sales in product lines with which our account managers were not initially familiar. The company is undergoing extensive cross-training to ensure that all account managers are proficient at selling products under both brands.

Now moving onto gross margin for the quarter. Coming in at 36.9%, our gross margin was several points below our internal target, and was primarily impacted by the following activities: number one, our continued shift in product mix as sales of invisibleSHIELD products, our highest margin product category, decreased as a percentage of overall sales compared to the first quarter of 2012; number two, an increase of our inventory reserve related to the excess inventory; number three, excess air freight charges. All of these factors had the effect of compressing our gross margin during the quarter.

Due to the circumstances surrounding our revenue and EBITDA shortfalls in the first quarter, as well as some industry issues that will affect our business, we are adjusting our fiscal '13 guidance down for the remainder of the year. The most significant change in guidance is due to Apple delaying new device launches until later this year. We have benefited over the last several years from numerous Apple device launches spread throughout the year, which we won't see this year. We are also experiencing a slower onboarding process with our new master distributors and longer closing cycles with some of our targeted new distribution.

On the international front, we are facing increasing economic difficulties in Europe as we strive to expand our retail footprint there. As a result of these factors, we are lowering our fiscal '13 revenue guidance by $30 million -- $39 million to a range of $274 million to $280 million or approximately a 12% revenue guidance reduction for the year. We are also lowering our EBITDA guidance to a range of $53 million to $55 million, and resetting gross margin expectations for the remainder of the year to the low 40s.

I'm now going to shift my remarks for a few minutes to discuss those reasons why we remain encouraged by ZAGG's current opportunities in the mobile computing industry. I believe our sales decline is relatively short-lived, and that we are building a strong foundation based on continued product diversification, stronger distribution partners and better operating performance.

As a result of our distribution change to 3 master distributors, we are already experiencing improved pricing management across all of our channels of distribution. We also believe that our new master distributors will play a significant role in our ability to open up new distribution in travel, specialty retail, wholesale clubs, outdoor recreation, education, government and international. From a new product perspective, we are a company that is constantly pushing the envelope to introduce these new creative product solutions. As our product management discipline continues to mature, we are getting better at launching new products and gaining insights that will help us to avoid the product problems we experienced in the recent quarter. We remain committed to introducing new products that will surpass expectations and set new industry standards. For example, the invisibleSHIELD EXTREME will be relaunched next month with a new formulation that cures rapidly while providing the highest level of device protection. Fortunately, our retail partners are eager to stock this product when it becomes available. Another example is the next generation of our mobile keyboard line, which has been completely redesigned, and will offer features not previously available in tablet keyboards. I've been using an early production version of our new keyboard with my iPad Mini for several weeks, and it is, by far, the best keyboard from both a design and functionality perspective that ZAGG has ever built. We will be launching these keyboards near the end of the second quarter, and I'm confident they will become the new standard in the industry.

Another promising upside opportunity for us this year is our mobile gaming platform where we expect to launch the caliber advantage online at the end of the second quarter and in retail during the third quarter. We have been working diligently to bring both retail and software development companies together to support this launch. At present, we have over 28 gaming titles that are committed to support our online launch. Although this is a more complicated product launch than we have ever undertaken, we are excited by our progress and by the response from the industry.

While Apple's products have played a large role in our growth, Samsung continues to strengthen and challenge Apple's multiyear dominance in mobile computing. I'd like to address what effect this dynamic has on our flagship product, the invisibleSHIELDs. During the first quarter of 2013, our market research showed that the invisibleSHIELD was tracking in near unison with the top-selling smartphones and tablets. The increasing popularity of Samsung's mobile computing products is favorable to ZAGG, and we have experienced significant growth in sales of our Samsung-related products.

Until recently, the Android platform was extremely fragmented, but now with Samsung emerging as a category leader, we expect our Samsung-related sales to continue to increase. We are often asked about attach rates for the invisibleSHIELD. Because each of our retailers has a different strategy for selling the invisibleSHIELD, their attach rates vary widely, and we don't get consistent data on this metric, which we can accurately track and report. Therefore, we measure our success for the category on a real dollar basis, and look for this category to produce high single-digit growth in 2013.

We recently updated and strengthened our long-term supply agreement with our film partner, and are working together to further differentiate the invisibleSHIELD from the competition by introducing creative product solutions that will allow us to remain the market leader. Several of you have asked us about technological advances in glass that would put our invisibleSHIELD business at risk. Fortunately, to our knowledge, there is not a current solution or anything on the horizon that would lessen the need for consumers to protect their device frames from scratching and breaking.

ZAGG continues to strengthen as a brand that builds great products and stands proudly behind them. Next week, we will be recognized as one of the top suppliers in 2012, and the first-ever mobile accessory supplier by one of our largest customers. In addition, we were recently named co-captains for mobile accessories at another one of our large retail customers. We are pushing the envelope on new technologies and taking calculated risks with our new product initiatives. I'm confident that our new product efforts will be rewarded by growth in our existing distribution, as well as opening up entirely new doors for our products to be sold through.

With regard to improving gross margin, I had the opportunity to work closely with our operations team to establish several new disciplines in supply chain, inventory management and logistics. Air freight has been one of those expenses that we have been trying to minimize. To bring greater visibility and control to this large expense, we recently modified our air freight policy to require several additional levels of internal sign-off, as well as my personal review in order to drive more visibility and accountability through the organization.

We continue to refine our inventory management processes to ensure we maintain proper inventory levels to meet forecasted demand. Clearly, we have our work cut out for us, but the organization is quickly aligning to support our product, brand and distribution initiatives.

Throughout the remainder of 2013, an important area of focus for me will be supporting and strengthening both the ZAGG sales and product management teams. As an organization, we continue to lead with product to both build the ZAGG and iFrogz brands and expand our distribution. Due to the hard work and focused effort of our product teams, our new product pipeline is more robust than ever.

We have a solid balance sheet and sufficient access to capital to grow our business. We are improving our financial management disciplines and operating efficiencies, while constantly adapting to the rapidly changing consumer electronics industry. We are fortunate to have new leadership at the executive and board level with many years of successful consumer products experience. Our board governance has never been stronger, and the company as a whole has gone through a significant maturation process in recent months.

As we disclosed in an 8-K filed last Monday, Ed Ekstrom resigned from our Board of Directors. In August 2012, when the company adopted a policy prohibiting short-term or speculative stock transactions, Ed maintained a margin loan on a portion of his ZAGG shares and was granted time to come into compliance with the policy. However, Ed recently communicated to us that his full-time commitments had increased significantly. So Ed chose not to seek a waiver of the company's policy in advance of the filing of our 2013 Proxy Statement, but rather to resign from the board. We are grateful for Ed's service and wish him well in his future endeavors. At ZAGG, we are establishing a culture of empowerment and accountability. There's more attention and focus on planning then execution than ever before. All of these themes combine to give me great confidence in the future of ZAGG. 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 first quarter 2013 financial results.

As stated in today's release, we will be disclosing consolidated financial results reflecting our primary operations within the United States, as well as our international operations from ZAGG International, our wholly-owned subsidiary operating under Shannon, Ireland.

On the call today, I will speak only to consolidated results unless otherwise stated. The financial statements provided in today's release reflect consolidated Q1 2013 financial details. So you may refer to them for further clarifications.

Revenue for the quarter was $51.5 million versus $55.5 million in the quarter from the prior year, representing year-over-year decline of 7.2%.

During the first quarter of 2013, management consolidated a number of ZAGG's iFrogz's processes and functions, closed the iFrogz office in Logan, Utah and downsized a number of iFrogz's employees. The 2 offices consolidated marketing, product development, product management, customer service, sales, accounting and IT. This change and other factors led management to reassess its recordable operating segments during the quarter, and we ultimately concluded that the company should be a single reportable operating segment. The breakdown for the sources of revenues are as follows.

For the quarter, 83% of sales came from our retail channel versus 82% in the same period last year. 12% of sales were from zagg.com and iFrogz.com versus 13% in the same quarter last year, and 5% from the kiosk and stand-alone stores versus 5% in the same quarter last year.

International sales accounted for 10% of total revenue in the quarter versus 11% in the same quarter last year. We continue to see diversification in our product revenues, with 44% of revenues coming from the invisibleSHIELD product line versus 48% in the same quarter of last year, and 32% coming from our keyboard product line versus 21% in the same quarter of last year.

Gross profit for the quarter was $19 million versus $26.9 million in the same quarter of last year, which translates into gross margins for the quarter of 37% versus 49% for the prior-year period. The decrease in gross profit percentage is due to a number of factors, including the continued product mix shift as sales of our invisibleSHIELD products, our highest margin product category, decreased as a percentage of overall sales compared to the first quarter of 2012.

As noted, sales of our keyboard products increased from 21% of total net sales to 32% over the same period. We also had increases in our reserve related to excess and slow-moving inventory and higher-than-expected airfreight charges incurred during the period.

Operating income in the quarter was $2 million versus $10.2 million in the same period last year. Operating margins for the quarter were 3.9% compared to 18.4% for the same period last year. We also incurred $1 million in stock compensation expense during the quarter compared to $1.3 million in the same quarter of last year.

The effective tax rate for the quarter was 24% compared to 36.9% for the same period last year. The tax rate in the quarter was affected by R&D tax credits that had a disproportionate effect on the rate due to the smaller pretax net income. We anticipate our tax rate for the remainder of the year to average closer to 38%.

Net income in the quarter came in at $900,000 versus $5.1 million in the same quarter in the prior year.

Our fully diluted share count for the quarter was 31.7 million shares. At March 31, 2013, we had 0.6 million outstanding options, 0.4 million outstanding warrants and 0.6 million outstanding restricted stock grants. We used the treasury method in calculating our diluted shares outstanding. Our fully diluted earnings per share were $0.03 for the quarter versus $0.16 in the same period last year.

During the first quarter, we executed under our stock repurchase plan and purchased 796,764 shares of common stock at an average price of $7.50 per share for a total expenditure into the repurchase plan of $6 million, leaving $4 million left under the repurchase plan authorized by our Board of Directors.

During the first quarter, we incurred the following noncash charges, which we have tax affected in the calculation of pro forma EPS, assuming a statutory rate of 38.25%; first, $1 million or $0.02 related to stock-based compensation; second, $2.4 million or $0.05 related to amortization of intangible assets; and third, $0.6 million or $0.02 related to our equity method investment in HZO. These losses are not tax-deductible, so the loss has not been tax-effective.

Total noncash charges included in the calculation of pro forma net income totaled $4.1 million in the quarter or $0.08 per diluted share. Adjusted EBITDA for the quarter came in at $6.1 million compared to $14.4 million for the first quarter of 2012.

Turning to the balance sheet. Working capital at the end of the quarter was $82 million compared to working capital of $89.4 million at December 31, 2012. We reported a cash balance of $23.4 million.

For the first quarter, we generated cash from operations of over $14 million. The balance on our line of credit at March 31, 2013, was $17.7 million, and the term loan balance was $24 million.

Accounts receivable for the quarter were $35.5 million as compared to $54.6 million at December 31, 2012. DSOs in the quarter were 62 compared to 57 for the quarter ended December 31, 2012. We continue to be very comfortable with the quality of our accounts receivable. Inventories for the quarter were $41.3 million compared to $40 million at December 31, 2012. We continue to evaluate inventory on a monthly basis, and reserve against excess and slow-moving inventory as needed. We are satisfied with the progress that HZO is seeing with the execution of contracts and the further development of their business plan. It is likely that HZO will raise additional funds to execute on their business strategy with the OEMs. And at this point, we have not participated in any additional rounds of financing as we are focusing on our business plan here at ZAGG. At March 31, 2013, our ownership percentage in HZO was 30%. With that, I'd like to turn the call back over to Randy.

Randall L. Hales

Thanks, Brandon. And I want to reiterate that you have the commitment of the entire ZAGG organization, and that we will continue to focus on advancing our growth initiatives to execute effectively and deliver results. We remain optimistic about our future and we believe that ZAGG will continue to ascend as a leader in mobile computing accessories. With that, operator, we are ready to begin the question-and-answer session.

Question-and-Answer Session

Operator

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

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

I guess, first off, when you -- in the transition to new distributors, is it fair to assume that the most impact we saw this quarter was on the invisibleSHIELD side since that was the kind of the business, I guess, that looked like it was down a little over double-digit pace in the first quarter? Or did that impact keyboards, et cetera, everything?

Randall L. Hales

Yes, Dave. So the distributors were full-line distributors. They had access to all of our various products, not just the invisibleSHIELD.

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

Okay. So then I mean, I guess, when I look at the invisibleSHIELD, maybe ask the question a little differently. As I look at the invisibleSHIELD's revenues being down as much as they were, if I -- the 3 things that you guys kind of broke out in terms of distribution off of extreme, I guess, how should we think about what was the biggest impact there in terms of what drove that?

Randall L. Hales

Yes. So, Dave, a couple of things. First of all, we haven't lost any peg space with invisibleSHIELD. So our business, it still looks good from that perspective. But we also didn't build for a device launch and have any sell-in, in this quarter like we experienced in the same quarter last year. And obviously, that had an impact on the invisibleSHIELD sales.

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

Okay, fair enough. And then, Brandon, I may have missed it since I jumped on late. Did you talk about Best Buy as a percentage of revenues? Do you have that number?

Brandon T. O'Brien

I do. So Best Buy as a percentage of revenues for the quarter was 30%, and then Walmart came in at 12%.

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

Okay. And then last one, I would say for now and then I'll step back. Gross margin impact, obviously, I guess the mix issue, can maybe just -- do you have the number in terms of your dollars or basis points? What impact of the inventory reserve for excess inventory, et cetera, and then the air freight charges, what impact those might have each had on the quarter?

Brandon T. O'Brien

Yes. The biggest one was the mix shift by far, but you did have airfreight -- or excuse me, the charges related to inventory were about $1 million in the quarter related to the 9-inch keyboards and some excess inventory that we have.

Operator

Our next question comes from Michael Malouf of Craig-Hallum Capital.

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

Since we have like basically 30% of the sales at Best Buy, it's sort of a good microcosm of what's going on because they handle so many of your products. Can you give us a sense of what the attach rates or what the sales are of invisibleSHIELD within that channel just to give us a sense of how, at least on an apples-to-apples basis, things are going?

Randall L. Hales

Yes. Mike, it's a difficult one for us to get our arms around because we don't get reliable or good data from them. The thing I can tell you about Best Buy is that they have been in the installation business longer than anybody else. They've also been the product longer than anybody else, so they tend to drive a higher attach rate than the rest of our customers on balance. They do a very good job with that. But to a percentage, and to try to put that in some kind of a framework for you, we just don't have that information.

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

Right. But do you know what the growth rate of the invisibleSHIELD sales are year-over-year in Best Buy, correct?

Randall L. Hales

Yes. I'm sorry, yes. We were basically flat in the quarter year-over-year at Best Buy in the sales of invisibleSHIELD.

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

Okay. And that's -- I guess, you're flat even though you had more SKUs with regards to invisibleSHIELD on the large form factors like the iPad and the Amazon Fire and things like that. So I guess one could assume that perhaps the attach rates on the small form factor, meaning the cellphones, really the Samsung and the iPad or the iPhone, were down. Is that a safe assumption?

Randall L. Hales

I think what really drive that is the fact that we didn't have a new device launch at Apple or at Best Buy. There's no new iPad like we saw last year in that first quarter. And I think that's really what is driving this.

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

Okay. And then just a quick question, the HZO, do you have any idea on what the value has been banter around with regards to the raise. Obviously, you passed on? It seemed you kind of know what the value is. So just a sense, that would be helpful.

Randall L. Hales

Yes, it's an up-round, but we can't disclose that. That was in the documents. They don't want that information out there. So we can say it was an up-round from the last rounds that were raised with HZO.

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

Okay, great. And with regards to that, I'm just going to talk a little bit more about gross margins. You have the $1 million charge, and I know that the mix was certainly still moving against you, but still you had a pretty big percentage of invisibleSHIELD. So was there some degradation in the margin of invisibleSHIELD?

Randall L. Hales

No. We haven't had any pricing pressure related to the invisibleSHIELD. So it really was a function of the mix. I mean, that was substantial. I mean, in my comments I talked about, we went from 19% to 35% on keyboards with inherently a lower gross margin contribution, that coupled without the new device. Typically, when there's a new device launch, we have a really strong load-in order of invisibleSHIELD product, which is very accretive to our gross margin. So mix is the biggest issue there, but there hasn't been any pricing pressure.

Operator

[Technical Difficulty] Our next question comes from Jon Hickman of Ladenburg.

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

Brandon, can you talk a little bit about your operating expenses for the year? Last year, they were like $75 million. What kind of growth rate would you expect on that going forward here?

Brandon T. O'Brien

Well, we've modeled our operating expenses out, still pretty flat with last year, not a lot of increase on operating expenses, Jon. So we are planning to get leverage out of that as we grow the top line. We still think we'll get some leverage there. We've got a fairly fixed model in place. And so there's not a lot of variable cost. And so it should be fairly consistent.

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

Okay. So you think pretty flat going forward? Okay. And then I wanted to also ask you about the buyback program. You said you had $4 million left, so are you going to continue to do that through the next quarter or so until that's gone?

Brandon T. O'Brien

Yes. So we do have $4 million that's authorized. We will be opportunistic on those repurchases, work closely with our board to authorize the next tranche to go out and purchase that. So we're going to kind of see how the market plays out, and then consult with the board and execute as we see fit.

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

Okay. And my last question is on your operating expense line or your interest expense line. I had that number at about twice what it came in at around $500,000 instead of $225 million. Going forward, was there some anomaly there? Or is that going to be your expense going forward?

Brandon T. O'Brien

Yes, there wasn't. I mean, we didn't refinance that debt last year, and the effective rate we've been paying for the quarter was about 1.65%. And so that's -- obviously, it's based off of LIBOR, so it has the possibility to move. But as I spoke in my remarks, we did pay down on the line of credit on April 1. We did make a payment against the term loan, so borrowing any drastic changes in LIBOR, I think that will be indicative of what we would expect.

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

Okay. And your expectations for cash flow positive operations for the remainder of the year?

Brandon T. O'Brien

For the year, like last year, it can get lumpy from quarter-to-quarter depending on the schedule we have for new product launches. As Randy alluded to, we're looking to launch the caliber advantage at the latter part of next quarter. So the second quarter typically is the quarter if we are a net user of cash, that would come through. So it really depends on the timing of those. But for the entire year, definitely, we will be generating some strong cash flow.

Operator

Our next question comes from Paul Coster of JPMorgan.

Paul Coster - JP Morgan Chase & Co, Research Division

The first one is on gross margins, Randy, you talked about. So I think the gross margin's going to mid to low 40s this year. Is that immediately or is that sort of full year? Or can you sort of shape how the recovery takes place?

Brandon T. O'Brien

Yes. That's a full-year estimate.

Paul Coster - JP Morgan Chase & Co, Research Division

That includes the margins in this first quarter?

Brandon T. O'Brien

Yes it does.

Paul Coster - JP Morgan Chase & Co, Research Division

Okay. And there's a lot of inventory from a seasonal perspective. Usually, it dips in the first quarter, but not -- but it hasn't this year. So what's in inventory? And is it atypical or is it something to the product launch?

Brandon T. O'Brien

Well, it does have to do with product launches, the timing of when we're giving our keyboards in. We have made the transition to try and get more product on the ocean, so we're getting bigger shipments as they come in to stage for our customers. And we look closely at those inventory levels, and if we identify problem skews, slow-moving skews, then we'll reserve against those. That has been our normal course of business for the last few years. And so we'll continue to do that. I'm not concerned with the levels of inventory that we have right now, Paul. I think we're in a good spot.

Paul Coster - JP Morgan Chase & Co, Research Division

The guidance that you're issuing for the year, Randy, does it include the gaming controllers or is that kind of upside?

Randall L. Hales

Yes, still primarily upside, Paul. The gaming controller, we're probably more encouraged by our progress at this point in time than we have been. It's a very complicated launch, bringing software companies together with the retailers and all coming together for this launch. It's kind of a chicken-and-egg scenario. The software-titled companies want retail distribution. The retailers want all the great titles. And so we're orchestrating all of that to come together for the launch. And it's complicated, but we've got a good head of steam right now. Like I've mentioned during my remarks, we've got 28 titles already committed for our launch at the end of June. And then we'll continue to build that title library as we move to a retail launch in the third quarter. So more directly to your question, there's a little bit of that built in, but not a lot.

Paul Coster - JP Morgan Chase & Co, Research Division

The change to the year was it sort feels like it's really happened quite recently. I mean, I realize this is the first time you've been through year-end in this seasonal period as CEO. So -- and obviously, that counts as something here. But it does sound like this really recent, this discovery of this sort of poor execution of the change in the channel management. Can you just sort of talk to us about when you discovered this and what do you think went wrong in terms of kind of capturing this earlier?

Randall L. Hales

Yes. Yes, you're not wrong, in that it did surface fairly late. We got through January. January looked like it was down just a little bit, but nothing significant. And then we didn't have visibility into February until mid-March. So it was really after mid-March when we had a glance at February results. And then March came in challenging also that we had to really start looking deeply into what was going on and what was causing the shortfall. And as we looked back into this distribution handoff, the good news is the goal was to get our pricing management through the channels, corrected and we're well on our way there. In fact, several of our customers have commented that, that change is taking place rather quickly. The challenge is that the new distribution onboarding process has taken longer. They're very large companies relative to the distributors that we've had in our product lines. And so it's taken longer to educate the sales force, longer to get them going and longer for us to get them up to speed the way they need to be.

Operator

[Operator Instructions] Our next question comes from Mike Latimore of Northland Securities.

Ryan Macdonald

This is Ryan MacDonald on for Mike Latimore. The first couple of questions is surrounding iFrogz. Could you provide a percentage of revenue that iFrogz contributed? I know you talked about consolidating the 2, so I'm not sure if you still give that. And then also if you could provide a little bit more color or detail around, you talked about some sales opportunities missed, particularly with iFrogz. I mean, can you quantify at all how much that took out of the quarter in revenue?

Brandon T. O'Brien

Yes. Let me mac up, Ryan, the first part of your question. We have forecast iFrogz on a total annual basis to represent anywhere between 25% and 30% of our total revenue. And we see that brand gaining some strength certainly from the first quarter on out. We've got some great products going into that brand this year with our caliber gaming products, as well as the Animatones line for children, which is growing. And the themes that we saw happen in the first quarter were in the personal audio portion of our iFrogz sales. We lost a couple of pegs at some key retailers. We also gained a couple of key pegs at some key retailers that will come on a little bit later in the year and offset some of that. But that personal audio category is a very challenging one. It's very trend-driven, and one that moves very quickly. So we're constantly reinventing ourselves, and we're just in one of those cycles where we gave up some SKUs, pick up some SKUs that come on later in the season.

Ryan Macdonald

And then just surrounding the gaming launch, you mentioned that the retail launch will be sometime in third quarter. Do you -- how many retailers is that planned for?

Randall L. Hales

We haven't disclosed any of that because we've been working confidentially with all of them. But if you look out through the landscape of who currently is in the gaming business in one way or another, whether it's software titles or controllers, et cetera, you can be assured that we've talked to all of them. And the reception has been very positive.

Ryan Macdonald

Okay. And then just a final question. So what do you feel is the -- would be for second quarter here, the key drivers for that revenue? I mean, are you expecting material revenues from the online launch of the gaming at all?

Randall L. Hales

I think that will build in time. I wouldn't call it material. It's really more about messaging when we launch online, letting the gaming community know that it's out there, recruiting some of the early adopters, getting some buzz started around the product, but really just send the message that we are in the gaming business. We've got these titles moving forward. You can watch for this in retail in the third quarter, and that it's kind of our coming-out party. So it will serve more as a platform to introduce that we're in the gaming environment now.

Operator

Our next question comes from Dave King of Roth Capital Partners.

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

I guess just as you think about the -- or as you've kind of laid out your guidance for the remainder of the year or for the year, it kind of implies high single-digit growth if you back into it for the final 3 quarters. I guess as you think about that and what's incorporated into that, it sounds like you've got new distribution that should come on to kind of offset some of the poorer price distribution that you had. Before, it sounds like that's larger. It also sounds like there's the keyboards, and then also invisibleSHIELD extreme revamp, some of that kind of stuff. It sounds like some stuff from iFrogz from some of the changes you made there, and then also just from a cyclical nature that you described, Randy, but then also just device launches. As you think about those things, what do you think's going to be the primary driver of where that revenue growth comes from? Is it really tied most to the device launches? Or is it some of this -- and those other things are just lesser on importance? Or is it all of the above? Just help me out.

Randall L. Hales

Yes. If you go back to some comments we've made the last, well, couple of months ago in our last call, we talked about the drivers being based on 3 things. We said 50% to 60% of our revenue growth would come from SKU expansion at existing retailers that we're doing business with. We still feel very good about that, and you'll see that happen more definitively as we move through the year. And we also said that 20% to 25% of our growth would come from entirely new retail relationships, and those are advancing, albeit a little more slowly than we had also anticipated, and then 20% to 25% of our growth from new products. And we feel very confident with that number. We don't release these numbers other than in kind of a range. But I can tell you that our new product revenue outpaced our projection so far year-to-date.

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

Okay. So then it's fair -- so is it fair to say then that really where the kind of shortfall then fell in the first quarter was on just the fact that there was nothing in terms of a new device launch?

Randall L. Hales

That, yes, in part, because we did build a little bit in the first quarter of last year for the iPad 3 launch. And even though it launched in April, early April, we were shipping products in the end of the first quarter last year. But the real challenge was, as we've talked about, the falloff in the iFrogz audio and the slower onboarding process of our new distributors combining to keep us from performing where we wanted to.

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

Okay. And then you can -- and you expect those things to generally be resolved as we look forward to the balance of the year?

Randall L. Hales

We do. The distribution relationships will strengthen. Those teams will become more familiar with their products. And the iFrogz, as we mentioned, has picked up some pretty significant SKUs where we lost some in the first quarter.

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

Okay. And then in terms of device launches, are there any that you see out there that should be a bigger beneficiary to this, provide a bigger benefit than others upcoming?

Randall L. Hales

I think our -- yes, definitely, our landmark launch this year is going to be the caliber gaming product line. Although I talked a little bit, too, about our next generation of keyboards. They are just fantastic. We're anxious to get those into retail. We've had several retailers that have seen it, have seen the product and have already committed to it. And we believe those will be nice drivers for us through the balance of the year. And then we've got, as we talked about it in an earlier call, an entry into power management that will come late in the year that we're also having some hope for.

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

Yes. Sorry, I meant more in terms of device launches from whether it'd be Samsung or anything out there that you see coming in terms of the market that could drive it?

Randall L. Hales

Yes. I'm sorry, I missed that. Well, Apple announced last week that they're pushing all of their device launches late into the year. And unfortunately, that's a significant hit to us. We've been the beneficiary of 2 or 3 consistent launches for the last 3 years spread out during the year, and those have provided great lift for us. So without that, that's a bit of a challenge to recover from not having those. The Samsung Galaxy 4 launched recently, and we had some nice sell-in, in the month of April for that. But to date, nobody has had the kind of device launches that has spiked demand for our products the way that Apple has.

Operator

At this time, I'd like to turn the call back over to CEO, Randall Hayes, for any closing remarks. Sir?

Randall L. Hales

Yes. Thank you. We just want to thank everybody who have joined us for the call today, and for your continued support of ZAGG. And we will continue to do what we need to do and become better operators, and drive these new products through channels and bring our distributors up to levels of performance that get us back on track. So again, thank you for your interest, and we'll talk to you in July.

Operator

Thank you, Mr. Hales, and thank you, ladies and gentlemen, for your participation. That does conclude ZAGG Inc's. First Quarter Earnings Conference Call. You may disconnect your lines at this time. Have a great day.

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