Zagg Inc. (ZAGG) is expected to announce 4th quarter and full year earnings on February 27th. Analysts are expecting $0.19 to $0.21 per share for the 4th quarter. Let's take a look at how they get this estimate.
Zagg announced revised revenue guidance back in December for 2011 of $175 million. This was an increase of $5 million from the revenue guidance given in November in its 3rd quarter earnings release. So this gives us the starting point for forecasting 4th quarter earnings. Zagg had revenues for the 9 months ending September 30, 2011 of $111.7 million. This means it will have revenues of at least $63.3 million for the 4th quarter. iFrogz made up 31% of revenues for the 3rd quarter, so I assumed this ratio will hold for the 4th.
Zagg Sales | 43,371,998 |
iFrogz Sales | 19,976,217 |
Total Sales | 63,348,215 |
Next is coming up with an accurate cost of goods sold. Now, the trick is to estimate iFrogz cost of goods sold. Zagg acquired iFrogz on June 21, 2011. Because of GAAP purchase accounting rules Zagg was required to write-up the value of the acquired iFrogz inventory above its book value. The valuation was $15.12 million. This is about $4.1 million higher than book value. This has caused Zagg's gross margin to be lower for 2011 than we can expect it to be going forward.
At the end of the 3rd quarter the balance of the acquired iFrogz inventory was at $1.8 million. For the 2nd and 3rd quarters this written-up inventory when expensed as COGS was 79% of iFrogz sales. Assuming all of the remaining inventory is sold in the 4th quarter means that of the $19.97 million in iFrogz revenue, $2.3 million of it will be on the remaining acquired inventory (1.83 / .79 = 2.3).
iFrogz 4th Qtr COGS | |
Acquired Inventory Balance | 1,835,360 |
Implied Sales Value | 2,323,241 |
Sales of new inventory | 17,652,977 |
COGS of new inventory | 9,885,667 |
Total Sales | 19,976,217 |
Total COGS | 11,721,027 |
Now we need to estimate the COGS for the remaining $17.6 million in iFrogz revenue. When adjusting for the write-up for the 2nd and 3rd quarters, COGS as a percent of sales for iFrogz was 54.3% and 57.8%, respectively. I assume this ratio to be 56% for the 4th quarter. On an ongoing basis this should be a conservative estimate.
On to estimating COGS for the Zagg branded segment. Zagg's COGS as a percent of revenues excluding iFrogz was 49.4%, 52.6%, and 47.7% for the 1st, 2nd, and 3rd quarters, respectively. I assumed COGS for the 4th quarter to be 49.5%. While the most recent quarters are the most relevant it is worth noting that this ratio was 49.1% for 2010.
1st Qtr | Acquisition | 2nd Qtr | 3rd Qtr | 4th Qtr Est | 2011 | |
iFrogz Sales | 2,346,000 | 14,470,000 | 19,976,217 | 36,792,217 | ||
iFrogz COGS | 1,853,340 | 11,431,300 | 11,721,027 | 25,005,667 | ||
Gross Profit | 492,660 | 3,038,700 | 8,255,190 | 11,786,550 | ||
iFrogz.Inv.Writeup | 579,000 | 3,063,000 | 534,345 | 4,176,345 | ||
iFrogz.True COGS | 1,274,340 | 8,368,300 | 11,186,682 | 20,829,322 | ||
iFrogz.True Gross Profit | 1,071,660 | 6,101,700 | 8,789,535 | 15,962,895 | ||
iFrogz.Acquired.Inv.Balance | 15,120,000 | 13,266,660 | 1,835,360 | |||
Zagg Sales | 26,976,320 | 36,442,465 | 31,417,000 | 43,371,998 | 138,207,783 | |
Zagg COGS | 13,329,740 | 19,174,094 | 14,982,700 | 21,469,139 | 68,955,673 | |
Gross Profit | 13,646,580 | 17,268,371 | 16,434,300 | 21,902,859 | 69,252,110 | |
Combined Sales | 26,976,320 | 38,788,465 | 45,887,000 | 63,348,215 | 175,000,000 | |
Combined COGS | 13,329,740 | 21,027,434 | 26,414,000 | 33,190,166 | 93,961,340 | |
Combined Profit | 13,646,580 | 17,761,031 | 19,473,000 | 30,158,049 | 81,038,660 | |
iFrogz % of Total Sales | 6.0% | 31.5% | 31.5% | 21.0% | ||
Normalized | ||||||
1st Qtr | Acquisition | 2nd Qtr | 3rd Qtr | 4th Qtr | 2011 | |
iFrogz Sales | 100.0% | 100.0% | 100.0% | 100.0% | ||
iFrogz COGS | 79.0% | 79.0% | 58.7% | 68.0% | ||
Gross Profit | 21.0% | 21.0% | 41.3% | 32.0% | ||
iFrogz.Inv.Writeup | 24.7% | 21.2% | 2.7% | 11.4% | ||
iFrogz.True COGS | 54.3% | 57.8% | 56.0% | 56.6% | ||
iFrogz.True Gross Profit | 45.7% | 42.2% | 44.0% | 43.4% | ||
Zagg Sales | 100.0% | 100.0% | 100.0% | 100.0% | 100.0% | |
Zagg COGS | 49.4% | 52.6% | 47.7% | 49.5% | 49.9% | |
Gross Profit | 50.6% | 47.4% | 52.3% | 50.5% | 50.1% | |
Combined Sales | 100.0% | 100.0% | 100.0% | 100.0% | 100.0% | |
Combined COGS | 49.4% | 54.2% | 57.6% | 52.4% | 53.7% | |
Combinded Profit | 50.6% | 45.8% | 42.4% | 47.6% | 46.3% | |
On to operating expenses. Both Advertising and Marketing and Selling, General and Administrative expenses have generally been falling over time as a percent of sales.
This is what one would expect for a company with growing and realizing economies of scale, but it hasn't been an ideal textbook case for Zagg. SG&A averaged 20% of sales for 2010 but this ratio has increased in 2011. A large portion of the increase is due to the iFrogz acquisition. On a going forward basis SG&A will remain above 2010 levels as the acquisition of iFrogz requires significant amortization expense.
While this is not a cash expense it does affect GAAP earnings. Zagg should see further economies of scale as it grows because those amortization costs are fixed and won't grow in proportion to sales. I estimated SG&A at 24.5% and Advertising at 6%. I think a case could easily be made to drop each of these by another 0.50% or more, but it is best to be conservative and positively surprised.
Operating Expense Analysis | |||
1st Qtr | 2nd Qtr | 3rd Qtr | |
Advertising & Marketing | 2,511,816 | 2,615,702 | 2,763,000 |
Selling General & Admin | 6,270,478 | 10,899,351 | 12,096,000 |
Total Operating Expenses | 8,782,294 | 13,515,053 | 14,859,000 |
A & M % of Sales | 9.3% | 6.7% | 6.0% |
SG & A % of Sales | 23.2% | 28.1% | 26.4% |
Operating Exp % of Sales | 32.6% | 34.8% | 32.4% |
iFrogz Acquisition | 1,828,000 | 119,000 | |
Teleportal Note Impairment | 1,071,000 | ||
Adjusted SG & A | 8,952,351 | 10,906,000 | |
Adjusted Operating Exp. | 11,568,053 | 13,669,000 | |
Adj. SG & A % of Sales | 23.1% | 23.8% | |
Adj. Operating Exp % of Sales | 29.8% | 29.8% | |
Well, that is the bulk of the work. I kept interest expense at $1.4 million, the same as the prior period and estimated interest income at $130 thousand as Zagg has been sitting on a large pile of cash. The effective tax assumed was 37%. Net loss attributed to minority holders was put at $145 thousand. And the results are:
Zagg Inc. Earnings Estimate | 4th Qtr 2011 |
Net sales | 63,348,215 |
Cost of sales | 33,190,166 |
Gross profit | 30,158,049 |
Operating expenses: | |
Advertising and marketing | 3,800,893 |
Selling, general and administrative | 15,837,054 |
Total operating expenses | 19,637,947 |
Income (loss) from operations | 10,520,103 |
Other income: | |
Interest expense | (1,400,000) |
Interest and other income | 130,000 |
Total other income (expense) | (1,270,000) |
Income (loss) before taxes | 9,250,103 |
Income tax benefit (provision) | (3,422,538) |
Net income (loss) | 5,827,565 |
Net loss attributable to noncontrolling interest | 145,000 |
Net income attributable to stockholders | 5,972,565 |
Net income (loss) per common share | 0.202 |
Weighted average number of shares outstanding | 29,634,000 |
By my analysis, Zagg appears that it will meet the earnings estimate. This would be a 70% year over year increase in earnings and 172% over the prior quarter. The revenue increase is 117% year over year and 38% over the prior quarter.
While doing this analysis I made some adjustments for one-time charges as they not reflect the economic reality for Zagg as a going concern. As the P/E ratio is the most common valuation measure it will be instructive to look at Zagg's P/E ratio adjusting for the one-time charges.
1st Qtr | 2nd Qtr | 3rd Qtr | 4th Qtr | 2,011 | |
EPS | 0.14 | 0.11 | 0.07 | 0.20 | 0.52 |
Diluted EPS | 0.13 | 0.10 | 0.07 | 0.20 | 0.50 |
Adjusted Diluted EPS | 0.13 | 0.19 | 0.16 | 0.20 | 0.68 |
P/E Ratios - Based on 2011 earnings | |
P/E of Basic EPS | 18.00 |
P/E of Diluted EPS | 18.72 |
P/E of Adjusted Diluted EPS | 13.76 |
Current Price | 9.36 |
Disclosure: I am long ZAGG.
