ZAGG's CEO Discusses Q4 2013 Results - Earnings Call Transcript

| About: ZAGG Inc (ZAGG)

Start Time: 17:07

End Time: 17:52


Q4 2013 Earnings Conference Call

February 25, 2014 05:00 PM ET


Randall L. Hales - CEO and President

Brandon T. O'Brien - CFO

Kimberly Rogers- IR, Genesis Select


David King - Roth Capital Partners

Michael Malouf - Craig-Hallum Capital

Ryan MacDonald - Northland Capital Markets

Jon Hickman - Ladenburg Thalmann & Co.


Good day, ladies and gentlemen and welcome to ZAGG Incorporated Fourth Quarter 2013 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct the question-and-answer session and instructions will be given at that time. (Operator Instructions) As a reminder, this conference call may be recorded.

I’d now like to turn the conference over to Ms. Kim Rogers, with Genesis Select, Investor Relations for ZAGG Incorporated. Ma'am, you may begin.

Kimberly Rogers

Thank you. Good afternoon, ladies and gentlemen, and thank you for joining us today on the ZAGG Inc. fourth quarter 2013 earnings 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 earnings press release that went out after the close of market today. 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 webpage under Events for one-year.

Before we begin, we'd like to remind everyone that the prepared remarks contain certain forward-looking statements, and that management may make additional forward-looking statements in response to your questions today. 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. For a more detailed discussion on the factors that can cause actual results to differ materially from those projected in any forward-looking statements, we refer 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 Security and Exchange Commission. ZAGG assumes no obligation to revise any forward-looking statements that may be made in today's release or call.

Please note that on the call today, in addition to discussing the GAAP financial results and the outlook for the Company, the following pro forma financial measures will be discussed as well: adjusted EBITDA and pro forma net income. 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. Good morning or good afternoon, everyone, and thank you for joining us today. I want to begin my comments by addressing some key developments that we identified in a press release that went out concurrent with our earnings release this afternoon.

After carrying as much as $70 million in debt over the past several years, we have now paid it off. This has been accomplished as a result of strong cash generation and a focus on aim down the debt. We are now able to carefully consider our terms of uses for the cash that we’re generating.

Today we announced that the Board has approved another round of stock repurchases in the amount of $10 million. Our strong operating cash flow and improved balance sheet enables us to repurchase shares at attractive prices that will be accretive to earnings per share. Also, the class action lawsuit that was initiated at the time of our former CEO’s departure was dismissed early this month.

As you know 2013 was a reset year in which something has worked well and some things didn’t. It was clearly a tough year. We are still in a period of revenue compression that we anticipate will continue during the first half of 2014 causing sales to be lower on a year-over-year basis in the first and second quarters.

However, we believe we're addressing the root causes of the revenue decline at the end of 2014 will be a year where we see stabilization with annual sales ending flat to slightly up. That will be accomplished by a return to low double-digit growth in the second half of the year, with that momentum carrying us into 2015.

We will continue to experience some margin erosion associated with the ongoing shift in product mix with less dependence on the high gross margin invisibleSHIELD and the clean-up of some inventory issues we have discussed previously.

We're fine tuning our turnaround strategy and we have already made significant changes in sales, product management, product development, marketing, distribution, operations, customer service and key leadership roles. Fortunately we have managed costs carefully in 2013 and implemented several new disciplines that are proving to service us well.

Growth will require investment of capital and talent and the promotion of our key strategies going forward. This year at CES, we introduced several new products and product line extensions supported by new packaging and brand positioning that brings additional clarity and simplification to our brand identities.

When we talk about product strategies in 2014, it is with an emphasis on winning share strategically in each of the product categories that we participate. Winning share strategically will be fuelled by product leadership and in some category supported by investing and merchandising on promotion.

It starts with the renewed focus on making sure we have the right products in each of our product categories and fine tuning our launch methodology. First, we are moving to semi annual product launch cycles to correspond well with our retailer resets, which will allow our sales team to be in front of our customers much earlier in the selling cycle.

To further support our product initiatives, we are creating a virtual product supermarket where our teams can -- where our sales team rather can gather information quickly and easily to build customizable product offerings by category, by model, by SKU and price positioning, fully supported with merchandising and promotional strategies, marketing collateral and media content. All of that combines to create programs tailored specifically for each of our retail customer’s unique needs.

In addition, we have greatly simplified our brand identities to reduce market confusion and create higher value propositions with our customers. Our largest and most mature product category is screened protection. And although the invisibleSHIELD remains the clear market leader, our revenues in the category declined in 2013. To address this, we are implementing changes in the product line that we believe will improve both the point of sale and end user experience.

By midyear we will be promoting a simplified product offering that will include our bestselling original film, a new film currently in the final stages of development and the first invisibleSHIELD glass screen protector. With the latter two products incorporating new technologies, greatly simplifies installation. The new film will provide the highest combined clarity and unparalleled self-healing scratch resistance and break protection.

We anticipate the screen protection category is stabilizing in the second half of 2014 and return in to growth in 2015 as our new product offering and the invisibleSHIELD On Demand system is introduced into the market. Our invisibleSHIELD On Demand program has created lots of industry buzz and caused us to experience record traffic during the CES Show.

The advantage of the invisibleSHIELD On Demand program is its ability to quickly produce screen protection for virtually any device thus capturing the estimated 20% to 30% of customers that are currently turned away due to retailers and kiosks not carrying a package screen protector for their device. It also allows us to ensure that invisibleSHIELD can be made available on the day of launch for all new devices.

We are currently alpha testing the invisibleSHIELD On Demand system in select retail locations and at some of our kiosks. Early in the second quarter, we will move into a beta testing phase with an expanded footprint and introduction of our new film, assuming the beta test goes well, we plan to roll out to key strategic retailers in the third quarter.

2014 will be a year in which we make significant advancements in our keyboarding products designed to position us to win share strategically. We have introduced two new keyboards since CES. One for the Samsung 12.2 inch Pro and our new ZAGG Auto Kit that more broadly addresses the android market.

We'll also introduce several new technologies and unique product features into our keyboard line up this year. We are building on momentum gain at the end of 2013 and anticipate mobile keyboarding to continue to be a growth category for us.

With regard to personal audio, we experienced a decline due to distribution losses in 2013. We're addressing this concern by simplifying and bringing focus to our product offering that will include a good, better, best assortment supported by improved brand positioning.

Despite some of the 2013 setbacks, NPD data indicates that the iFrogz audio line is one of the top five audio brands in the United States. Specifically, the plugs ear bud is the number one selling personal audio SKU by unit volume. The Toxix is the number one selling headphone under $15, while the Luxe is the number two performing ear bud between $15 and $25. It is our intention to leverage these successes in personal audio along with our improved product offering to capture new business in 2014.

In portable audio, CES was a platform for the introduction of our groundbreaking new portable audio products. The iFrogz Tadpole is a key-fob sized, ultra portable Bluetooth speaker designed strategically to open distribution in price sensitive retail channels. The reception of this product in all channels of distribution has exceeded our expectations. This product demonstrates how our focus on introducing creative product solutions will drive market success and open doors that allows us to win market share.

2013 was a year in which we had difficulty differentiating the iFrogz branded cases from the flood of opening price point products in a category with little to no barriers in trade. We are in the process of rolling out our 2014 strategy that includes highly focused product offerings designed to leverage the strength of all three of our brands and builds on a platform of protection and technology. Our goal is to stabilize our case business this year.

The category of power management is one in which we are enthusiastic about the opportunities for growth. The need for great power management tools is constantly increasing. For 2014, we had simplified the iFrogz offering and building on the momentum of the GoLite series, which is targeted toward a female demographic.

The ZAGG power management line will be expanded to offer a complete line of tools that address the needs of professionals from sun up to sun down at home, in the office and while traveling. Once again, our product positioning and differentiation is designed to lay a foundation in which we can win share strategically.

Mobile gaming is an emerging category that we have been talking about for a while now. The category in general has taken longer to get off the ground than anyone in the industry would have anticipated. We believe the sluggish start is a reflection of limited software content and slower than anticipated adoption of mobile gaming.

At this time, it doesn't make sense for us to put retailers in SKUs that will underperform due to the fact that the underlying demand isn’t there yet. We are closely watching this market and we will enter at the time when we see convergence of gaming content and consumer adoption of mobile gaming.

In the meantime, we continue to refine our products and launch strategies by observing our competitors and closely monitoring consumer feedback on the products that have been introduced. Product is the cornerstone of our strategic objectives and we will focus a great deal of our resources on delivering the right products, supported by investment and promotion and merchandising in 2014. This year we look to grow keyboard, personal audio and power management, while stabilizing the screen protection and case categories.

With regard to new products opportunities, we don’t suffer from a shortage of great ideas, just resources. So we will continue to prioritize and advance the best concepts that will allow us to win share strategically and return to growth in the second half of 2014.

Merchandising at retail and leveraging promotional activities will further support our products while strengthening our brands this year. Market research conducted late in 2013 revealed that there was confusion about ZAGG’s overall brand strategy with both our retailers and the consumers at point of sale. That information guided our efforts to more clearly define our brands and better align products with the appropriate brand.

At CES, we introduced updated packaging that supports the brand positioning and helps eliminate marketplace confusion. To help you understand how we’re positioning our three brands, ZAGG is our work hard professional brand that brings technology and accessories together, while iFrogz is our play hard, colorful trend driven brand and invisibleSHIELD has become synonymous with protection.

Having clearly defined brand identities is helping to ensure we assign the right products to the right brands and better align with our distribution, all of which combines to position us to win market share.

Turning now to distribution. When I took over the sales leadership at the end of 2013, I challenged our selling organization to focus on securing new distribution that we will be announcing as contracts are finalized in the coming months.

I also engaged a consulting group that has expertise in revenue acceleration. They conducted extensive research and presented a set of macro recommendations. For example, their research indicated that although we have unique products, they are not differentiated to the consumer at the point of sale. This led to our initiatives to increase our investment in merchandising and promotional activities in 2014.

In addition, they suggested that we needed to segment our customers into groups in which we could offer custom service levels that better align with their specific needs. We’ve now established five customer groups with unique service commitments for each one. They also suggested two parallel strategies for driving both short-term and longer-term revenue growth.

Without going into detail and revealing competitive initiatives, it is important that you know we’ve already began executing against those recommendations. All of this is designed to help us stabilize the business and build the platform for a return to growth later in the year.

In our domestic distribution we added several sales managers with experience in the new channels we’re targeting. We are very close to announcing the addition of an EVP of Sales to lead our entire global sales organization. Internationally we now have sales managers on the ground in Germany, France and the U.K. We have also added a sales manager with a focus on Latin America.

Up to now our e-commerce strategy has been largely focused on driving business to our own website. This narrow focus worked well for us during our rapid expansion years, but its now time to broaden our overall online strategy and develop deeper relationships with key online retailers and the .com divisions of our brick and mortar customers.

During 2014, we will be aggregating content and disseminating that through the e-commerce channel with a managed e-commerce strategy, we anticipate driving top line growth. We expect the last few months launching several operational initiatives that will allow us to have improved internal processes and reporting.

This spring we are transitioning to our order fulfillment or we’re transitioning our order fulfillment and distribution to RR Donnelley to improve and reduce costs across our logistics functions. RR Donnelley will provide us with more centralized distribution, more economical freight lane access, improved inventory management, and higher service levels for our customers. This significant improvement in our supply chain management is essential to our strategy to win market share and support our future growth plans.

Consistent with what we’ve said over the past few months, we look to stabilize the business in the first half of 2014 and return to growth in the second half of the year. Our focus is on winning share strategically with the right product and brand positioning and with increased investment in the distribution channel. By executing on our sales initiatives, we anticipate same growth with our existing customers and gaining distribution in new channels.

We have no plans to make large acquisitions, but we are always looking for small bolt-on opportunities where we can leverage our brand and distribution to bring creative product solutions to the market.

At this time, I’d like to turn the call over to Brandon, who will talk about the financial results in detail and discuss the guidance for 2014. Brandon?

Brandon T. O'Brien

Thank you, Randy. And thank you for joining us today to review our fourth quarter 2013, financial results. As stated in today's release, we will be disclosing consolidated financial results reflecting our primary operations in the United States, as well as our operations from ZAGG International, our wholly-owned subsidiary operating in Shannon, Ireland.

In the call today, I will speak only to consolidated results, unless otherwise stated. The financial statements provided in today's release reflect Q4 and full-year 2013 financial details, so you may refer to them for further clarifications.

Net sales for the quarter were $66.8 million versus $87.5 million in the prior year quarter, representing a year-over-year decline of approximately 24%. The decline in our net sales versus last year was due to a decrease in sales in most of our product categories. We experienced competitive pressures from other protection products for the invisibleSHIELD product line, primarily from rugged cases that includes screen protection as part of their product offering, strong competition from tablet keyboard manufacturers and lost retail distribution for some of our iFrogz audio and case lines.

The breakdown for the source of the net sales is as follows. For the quarter, 86% of our sales came from our retail channel versus 82% in the same period last year. 8% of sales were from and versus 13% in the same quarter last year, and 6% for some of the kiosks and standalone stores versus 5% in the same quarter last year. International sales accounted for 10% of total net sales in the quarter versus 13% in the same quarter last year.

For the fourth quarter, 40% of net sales came from the invisibleSHIELD product line versus 43% in the same quarter of last year. Keyboards represented 30% of our net sales compared to 28% in the same quarter last year.

Gross profit for the quarter was $24.5 million versus $38.6 million in the same quarter last year, which translates into gross margins for the quarter of 36.7% versus 44.1% for the prior year period. Gross margins were impacted in the quarter by airfreight to support demand for our keyboard products for the iPad Air. Product mix with lower invisibleSHIELD sales, some discounting on older model keyboards and sales to retail discounters for older inventory.

In the fourth quarter we made a brand strategy decision to brand the line of gamming controllers as ZAGG products rather than under the iFrogz brand as was originally planned. As a result it was determined that future cash flows under the iFrogz trademark would be less than previously estimated.

During the quarter management performed an annual impairment test of the goodwill and intangible assets required under generally accepted accounting principals. As a result of the analysis we recorded $11.2 million non-cash impairment charge in the fourth quarter. $9.7 million related to the iFrogz brand and the remaining balance of goodwill of $1.5 million was also impaired.

We did not completely impair the iFrogz trademark as we expect to continue to generate meaningful cash flows under the iFrogz brand, but we determined that at December 31, 2013 the carrying value was in excess of the fair value which caused us to take the charge during the fourth quarter. The remaining $7 million related to the iFrogz brand has been determined to be a definite-lived intangible asset and will be amortized over its remaining useful life of 10 years.

In the fourth quarter of 2012, we took a similar charge. However this year the charge is more impactful to our operating margin due to the decline in sales and gross profit in 2013 compared to 2012. Operating loss in the quarter was $2.9 million versus operating income of $5.3 million in the same period last year. Operating margins for the quarter were negative 4.4% compared to 6% for the same period last year. Operating income net of the non-cash impairment charge was $8.3 million or 12.5%. We also incurred $1 million in non-cash stock compensation expense during the quarter compared to $1.1 million in the same quarter of last year.

For the year, our effective tax rate came in at 43.5%. The rate was driven up due to the non-deductible expenses related to our percentage recognition of loses in investment in HzO. Net loss in the quarter came in at $2 million versus net income of $0.2 million in the same quarter in the prior-year. Our fully diluted share count for the quarter was 31,358,225 shares.

Total shares issued and outstanding at December 31, 2013 were 30,574,513. At December 31, 2013 we had 438,797 outstanding options, 390,000 outstanding warrants and 356,819 outstanding restricted stock brands. We use the treachery method in calculating our diluted shares outstanding.

Our fully diluted loss per share was $0.07 for the quarter versus fully diluted earnings per share of $0.01 in the same period last year. During the fourth quarter we incurred the following non-cash charges which we have tax-affected assuming a statutory rate of 38.5% in the calculation of pro forma EPS. First the $11.2 million or $0.23 related to the impairment of goodwill and intangibles. $1 million or $0.02 related to the stock based compensation and $2.5 million or $0.05 related to amortization of intangible assets.

The non-cash charges totaled $14.7 million or $0.30 per share of the non-cash charges recorded in the quarter, the $11.2 million impairment of goodwill and intangibles is a non-recurring charge. Adjusted EBITDA for the quarter came in at $12.3 million compared to $20.9 million for the fourth quarter of 2012.

Turing to the balance sheet. Working capital at the end of the quarter was $83.4 million, compared to working capital of $89.4 million on December 31, 2012. We reported the cash balance of $15 million. For the fourth quarter we generated over $9 million in operating cash flow and for the entire year we generated over $35 million in cash flow from operations. The balance on the line of credit was $17.5 million and the term loan balance was paid up in it's entirety as of the end of the year. We drew down on the line of credit in the fourth quarter to payoff the long-term note.

As noted in the press release that went out today we have subsequently paid the line of credit balance down to zero. Accounts receivable for the quarter were $46.6 million as compared to $54.6 million on December 31, 2012. DSOs in the quarter were 64 compared to 57 for the quarter ended December 31, 2012.

Inventories for the quarter were $44.5 million compared to $40 million on December 31, 2012. We have budgeted some impact on our gross margin as we work through excess levels of inventory during 2014. We continue to evaluate inventory on a monthly basis and reserve against slow moving inventory as needed.

We are pleased with the progress that the team at HzO is making in giving the HzO technology incorporated in several wearable devices and smartphones during 2013. We continue to own approximately 15% of HzO. In the press release that went out this afternoon we introduced guidance for 2014.

We anticipate the results of our domestic and international sales initiatives, the opportunity for our new products with upcoming resets at our large domestic retailers and the potential expansion of our overall distribution channel to have a positive impact on quarterly revenues in the second half of 2014. Most of these initiatives are just getting underway and therefore the compression in that sale’s we experienced during 2013 will likely continue in the first half of the year. Therefore we are forecasting modest growth in that sale’s for 2014 with guidance for net sales in a range of $218 million to $228 million and adjusted EBITDA in the range of $32 million to $34 million. We are also forecasting annual gross margins in the mid-to-high 30s for the full-year.

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

Randall L. Hales

Thank you, Brandon. At this time we’ll turn the call over to the operator for the Q&A.

Question-and-Answer Session


Thank you. (Operator Instructions) Our first question comes from Dave King from Roth Capital. Your line is open, please go ahead.

David King - Roth Capital Partners

Hi, good afternoon guys.

Brandon T. O'Brien

Hi, Dave.

David King - Roth Capital Partners

I appreciate all the color first off on some of the initiatives you have implemented. I guess my main questions have to do with the guidance. In terms of that, if I heard you correctly, I think you guys are kind of guiding to a low double digit increase in the back half of the year, if that is the case then, how should we think about the first half if I kind of look at my model here, I am coming up with kind of a high single digit decline, is that the right way to think about it? And then in terms of that back half, it sounds like some of that’s due to some of the initiatives on keyboard side, power, personal audio, which of those do you think are going to be the biggest buckets of those, I mean I guess I’ll just stop there for now.

Randall L. Hales

Yes, let me address the back half of the question first. When you look at the product categories and the opportunity potential for growth keyboard would be the most significant. And then, I would also say, the things driving the growth in the second half of year is the traction that we’re going to see start coming together on the sales initiatives as well, not just the product categories. In the first half of your question, you’re right, low double digit growth in the back half of the year and that slowed down in Q1 or Q2 from a year-over-year perspective.

David King - Roth Capital Partners

Okay, so in the first half down low single digit is probably a fair way of looking at it, so a slower decline than what we have seen recently?

Randall L. Hales

I think that -- yes, I would say low single digit to low double digit kind of in that rage, yes.

David King - Roth Capital Partners

Okay, that helps. And then in terms of the EBITDA guidance for ’14 it looks like there you guys are still guiding to a decline even with 1% to 4% growth on the top line. Is that mainly on the gross margin side, how should we think about the margin and to what extent is that investments on the expense side or how should we think about expenses? Thanks.

Brandon T. O'Brien

Yes, Dave it really is driven a lot from the gross margin decline, I mean some of the impacts we’re expecting in the gross margin are from moving to some of the inventory that we have some excess levels on. And also Randy talked about some of the investment that we’re planning to make. A lot of that investment is going to be in-store displays, and those in-store displays they hit the gross margin line rather than coming below the line. So those are investments that are kind of buried in the gross margin reduction guidance.

David King - Roth Capital Partners

Okay, that helps. And then lastly just one more, and then I’ll step back. In terms of the buy back that you announced it's very encouraging, I guess how should we think about the pace of that and what's your appetite with the stock where it's trading these days and the first quarter being I think typically your strongest kind of cash generation quarter. How should we think about the buy back?

Brandon T. O'Brien

Yes, now so that the board was very open to the $10 million stock buy back, we feel like now is a good time to start taking advantage of that and so once we get into a trading period which opens here shortly we’ll begin to execute against that and then we’ll take some of that down and reevaluate with the board and determine what next levels they want to move to. So we’re definitely very open at these stock prices to be in the market and be executing on that repurchase program.

David King - Roth Capital Partners

That’s fantastic. Thank you.


Thank you. And our next question comes from Mike Malouf from Craig-Hallum Capital. Your line is open, please go ahead.

Michael Malouf - Craig-Hallum Capital

Great. Thank you guy’s for taking my questions.

Brandon T. O'Brien

Yes, thanks Mike.

Michael Malouf - Craig-Hallum Capital

So if I could just dive a little bit more into the inventory, can you give us a sense of, and maybe I missed this, but finished goods a percentage of that inventory and how you think that will go down over the next few quarters. Where would you like -- where would you like it to come out for you guys? And then sort of a related question with regards to gross margins, how much of the gross margin pressure is related to the inventory decline that we’re going to go through obvious the rationalization, and where do you think at the end of the year -- and what’s sort of a substantial gross margin to think over the next and maybe if we look out into the next year or so?

Brandon T. O'Brien

Yes, I’ll take the first part of your question there, the break on an inventory is we have about 92% of that inventory is finished goods, so a lot of that is driven from products that we source in China, have long lead times and have to bring that product over in anticipation of demand. We have got a lot of that inventory, so we are working to move that through a few different channels. We’re looking to move that through discount retailers also some online offerings and we can also use that as an opportunity to get into some new retailers where we don’t have penetration yet and give them some good buys on those inventory levels. So, if you’re looking at it and if you’re at it for turns we think we need to get our turns up closer to7, 8 I don’t think we’ll get there in fast order, but we definitely have internal goals. Yes, I think it's important to highlight Mike that most of the employees here at the company have compensation that is tied to inventory turns. So we recognized the importance of getting these inventory levels down and that is the key focus for us going forward in 2014.

Randall L. Hales

And Mike I think regarding your question about gross margins longer term, we’re sharing with you in the guidance what we can see clearly, but I think it's a natural conclusion to drive that invisibleSHIELD becomes a smaller percent of our overall sales and we continue to spend in the advancement of the brand, in the merchandizing, in the promotion and become more aggressive on that front. But there’s likely to be gross margin compression how much, how far, how fast we couldn’t say yet. So the real opportunity for us, and the thing that we need to do is to get that top line moving again.

Michael Malouf - Craig-Hallum Capital

And let me ask just a different way, if you had inventories currently at a nice tight level, let’s call it, that7, 8 turns level, what do you think gross margins in 2014 would be?

Brandon T. O'Brien

We’ve guided from the mid-to-high 30s this year. I think we would confidently say closer to the high 30s.

Michael Malouf - Craig-Hallum Capital

Okay, great. And then if I could just get a little bit more clarity on the invisibleSHIELD competitive environment. I know you’re coming out with a couple of new exciting products, but how do you feel the consumer is reacting to screen protection, are they deciding that they don’t need it anymore, have you done some work surrounding the overall demand for screen protection. I remember for years since I got for years, that the competitive threats on the Gorilla Glass and now we hear that some people are looking at Sapphire. I’m just wondering if you’re seeing a demand fall off or is it really just a replacement with maybe some of these rugged cases. Thanks.

Brandon T. O'Brien

Yes, Mike I think what we experienced last year is really a replacement due to alternative products in a lot of new cases as you mentioned, we know from our market research and everything that we’re seeing in the market that it's actually forecasted to grow as a category, low single digit in 2014. So, there is growth opportunity. I think the other thing that is important to understand we have a very, very high market share at the high end of the spectrum, shield sold at $15 and higher and that is a smaller piece of the overall market than the $10, $15 retail. So, there is some things that we can do to be more competitive and leverage our brand into a larger market than we currently play in most definitely and I would say stay tuned as we started announcing some of our product strategies in a little more detail.

Michael Malouf - Craig-Hallum Capital

Great. Thanks a lot.

Randall L. Hales

Thanks, Mike.


Thank you. Our next question comes from Ryan MacDonald from Northland Capital. Your line is open, please go ahead.

Ryan MacDonald - Northland Capital Markets

Hi, guys. Can you talk about -- I know obviously keyboard’s was obviously expected to be a driver in the second half of the year. Can you talk about how important the partnership with Samsung is to that growth in the product segment and as some of these new Samsung keyboards get launched, I mean how does that rollout in particular to the SMAAP partnership program?

Brandon T. O'Brien

Yes, Ryan we’ve looked hard at that keyboarding category obviously and even through the end of last year we were primarily aligned just with the Apple tablets as you know. Our strategy into 2014 will be to follow the leading manufacturers and their devices all year long, so that includes of course Apple, Samsung and then into the broader Android market with our Auto-Fit keyboard. So there’s a great deal of expansion in our product offering going on right now. We have already a launched two keyboard products designed specifically for Samsung tablets. The most recent one was a product we called the Cover-Fit that works with Samsung’s 12.2 inch pro tablet that was there big unveiling at CES and which generated some new traction for us and opened up some new distribution that we haven't had previously. So, out of the gates we’re feeling good about that Samsung agreement. And we’ll continue to be very active with it.

Ryan MacDonald - Northland Capital Markets

Okay. And can you update us on obviously invisibleSHIELD on demand; it sounds more like a 2015 material driver of revenue. Can you update us on the number of pilots that was going on with the invisibleSHIELD on demand?

Randall L. Hales

Yes, there’s about a dozen right now that we’re running, that will expand quite significantly as we move into our beta testing the first part of April, and then we’ll start to roll it out for about, if everything goes well in the beta test we’ll start to roll it out more broadly in the beginning of the third quarter. I think it's important to keep in mind that we’re not necessarily about promoting the invisibleSHIELD on demand as a program as much as we are making sure the retailers have the right film assortment. And so changing our film assortment, streamlining it, creating some better products introducing the new film and the glass is our first priority. The second priority is to say to those retailers where there is an opportunity for an assisted sale the invisibleSHIELD on demand is a great way to reduce inventory carrying cost and to become more engaged with the consumer at the point of sale. So there’s a lot of key benefits and features of it but it's not our primary driver for bringing new life back into the categories making sure that we have the right film assortment out there and then that’s kind of the icing on the cake in an assisted sale location.

Ryan MacDonald - Northland Capital Markets

And just finally, I mean what are you modeling for tax rate for 2014?

Brandon T. O'Brien

Tax rate, the statutory right around 39% is what we’re modeling and we do have some good strategies in place that could help reduce that, but it's real contingent on growth outside of the U.S. we hope to see some growth, but I think for modeling purposes I’ll keep it at 39%.

Ryan MacDonald - Northland Capital Markets

Okay. Thank you very much.

Brandon T. O'Brien

Thanks, Ryan.


Thank you. (Operator Instructions) Our next question comes from Jon Hickman from Ladenburg. Your line is open, please go ahead sir.

Jon Hickman - Ladenburg Thalmann & Co.

Hi, thanks for taking my question. Could you elaborate a little bit on what's going on with advantage, you’ve re-branded it under the ZAAG brand, but you’re not going to roll it out to retailers, is that what I got out of your comments?

Randall L. Hales

Yes, Jon exactly. We’re taking kind of a wait and see approach with the category right now. We’ve had some early indication that, that market has not matured to a point where it's a viable product on show at least to the level where we feel it's time to launch. Sales have been slow in the category out of the gates, say again I think we need to see more content -- gaming content moved over to the platform, the consumer awareness needs to raise a little bit. This is probably a situation where we want to be leading edge, but not bleeding edge and we feel like the market is still a little bit young.

Jon Hickman - Ladenburg Thalmann & Co.

So, did you get your approval from Apple yet?

Brandon T. O'Brien

We are still in -- you’re talking about the MFi certification and we have not -- we continue to work with them through that process and we’ll continue to do so and anticipate being ready to the launch when we feel like the market is the right time.

Jon Hickman - Ladenburg Thalmann & Co.

Okay. So, I am going to just go back to gross margins here for a second. So, going forward in for the long-term you want us to kind of think about gross margins in maybe upper 30% instead of a lower 40% range. That’s what things are going to be?

Brandon T. O'Brien

Right, yes that’s definitely what we’re seeing for this coming year Jon. A lot of that is driven by the gross margin we’re going to have to take to move some of the excess inventory and also some of the investment in the in-store displays and marketing, which we feel is an investment in the brand and will help to grow that top line of just to the nature of how that marketing flows through the income statement, that is an impact to gross margins as well.

Jon Hickman - Ladenburg Thalmann & Co.

Okay. Just -- so if you -- it sounds to me like that the gross margin issue is primarily -- your other investment categories or your other operational expenses are going to be pretty much where they have been on a percentage basis going forward?

Brandon T. O'Brien


Jon Hickman - Ladenburg Thalmann & Co.

Okay. Thank you. That's it from me.

Brandon T. O'Brien

Thanks, Jon.

Jon Hickman - Ladenburg Thalmann & Co.



Thank you. I'm showing no further questions at this time. I would like to hand the conference back over to Mr. Hales, for closing remarks.

Randall L. Hales

Thank you all for joining us today to discuss our Q4 and full-year 2013 results. We are working hard to return ZAGG to growth as we’ve discussed and we’re focused on improving our shareholder value, with better execution. Our entire team is committed to building on the brand value, expanding our distribution, and continuing to create exceptional products for the mobile device accessories market and we look forward to having you join us in our next earnings call for the updates. Thank you.


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

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