Kim Rogers-Carrete - Genesis Select
Randy Hales - President and Interim CEO
Robert Pedersen - Founder
Brandon O’Brien - CFO
ZAGG Inc. (ZAGG) Corporate Objectives and Management Updates Call August 28, 2012 4:30 PM ET
Good day, ladies and gentlemen and welcome to the ZAGG conference call. As a reminder, this conference is being recorded. Now, I will turn the conference over to Kim Rogers-Carrete of Genesis Select, Investor Relations firm for ZAGG. Please begin.
Kim Rogers-Carrete - Genesis Select
Good afternoon and thank you for joining us today for the ZAGG Inc. webcast to discuss the company’s ongoing corporate objectives and the strategic direction of the management team. On the call today from the company are Randy Hales, President and Interim Chief Executive Officer along with ZAGG’s Chief Financial Officer, Brandon O’Brien. Also joining us today is Robert Pedersen, founder of ZAGG. This call is being webcast and will be archived at investors.zagg.com for one year.
Before we begin, we would like to remind everyone that the prepared remarks contain certain forward-looking statements and management may make additional forward-looking statements in response to 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 as well as the current report on Form 8-K 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 on today's call. And with that I would now like to turn the call over to Randy Hales, ZAGG's Interim CEO. Randy.
Thank you, Kim and thank you everyone for joining us on today's webcast. The purpose of this call is for Brandon and me to give investors, particularly our retail and individual investors and other interested parties the opportunity to send in questions and for us to address the concerns many of you have expressed surrounding the recent departure of Robert Pedersen, the former CEO and co-founder of ZAGG. Thank you to everyone who’s submitted a question and we'll be addressing your questions after our prepared comments.
In connection with Robert Pedersen's recently reported sales of ZAGG's shares has a result of a margin call, the ZAGG board in counsel with Robert made a mutual decision concerning Robert's ongoing role at ZAGG, but helped this decision upheld the board's priority to protecting shareholder value.
Robert will remain with the company as an executive consultant and will be available to us on an as needed basis. Since we issued the press for this call, we've had a very positive development, a Form 4 which filed today for the block sale that took place on Friday, August 24, in which Robert Pedersen sold 1.2 million shares of ZAGG stock. This sale completely closes out Robert’s margin position and therefore he will no longer be subject to margin cost.
We have Robert here with us today and we will be hearing from him a little later in the call. If you would like additional information around Robert's recent stock sales and departure, I would refer you to the SEC website sec.gov where you will find the Form-4s and the 8-Ks that were recently filed.
First of all, I would like to thank Robert as the co-founder of ZAGG for the many contributions that he has made in building the company to where it is today. Secondly, I would like to assure you that there will be no change in the strategic direction that we implemented earlier this year with regard to product, brand and distribution and the ongoing operations of the company.
Robert and I have enjoyed an excellent working relationship since I joined the team last December as the President and COO. Prior to joining the executive team, I worked closely with Robert as a member of the Board of Directors. Immediately after joining the company Robert and I began working with the ZAGG leadership team to identify and establish corporate objectives that would serve to guide the company and our employees for the foreseeable future.
Once those objectives were established, Robert handed much of the responsibilities for the day-to-day operations over to me and since that time I have worked with our employees, customers, vendors and suppliers to communicate and implement those objectives.
For some time now our key retail relationships had been managed by our Executive Vice President of Sales Derek Smith and his account management team. I have enjoyed spending quite a bit of time traveling with Derek these past eight months getting to know our key customers.
ZAGG has announced standing leadership team in place and our employees are closely aligned with our corporate objectives that support our drive to become a $1 billion company. We believe the company is well positioned for its next phase of development and growth and I am pleased to be working with such a talented, professional and loyal group.
Recently ZAGG strengthened and expanded its bench with the addition of Kent Wuthrich, Executive Vice President of Marketing and [Ben Doddfree] Vice President of Product Management. Earlier this year we significantly enhanced our product focus with the implementation of dedicated product teams. We tasked the product managers with both filling holes in our existing product lines and creating product roadmaps that will serve to guide our new product activity as we continue to introduce creative product solutions.
In addition to managing the existing product categories, our product teams meet regularly to identify new product categories that have the potential to further advance ZAGG as the preferred brand. As a result of this product focus, the company currently enjoys the deepest product pipeline in its history. The Consumer Electronic Show in January of 2013 will represent ZAGG’S best ever new product show.
Not only will we be introducing exciting creative products solutions, but we will also reveal new brand positioning supported by packaging updates and rate designs. In short because of the day-to-day operating transition that has occurred this year between Robert and me and the organizational changes we have made, we believe ZAGG will continue to flourish. With that I would like to allow Robert Pedersen to make a couple of comments. Robert?
Thank you, Randy and good afternoon everyone. I would like to start by saying that I have sincerely enjoyed my time as CEO of ZAGG and as I step aside and let’s my team take over I feel very good about the legacy I have built. As a founder of the company it is important to me that my vision is carried on and I am extremely confident that under the leadership of Randy along with the rest of the ZAGG management team, ZAGG will continue to thrive and grow.
As Randy mentioned as of last Friday, I have sold all the stock in my margin account which means I have no further margin sells. By completely deleveraging my ZAGG stock, I removed the element of uncertainty around future unwanted sells and have taken a step towards building investor confidence in ZAGG.
I look forward to advising Randy and Brandon as well as the ZAGG board in my new role as executive consultant. In addition I look forward to focus some time on HCO where I will continue serving as Chairman of the board as well as spending more time with my family. It's been a pleasure to having the opportunity to speak to all of you again today and with that I would like to hand the call over to Brandon O’Brien. Brandon?
Thank you Robert. Thank you again everyone for joining us today. I would also like to thank those who sent in questions for this call. We’ve looked at all of them and then in the Q&A to follow my comments, Randy and I will address as many as we can.
There were some questions asking for comments and items we typically do not disclose such as breaking at quarterly revenue forecast for instance and so we’ll not be addressing some of your questions, but I think we will hit on most of the questions surrounding Robert’s resignation, the ongoing operations of ZAGG and other related topics.
I would also like to state my appreciation for what Robert has accomplished of ZAGG. As a result of the vision he had when he founded the company, we're now a market leader in an industry that is experiencing tremendous secular growth and with our corporate objectives aligned around products, brand and distribution, we're well positioned to continue growing.
Robert has ingrained an entrepreneurial spirit throughout the company that will forever be a part of our culture. He has mentored us well in focusing on quality products that [fill] our market need and his vision will continue on as we move towards our goal of being a $1 billion company.
I have been with ZAGG since we began trading publicly in 2007 and over that time, I have worked closely with Robert in overseeing our vendor manufacturer supplier and customer relationships.
My tenure with the company brings continuity to all of these relationships. Since Randy joined the Executive team, he and I have worked closely together on a number of fronts such as streamlining the internal reporting of ZAGG and creating dashboard for internal measurements around our strategic objectives.
I feel we have a very experienced and strong team in place to which Robert handed over the day-to-day operating decisions of the business throughout the course of this year.
Our product pipeline is more robust today than it has ever been, as we continue to focus on creative product solutions under capable product development leadership. I am confident we will provide continuality in carrying out the strategic goals of ZAGG. I would like to comment on few issues I feel are of concern to investors.
First, regarding our effective S3 registration statements. The Company has no plans to self stock at the current time particularly at this current price levels. With our ability to generate cash flow from our operations in our existing credit facilities we have no immediate plans to utilize S3. We show to put this stuff in place in order to give the company the maximum flexibility for acquisitions and capital market opportunities.
Most companies of our market cap have a [short] registration in place and we considered it good for a house keeping to have an effective S3 in place. ZAGG is the largest public company in the mobile device accessory sector. And we want to be prepared to take full advantage of that standing to maintain and expand our market share.
Second, we raised the range for adjusted EBITDA guidance in our Q2 earnings call to $56 million to $61 million for 2012 but they are seems to be concerned around the implied guidance for the second half of the year.
Our new guidance was based on an anticipated iPhone launch in October of this year. It is important to note that when we gave our original EBITDA guidance to a $55 million to $60 million back on our 2011 year end conference call, that was based on the assumption of the launch a new iPhone in a June-July timeframe which was at the prevailing rumor at the time.
Our sales are highly impacted by new product launches from major manufacturers particularly Apple, the fact that the iPhone was not launched in the June-July timeframe and we still increased our top line and EBITDA guidance was largely missed by the street.
We are confident in our ability to leverage our operating expenses and grow our EBITDA as we continue to grow our top line. Also included in our revised EBITDA guidance were estimated expenses related to some new product launches later this year.
Historically, we have done a soft launch on our new products, we have a couple of products laid for later this year that we will be spending more marketing and advertising dollars on than we have done historically. This is a direct impact to EBITDA, but as a management team, we feel these investments into our business will be realized over the next several quarters.
The launch of the new phone factor of the Apple iPad would be another catalyst in it for us. We constantly monitor new product launches from the device OEMs and the impact that we are expecting to have on our company.
Third, sales of the core invisibleSHIELD product line were down sequentially from Q1 2012 to Q2 2012 and up only slightly on a year-over-year compared. Our top selling skew remains the invisibleSHIELD for the Apple iPhone. We have seen strong diversification in the invisibleSHIELD product line with the proliferation of successful Android devices like the Samsung Galaxy SIII recently released.
We are analyzing the potential impact of Apple’s patent infringement victory over Samsung last week. The iPhone remains our top selling skew.
We have also seen diversification with our new product offerings with the iFrogz product line and the tablet keyboard products we design, manufacture and sell.
We are a more robust company now with a greater reach into our customers with additional product lines and skew which is right in line with our strategic plan. That being said, the over all softness in the quarter for the iPhone 4 handset based on anticipation in the marketplace for a new iPhone impacted our sales.
We get [software] data from our major channel partners on a weekly basis and we saw modest increases in invisibleSHIELD sales during the quarter over a Q1, 2012; but that did not translate to increase sales for us during the quarter as our channel partners were able to sell through inventories that they had already ordered and had in their warehouses.
The invisibleSHIELD product line will continue to be a major focus for us and we expect the majority of our revenues to come from that product line for the foreseeable future. For us, concerns around the slowing of the iFrogz operating division. We have been very pleased with the contributions we have received both product and people to our acquisition of iFrogz which we completed on June 21, 2011.
Randy has overseen the complete integration of iFrogz into ZAGG over his tenure and we are truly now operating as one entity. The iFrogz product line gives ZAGG a value brand of accessories enabling us to extend our reach within our retailers. It also gives us relationships with Chinese manufacturers that have helped us move quickly on many of our new products and bought the ZAGG and iFrogz brands.
The primary branded iFrogz products of cases and headphones are highly competitive. We will continue to focus on innovative products in both of these categories to help differentiate our products from the competition.
Our strong customer relationships and backend logistical strengths also aid in our ability to garner placement of our iFrogz products in our key retailers. Our new product teams are functioning across both brands, so as we develop new products, we continue to determine which brand these products will be sold under depending on price points and the demographics of the customer we are targeting with the new product. We are excited about the future of both brands and feel they will both contribute to the overall success of the company into the future.
In closing, I would like to say that I am very pleased with the direction ZAGG has taken this year in building an infrastructure that will sustain future growth. Now, we are ready to answer questions that were submitted to our website. Randy and I will take turns answering the questions.
The first question surrounds Robert’s departure. Was it purely a result of the margin calls or is there something else going on?
Now his departure was entirely related to the margin calls situation that started last December and unfortunately surfaced again two weeks ago.
The next question was how long will Robert continue to file Form 4?
Robert will continue filing Form 4 for the next six months. We would expect additional filings related to the exercise of the outstanding options and warrants. And again, I would refer you to the SEC website at sec.gov to view all the related documents.
The next question has been asked probably a 100 times since Robert’s departure. How involved was Robert in customer conversations and relationships?
As mentioned earlier in the call, for sometime now the customer relationship management has really belonged to Derek Smith, our Executive Vice President of Sales and his account management team. Additionally, I have had the opportunity to travel with Derek and get acquainted with our key customers since I came on-board late last year and we believe those relationships are in very good hands.
The next question is will the Board engage a search firm for the CEO position and will Randy be a candidate?
Yes, the Board is currently in discussions with the top executive search firm and I am planning to participate in that process. We think it will probably take anywhere from 90 to 120 days to complete.
Another common question was whether the company would change its guidance?
Historically, as we have greater visibility into our channel, we have updated our guidance. So as it is anticipated that Apple will have new product launches by later this year, as those launches come to fruition, we will likely update our guidance according to the impact we see in the channel.
Here is another great question we received. Are you aware of any upcoming product introductions by Apple that would compete directly with ZAGG or any product changes that would negate the need for a screen protectors or external keyboards?
That's a great question, because we would love to have inside information concerning Apple’s future product plans, but unfortunately we don’t. So our priority and our commitment then becomes, one that we will continue to build the best-of-class products and I believer that our history has demonstrated that we have successfully competed with all the accessory manufacturers including in Apple.
The next question is one that I am very glad it was asked. Why is ZAGG a superior product to all the other competitors and how can a premium price product dominate in a market with such few barriers-to-entry?
Ultimately, our ability to succeed in the competitive product categories comes down to three levers that would consequently influence we believe will create strong barriers-to-entry. Those levers include product brand and distribution; we talk those often. From a product perspective, we were diligent to make sure we deliver creative product solutions to address unmet market needs. In most cases those products are supported by intellectual property and we also have a strong brand position in mobile accessories and a wide distribution network, responsibly managed product brand and distribution all combined to create barriers-to-entry and allow us to thrive in these very competitive product categories.
A lot of you have asked specifically what management has done to help restore investor confidence and why you should continue to hold your shares?
In an effort to build investor confidence this year, we brought on two new independent directors who have shown that they are willing to take difficult steps to protect shareholder value and we put in place some operational structure that will allow the company to sustain growth. We also, based on our current valuation feel like we are significantly undervalued and our business has (inaudible) been stronger. We feel we have the infrastructure in place to continue to grow this business into the future.
There has been a lot of chatter regarding potential accounting fraud; this is a very serious accusation which has not been adequately explained by ZAGG management, will you please comment on this?
These acquisitions are baseless; we use one of the top accounting firms in the world and they review our financial statements on a quarterly basis. We are very comfortable with our disclosures and our financial statements and the control environment that we have established here at ZAGG.
Can you please give some insight and how the CEO resignation will affect the future relationship between ZAGG and HzO?
Robert’s resignation won’t affect our relationship at all. ZAGG has a 37% interest in HzO and is a majority shareholder in that entity. The HzO management is continuing to move forward with their business plan. We recognize our equity portion of their incremental loss in our financial statements and will continue to do so as long as we have an ownership interest in HzO. Just to be clear, we are not currently funding any ongoing HzO operations.
Finally, the last question we will be addressing on this call is, are there any changes in the plans or timing for expansion of international distribution?
Later this quarter, the Board will review and approve the European three year strategic plan that has been prepared, so that the team there starts executing that early in 2013; similar process will follow for other strategic international regions that we are looking at for next year.
In closing, Brad and I would like to thank everyone for listening in on our call today and for sending in your questions. We look forward to speaking with you again on our third quarter earnings call. Have a great afternoon.
Ladies and gentlemen thank you for your participation in today’s webcast. This concludes the program. You may now disconnect. Have a wonderful day.