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Edited Transcript of ZAGG earnings conference call or presentation 14-Mar-11 10:00pm GMT

Q4 2010 Zagg Inc Earnings Conference Call

SALT LAKE CITY Mar 21, 2019 (Thomson StreetEvents) -- Edited Transcript of ZAGG Inc earnings conference call or presentation Monday, March 14, 2011 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Kim Rogers-Carrete

ZAGG Incorporated - IR - Genesis Select Corp.

* Brandon O'Brien

ZAGG Incorporated - CFO

* Robert Pedersen

ZAGG Incorporated - Co-founder, President, CEO

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Conference Call Participants

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* Richard Fetyko

Merriman Curhan Ford & Co. - Analyst

* Mike Latimore

Northland Capital - Analyst

* Mike Stratford

Sidoti & Company - Analyst

* Jon Hickman

MDB Capital Group - Analyst

* Daniel Pike

Private Investor - Analyst

* Walter Ramsley

Wallace Partners - Analyst

* Mike Malouf

Craig-Hallum Capital Group - Analyst

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Presentation

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Operator [1]

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Greetings and welcome to ZAGG Incorporated's fourth quarter and full year 2010 financial results conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation.

(Operator Instructions).

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kim Rogers-Carrete, representing Genesis Select, the Investor Relations firm for ZAGG Incorporated. Thank you, you may begin.

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Kim Rogers-Carrete, ZAGG Incorporated - IR - Genesis Select Corp. [2]

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Thank you, Dale. Good afternoon, ladies and gentlemen, and welcome to the ZAGG Incorporated fourth quarter 2010 conference call. On the call with me today from the Company are Robert G. Pedersen II, President, Co-Founder and Chief Executive Officer. And, ZAGG’s Chief Financial Officer, Brandon O’Brien. We truly appreciate your patience today, and apologize for the delay in the call. ZAGG, unfortunately, encountered technical difficulties in getting the release to the wire services.And, we wanted to give everyone ample time to review the results.By now, you should have access to the fourth quarter 2010 earnings release.If you have not received your release, it can be found on the Investor Relations portion of ZAGG’s website by clicking on the Investor Relations tab.This call is being webcast, and a replay will be available on the Company’s web site through midnight April 14, 2011.

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, Form 10-Q, filed with the SEC for a more detailed discussion on 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 release or call.

Please note that on today’s call, in addition to discussing the GAAP financial results and the outlook for the Company, the following non-GAAP financial measures will be discussed -- EBITDA and adjusted EBITDA.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 web site.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 would now like to turn the call over to Robert Pedersen, ZAGG’s Chairman and CEO.Robert?

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Robert Pedersen, ZAGG Incorporated - Co-founder, President, CEO [3]

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Thank you, Kim.Good afternoon, everybody, and thank you for participating in our fourth quarter 2010 conference call.We are very pleased to report the outstanding results of our December quarter and year end 2010.The performance of our business was extremely strong, as a result of high sell through of our product line in both our direct and indirect channels.As a result, we are thrilled to announce all-time record quarterly revenue once again, and earnings per share.

Total revenue for the quarter was $29.3 million.That’s an increase of 157% over the fourth quarter of last year.For the full year 2010, revenues were $76.1 million, an increase of almost 100% from last year’s revenue 2009 to 2010.The results handily surpassed our yearly revenue guidance.Adjusted EBITDA, which, really, I like to highlight for the fourth quarter, was $6.6 million, or $0.27 per share, versus $1.7 million or $0.07 for Q4 2009.This is a 281% increase year-over-year.Net income attributable to stockholders for the quarter was $3.4 million, a dramatic increase from $251,000 reported in the fourth quarter of 2009.Fully diluted earnings per share for the quarter were $0.13, and, for the full year, earnings per share came in at $0.41.Later in the call, Brandon will provide further details on these financial results.

The quarter featured strong holiday sales in both the indirect and direct channels.And, the overall better than expected results were due to a number of factors in the quarter including strong underlying demand in mobile devices, including smartphones and tablets.Number two, expanding ZAGG’s SKUs in our indirect channel in combination with the further expansion of this channel with new partners.Number three, the successful introduction of our newest product, the ZAGGmate.And, number four, strong holiday sales on our web site, zagg.com.Our indirect channel partners have highlighted their success with mobile devices as a key feature of consumer spending patterns this past holiday season.And, ZAGG directly benefited in the fourth quarter from the better than expected demand for mobile devices.Within the mobile devices market we have identified the smartphone and tablet segments as the sweet spot for our flagship line of invisible shells and our related protection, personalization and other accessory products.This overall macro trend is continuing.

I would like to thank Brandon and his accounting team, and our new auditors, KPMG, for their extremely hard work in putting together these audited financials.As part of our audit process with our new firm, KPMG, we made a change regarding the ongoing development and leadership of the ZAGGbox project.I want to address that for a minute. The ZAGGbox Pro is a digital content aggregator for music, pictures, videos and movies, to share this content over network media players like iPhones and iPads.

As part of a thorough examination at year end, of our business relationships, we were made aware by our legal counsel that a board member, Mr. Larry Harmer, had what would be deemed to be a related party transaction in the ownership side of the ZAGGbox manufacturing.As stated in a press release that went out just earlier today, Mr. Harmer has now resigned from the Board.A new board member, Ms. Cheryl Larabee, who we are all very excited about, and has an enormous financial background in banking, will replace Harmer as a new director of the Company.

Subsequently, all the assets for the ZAGGbox have been transferred into a fully collateralized interest bearing note.The development and distribution of the ZAGGbox will now be headed up and funded by Mr. Harmer and his partners as an independent entity.This asset transfer and asset valuation has been signed off by KPMG stating that the note is amply collateralized and interest bearing.We view this latest development as extremely positive for ZAGG as it further streamlines our business.It will help us focus on our core mobile accessory products, while allowing us to still indirectly benefit from the ongoing ZAGGbox development and introduction.Our current business is already growing so quickly, and there’s still so much opportunity that we don’t want to take our eye off the ball, frankly.This change will enable us to further accomplish that.

Now, 2010 saw two macro industry events that shaped our fortunes.Number one, smartphone sales continued to accelerate, exceeding even analysts forecasts.And, number two, the surprising success of tablets with over 17 million units shipped in 2010, and many, many more forecasted for 2011.These trends resulted in a dramatic increase in the demand for accessories to protect, support and enhance the smartphone and tablet experience.And, that is what the basis of our business is.This is a significant [Inaudible -- audio interference] in our long term viability.We see these macro trends, and they are still in their early stages.smartphones were only about 20% of mobile devices shipped in 2010.And, global shipments are predicted to surpass 50% by 2014.

The tablet market is estimated to grow at an 80% compound growth rate over the next four years to around 200 million units by 2014.To put the global market opportunity in perspective, at the end of last year only 0.3% of the approximately 7 billion people in the world had purchased a tablet.We feel there is a very large market opportunity for tablets when you look at the facts that world-wide there are 5.1 billion mobile phone subscribers, 2.8 billion consumer electronics users, and 2 billion Internet users, and 1.3 billion PC users.The tablet market will be defined by rapid growth over the next few years, and this will attract a lot of attention by our competitors in this accessories market.However big this tablet market ultimately becomes, it’s likely to have a big B in front of it, and that represents an enormous global opportunity for us, as we are well positioned.

How will ZAGG remain relevant and continue to stand out from competition? By doing what we have done since we launched our first product, the invisibleSHIELD.By offering differentiated products that provide unique high quality and well-designed solutions, and premier customer service. ZAGG has established a strong brand in the mobile accessories market, and we are ready for growth from the continuation of these market trends.It doesn’t matter which brands of mobile device manufacturers succeed. ZAGG products are device-agnostic, and support all popular mobile devices from leading manufacturers, including Apple, HTC, Motorola, Blackberry, just to name a few.

Another component of ZAGG’s long term strategy is introducing new products and accessories to our line, and leveraging our brand, our leadership advantage in the mobile device accessories market, being quick to market, and the relationships we have built with customers, and our distribution channel to grow our market presence and expand our addressable market.Our channel partners prefer to work with manufacturers who can consistently bring new and appealing products to their customers, and do it quickly.We are continuously looking for opportunities to address a problem or meet a need in our sector.And, we search for solutions that will enhance the device users’ experience while protecting their gadgets.We are very zealous about great gadgets, true to our core.

Along these lines, in the fourth quarter we introduced the ZAGGmate, an iPad cover and wireless iPad keyboard, offering consumers a solution for two shortcomings with the iPad, including the iPad 2.Number one, the virtual keyboard on a touchscreen that can make typing a challenge.And number two, the large glass and aluminum surface on the front and back and sides that can be scratched in use, or damaged in a fall.These two issues are not solved with most cases on the market, including Apple’s own new iPad 2 cover.The ZAGGmate features a brushed aluminum protective iPad case that adds minimal bulk or weight, and a Bluetooth keyboard inside the iPad.This patent-pending design, an integrated easel stand, allows the position of the iPad to be portrait or landscape mode while typing, surfing the Net or watching videos.

We launched the ZAGGmate on Black Friday in select locations with our national indirect channel partners and on our web site.The ZAGGmate has proven to be successful and is perfectly positioned for the fast growing tablet market. The product has been extremely well-received by leading journalists and web reviewers.At the end of the fourth quarter we had expanded the ZAGGmate presence to the other retail outlets nationwide and online retailers.The ZAGGmate received the International CES Innovations award for design and engineering excellence, the third year in a row for our various product lines.The ZAGGmate also won the prestigious Mac World 2011 best of show and was featured a few days later on the Oprah Winfrey show.And I must say, there definitely is an Oprah effect.

At the end of the fourth quarter, ZAGG's products can be found in over 20,000 store fronts worldwide, with over 16,000 store fronts in North America including Canada and Best Buy Canada and Future Shop.Over 4,000 store fronts in Europe, and other countries.This is a 100% increase from the number of store fronts we had in 2009.We are also sold through many independent distributors here in the United States and Europe, as well.We now have secured most of the major retail space by selling a wide variety of high end accessories into the fastest growing consumer spending trend area in the world. And are partnered with the best retailers in the US with only a few major wireless carrier chains still remaining.

There is also a lot of opportunity for growth in the United States through the middle and lower tiered retailers, and with distributing the ZAGG full line of mobile accessories, as well as a great international opportunity.Last fall, ZAGG contracted with a fulfillment warehouse and a he distribution center in Shannon, Ireland to service and support our European retail and distribution partners.The ability to provide product the day of the launch and to restock in a timely manner will beneficially affect our ability to broaden these relationships and grow sales over time in Europe and elsewhere.As of today, the fulfillment center is live online and these operations are being overseen by a senior member of the ZAGG management team who has relocated he and his family to Ireland.

The fulfillment center is designed to scale to meet our needs as they grow, and there's significant capacity available for ZAGG's European business to grow seamlessly.We have longstanding relationships with leading wireless device retailers and accessory distributors in Europe and particularly the UK.Another long-term benefit from our presence in Ireland is the lower corporate tax rate enjoyed by US companies with operations in Ireland.This should have a real positive impact on our blended corporate tax rate into the future.

In summary, this has been another outstanding quarter for ZAGG, with record top line growth, made possible by the dedicated and hard working team at ZAGG.I'd like to thank them.With that, I'd like to turn the call over to Brandon for a detailed review of the financials and our guidance for 2011.Brandon?

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Brandon O'Brien, ZAGG Incorporated - CFO [4]

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Thank you, Robert, and thanks again for everyone for participating on the call today.We're very pleased with the record results for the fourth quarter.As stated in the 8-K filed on January 28, 2010, ZAGG announced the engagement of a new public accounting firm, KPMG, to audit the Company's financial statements beginning with the fiscal year ended December 31, 2010.As ZAGG grows, and our Company's profile on Wall Street increases, we saw a change in auditors as an important step to attracting the highest quality shareholder base. And, as a testament to our commitment to provide the highest level of compliance, transparency and integrity to our shareholders.Although our 10-K is not required to be filed with the SEC until March 31, 2011, we anticipate filing the 10-K well in advance of that deadline.

As stated in today's release, revenues for the quarter were $29.3 million, versus $11.4 million in the fourth quarter 2009, and $23.1 million in the previous quarter.This is our third consecutive quarter of record results for ZAGG.For the full year ended December 31, 2010, revenues were $76.1 million, versus $38.4 million last year.Gross profit for the quarter was $13.4 million, versus $6.1 million in the fourth quarter of 2009, and $11.6 million from the previous quarter. Which translates into gross margins for the fourth quarter of 46%, versus 54% for the fourth quarter 2009, and 50% in the previous quarter.Gross profit for the full year was $37.4 million, versus $22.1 million in 2009.Full year gross margins were 49.1%.

The primary driver of the decrease in the fourth quarter gross margin is due to a $1.4 million inventory write-off posted to cost of goods sold.In the past, inventory charges were immaterial and charged to SG&A rather than cost of goods sold.There is no impact on net income as a result of this change.Inventory deemed obsolete at year end was primarily related to prominent devices that did not have the full retail success originally forecasted during the year, and particularly in the fourth quarter.One of our competitive advantages is our ability to provide sufficient ZAGG products to be on the shelves of our channel partners on the launch date of new, highly anticipated devices, and the rapid restocking of our merchandise.Like the rest of the device and accessory industry, we do our best to anticipate expected demand and sell-through.We believe it is important to be well-stocked for all devices to have optimal retail success.There is inherent risk in this strategy but we feel this is a strategy that has provided us with far more upside than risk of inventory obsolescence.

Again, in this quarter, we saw operating leverage in our business as we continued to run a lean business with tight operating controls and fairly stable fixed costs.Operating income in the quarter was $6.1 million, nearly an 8X increase over $770,000 in the same period last year.Operating margins for the quarter were 20.9%, down from last quarter's exceptionally high results and at the top of our range for annual guidance for operating margins which were stated in the range of 19% to 21%.For 2010, operating profit was $16.8 million, versus $5.7 million in 2009.And, operating margins were 22.1%, again, exceeding our 2010 guidance for operating margins in the range of 19% to 21%.

Net income attributable to stockholders in the fourth quarter came in at $3.4 million, versus $251,000 in the fourth quarter of 2009, and $3.9 million in the previous quarter.The primary reason for the decreased net income compared to the prior quarter related to the inventory charge of $1.4 million in the fourth quarter and a tax return provision true-up entry of $436,000.Our fully diluted earnings per share attributable to stockholders was $0.13, versus $0.01 in the same period last year, and $0.16 in the previous quarter.Fully diluted earnings per share attributable to stockholders, net of the tax entry, were $0.15, and net of the tax entry and inventory charges were $0.20.Full year net income for 2010 was $10 million, resulting in fully diluted earnings per share of $0.41 for 2010.Management provides the calculation for adjusted EBITDA as it gives stockholders a better feel for the true growth experienced in the business by taking out the effects of taxes and tax related issues, stock compensation expenses and depreciation and amortization.Adjusted EBITDA for the fourth quarter came in at $6.6 million, or $0.27 per share.That compares to $1.7 million or $0.07 per share for the fourth quarter 2009, and $6.4 million or $0.27 per share from the previous quarter.

Turning to the balance sheet, working capital at the end of the quarter was $23.6 million, compared to working capital of $21.1 million at September 30, 2010.We filed an 8-K earlier today, outlining our increased line of credit facility through USBank, allowing us to borrow up to $20 million based on accounts receivable and inventory with an accordion feature to increase it to $30 million.It is our intent to finance our working capital needs through this line of credit facility.

Accounts receivable for the quarter were $17.7 million, with 64% of the receivables related to one customer and 17% related to another customer.We are very comfortable with the creditworthiness of these customers.The receivables balance from the first customer's is actually down from prior periods. And, the second quarter is in a new customer but payments are being received in line with the terms that we have agreed to.Accounts receivable increased in the quarter by $3.5 million, compared to the prior quarter, due to the overall increased sales on account during the quarter.Inventories were $17.9 million, comprised mostly of raw material in the form of raw materials and the rolls of films, packaging materials and finished goods for invisibleSHIELD.

Our DSOs in the quarter remained relatively consistent with the prior quarter at 67.1, compared to 66.5 for the previous quarter.We are -- we were a net user of cash in the quarter, putting our cash balance at the end of the year at $2.4 million.For the fourth quarter of 2010, our calculation of fully diluted shares was 25,769,060 shares, versus 23,852,584 shares at December 31, 2009, an increase of 8%, due to the issuance of stock in exercise of warrants and options and the issuance of additional options and warrants. For the year ended December 31, 2010, our calculation of fully diluted shares was 24,435,827 versus 22,989,039 for the full year ended December 31, 2009.An increase of 6%, also due to the issuance of stock in exercise of warrants and options, and the issuance of additional options and warrants during the year.

Back in November, we entered into a bridge loan agreement with HzO Inc.Under the terms of this note, ZAGG had the option to convert the note into preferred shares of HzO.During the fourth quarter, we made an additional advancement to HzO under the convertible loan agreement, and subsequently converted our receivables into equity of HzO. With KPMG's assistance, we have determined that our interest in HzO is properly classified as a variable interest entity.Accordingly, with our 55% interest in HzO, we have consolidated the results of HzO into our financial statements, and have accounted for the noncontrolling interest as required by the applicable accounting standards.For the year ended December 31, 2010, HzO posted a $76,000 loss, 55% of which is reflected in ZAGG's net income.HzO is in the process of a capital raise for additional funds to commercialize the technology.This raise is expected to close in the first half of 2010.HzO has just completed independent testing of the waterproofing technology with very strong results.And, the product development continues to move forward with the expectation to begin to monetize the technology before year-end.

Looking at the ZAGG sales mix, the fourth quarter showed an increase from the direct channel, as Internet sales were strong with online sales and Cyber Monday promotions.Mall kiosks had good growth in the quarter. Keep in mind, many of these kiosks are located outside or near Apple stores, and benefit from the high levels of traffic experienced at these stores during the Christmas season.Standalone stores are included with the mall kiosk numbers but did well in the quarter, as well.

The breakdown of sales for the fourth quarter is as follows.78% of sales were from the indirect or wholesale channel.17% came from the website.4% through the mall kiosk program. And, 1% from shipping and handling.The breakdown of sales for the year ended December 31, 2010 is as follows.73% of sales was from the indirect or wholesale channel. 18% came from the website. 7% was through the mall kiosk program. And, 2% from shipping and handling.As we have stated before, the indirect channel will continue to be the primary distribution channel for the ZAGG product line.Our long-term goal remains building distribution, and eventually put more branded ZAGG product into that channel.

In terms of product mix, ZAGG prefers to look at sales makeup from device categories such as handset or tablet versus device manufacturer.The market makeup of devices by manufacturer is rapidly changing at all times, and ZAGG is introducing formulations of our invisibleSHIELD, ZAGGskins and ZAGGmates as devices come to market. Newer devices such as smartphones and tablets are evolving into categories that we are tracking.As of the end of the fourth quarter, over 90% of our product sales were in the mobile handset category, with a significant majority for smartphone. And, approximately 7% of total sales were in the tablet category.We expect leadership by manufacturer in these device categories to move around and change over time.But, we expect to see contribution from smartphones and tablets to grow as a percentage of our total sales.

At this time, we are provided guidance for 2011 with revenues of $95 million to $100 million, and operating margins of the range of 19% to 21%.For margins in 2011, we are currently guiding margins in the mid-40s and operating margins to be 19% to 21%.The guidance we provide is based on our outlook for demand for our product, primarily the invisibleSHIELD and the ZAGGmate, our announced distribution agreements, increased contribution from Europe as a function of our new distribution facility, and the ongoing growth of mobile device sales.The introduction of new ZAGG products, the announcement of new retail channel partners, as well as any contribution from HzO or ZAGGbox are not included in this outlook.

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

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Robert Pedersen, ZAGG Incorporated - Co-founder, President, CEO [5]

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Thanks, Brandon.In closing, financially, we had an incredible year and we broke all kinds of records.We have done so far what most thought was not possible in the last six years of business.And, others still can't believe it.That being said, we also fully recognize that in order to keep growing and continue to be successful, we have to step up once again to the next level.And, we are already taking the necessary steps to do so.ZAGG is currently the market and brand leader in the accessories industry today for our category, according to sell-through from the latest MPD report. And, we intend to stay on top by continuing to innovate and vigilantly protecting our distribution channels and partners and our intellectual property and, ultimately, our shareholders.

And, with that, I would like to turn the call over to the Operator for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions).Our first question is from Richard Fetyko with Merriman Capital.Please go ahead with your question.

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Richard Fetyko, Merriman Curhan Ford & Co. - Analyst [2]

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Hi, good afternoon, guys.Strong results.Just wanted to make sure we understood correctly that net of the inventory adjustment that you made in the quarter, and the tax true-up you mentioned that the earnings on a fully diluted basis would have been $0.20, is that correct?

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Brandon O'Brien, ZAGG Incorporated - CFO [3]

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That's correct, Richard.

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Richard Fetyko, Merriman Curhan Ford & Co. - Analyst [4]

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Okay.Thanks.And inventory adjustment you mentioned obsolete devices. Do you care to specifically name which devices?I assume ZAGGbox but perhaps there was something else.

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Brandon O'Brien, ZAGG Incorporated - CFO [5]

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No, nothing related to the ZAGGbox.What we were referring to would be devices that the industry thought would be a big hit and as it turned out that the sales were not as strong as industry experts had anticipated.So we chose to build up inventory based off of orders from our customers.We have to make sure that we can quickly replenish stock levels and so we built up safety stock on some particular SKUs that just didn't sell as well as we had anticipated.

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Richard Fetyko, Merriman Curhan Ford & Co. - Analyst [6]

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I see.Okay.Got it.

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Robert Pedersen, ZAGG Incorporated - Co-founder, President, CEO [7]

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We would rather not say who those manufacturers were, which devices they were, so we're not throwing any manufacturer under the bus.

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Richard Fetyko, Merriman Curhan Ford & Co. - Analyst [8]

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Sure, sure.I'll look at the stock prices of these companies to figure out which ones.With respect to the ZAGGmate, obviously a launch in the fourth quarter with a fair amount of success initially.Just curious if you could tell us since then, you've had a few other additional months to observe the sell-through and reordering pattern and perhaps other demand sources for this product.Just curious, how would you characterize the sell-throughs and reordering for this product in the retail channel?

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Robert Pedersen, ZAGG Incorporated - Co-founder, President, CEO [9]

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It's actually remained very strong, Richard.It's been interesting.A lot of the attention from media, the Oprah show when it was highlighted, when MC Hammer featured it on the Oprah show, and brought it on as a beloved device of his that he loved. And Oprah acknowledged it. And winning the Mac World best of show. All of these events have happened in the first quarter here. And so a lot of the media attention. And then just the follow-up with the sales on the ZAGGmate itself. And we have a new version of the ZAGGmate for the iPad 2 that is being finished right now as far as being manufactured and will be released soon.

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Richard Fetyko, Merriman Curhan Ford & Co. - Analyst [10]

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Got you.And then a couple others on ZAGGmate.What are the gross margins relative to the invisibleSHIELD sales in the indirect channel?

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Brandon O'Brien, ZAGG Incorporated - CFO [11]

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So, we look at gross margins, as I alluded to in my remarks.We look at device specific margins and general categories. So we look at tablets and we look at invisibleSHIELD for handheld devices.That in mind, we're always trying to maintain 45% to 50% gross margin contribution.That's our target.And we haven't seen that.When we sell the ZAGGmate into the indirect channel, it falls in line with those gross margin contributions.

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Richard Fetyko, Merriman Curhan Ford & Co. - Analyst [12]

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Okay.And then lastly, if I may, the 2011 guidance assumes gross margins in the mid-40s.What does that assume? Does that assume growing mix of the indirect channel and anything else that would take it from the 50% to mid-40s?

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Brandon O'Brien, ZAGG Incorporated - CFO [13]

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Yes, so part of the taking up from the 50% to the mid-40s would be the channel mix, of course, and the more big box retailers and wireless store chains. And that would be the majority of it.Part of it would also be the success of the ZAGGmate and the spark and other higher end products that have just less than the margin, the gross margin that invisibleSHIELD would have.

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Richard Fetyko, Merriman Curhan Ford & Co. - Analyst [14]

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Got it.Okay.Thanks, guys.I'll get back in the queue.

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Operator [15]

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Thank you.The next question is from Mike Malouf with Craig-Hallum.Please go ahead.

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Mike Malouf, Craig-Hallum Capital Group - Analyst [16]

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Thanks a lot, guys.And wow, what a revenue quarter.That's great.I wanted to ask you a couple of questions.One is, on international sales, can you give us a flavor for what kind of success you are having internationally in anticipation of the Shannon fulfillment center going live?

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Robert Pedersen, ZAGG Incorporated - Co-founder, President, CEO [17]

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Yes.Internationally, that was the big reason for us to open that facility over in Shannon, is to hat take better advantage of the international sales opportunities.One of our core competencies has been our ability to have our product on the shelves at retailers on the date of launch.We haven't been able to enjoy that same success over in Europe, just due to manufacturing and shipping times. And so we feel like the opportunity of having that facility in Shannon enables us, particularly for the EU nations, to be there on the date of launch, particularly with our partner, Carphone Warehouse.We have a great opportunity there to hit more product launches by having that facility open. And so we feel like the international sales is relatively untapped.We've been running 15% to 20% at the most of international sales, but the majority of handsets are sold outside the United States.So there's a big untapped opportunity that we feel like we're going to be able to leverage with our facility in Shannon.

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Brandon O'Brien, ZAGG Incorporated - CFO [18]

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You also have, Mike, some of the expansion of our product lines like the ZAGGmate to be able to have a country-specific keyboard, country-specific packaging that we think we found a way to do it where it won't be too costly or complicated, and we're going to be able to further open up channels that made it more difficult before.

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Mike Malouf, Craig-Hallum Capital Group - Analyst [19]

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Great.And then with regards to the ZAGGmate, I know that Apple, there's been obviously some articles about how Apple is selling directly to a lot of corporations and they've done a lot of corporate outfitting their entire sales teams in the numbers of thousands of Apple iPads in the field.I'm wondering, have you had any success talking with these corporates as far as outfitting them with the ZAGGmate? Because I would think that would be a pretty good opportunity for you.

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Robert Pedersen, ZAGG Incorporated - Co-founder, President, CEO [20]

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That's an interesting comment.Good question, actually.We have gotten a lot of interest in the professional world. Attorneys, doctors, a lot of medical field. And they can have the ZAGGmate be the keyboard and the stand and then they take their iPad with them, walk around, they can put it back down.We're seeing that a lot, actually.With school systems, we're offering some special discounts to educational systems, and in bulk. And so those are good comments on a corporate level and also on a private level, to be able to offer the ZAGGmate.

And the thing is, is it's not just the ZAGGmate.Usually, when someone comes in to buy a ZAGGmate, like in our stores, they come in to buy just the ZAGGmate for the keyboard and the protection function. But they end up also buying the invisibleSHIELD for the front and the back or ZAGGskin or leatherskin and a Spark that can charge the iPad, one of the few mobile charging device accessories out there that has enough power to charge the iPad. And our average sale is bumped up significantly.So we're seeing that quite a bit, as well.

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Mike Malouf, Craig-Hallum Capital Group - Analyst [21]

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That's great.Just one last question with regards to the inventory.Brandon, maybe this is for you.Have you experienced -- is this an unusual as far as a percentage of sales, unusual write-off relative to past years? And I know that you had typically run this through the SG&A so is this the first time that you've run it through the gross profit? And should we expect that going forward on a quarterly basis to be this way or is this a year-end phenomenon? Thanks.

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Brandon O'Brien, ZAGG Incorporated - CFO [22]

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That's a great question, Mike.I mean, unusual, what's unusual for us.We've only been around a few years and so with the extreme growth that we've experienced, what we did at the end of the year is we took a really deep dive and looked very hard at our inventory, particularly with the appointment of KPMG coming on as our auditors.Obviously you go from one accounting group to a different, they have different views and there's different things that they're looking for.We felt that it was important for us to, each quarter we go through and we look at inventory, we make reserves for slow-moving SKUs.I think it was more of an anomaly with what we had at year end.I'm not saying we're not going to have charges going forward on a quarterly basis because we'll continue to look at that. And with the changes, you never know what's going to happen out there in the industry with new products, new handsets and obsolescence that comes in play.We try to run our inventories fairly lean to try and mitigate the charges that we'd have for writing off slow-moving inventory. And it will go to cost of goods sold from now on.As I said in my remarks, we did have some charges in prior quarters.They were not material.Didn't affect net income.But on a prospective basis, all charges related to inventory obsolescence will be posted as a cost of goods sold item.

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Mike Malouf, Craig-Hallum Capital Group - Analyst [23]

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Okay.Great.Thanks a lot.

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Operator [24]

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Thank you.The next question is from Mike Latimore with Northland Capital.Please go ahead with your question.

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Mike Latimore, Northland Capital - Analyst [25]

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Great.Thanks a lot.On the SG&A line, it was up $1.8 million sequentially.Was that largely on sales commissions or were there some one-time items in there?

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Brandon O'Brien, ZAGG Incorporated - CFO [26]

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The majority was sales commissions, Mike.We had a lot of promotions that we ran around Christmas time.That always ramps our sales commissions up and our affiliate program is continuing to grow.We also did use a manufacturer's rep with a couple of our accounts, so we did have sales commissions associated with those that increased that SG&A line.

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Mike Latimore, Northland Capital - Analyst [27]

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And on the inventory, overall inventory levels, can you talk a little bit about, a little more detail, on what's driving that? And then in the March quarter here, how are inventory levels looking?

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Brandon O'Brien, ZAGG Incorporated - CFO [28]

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Inventory levels for the end of the year, as I alluded to, again, in my remarks, the primary driver is making sure that we've got adequate stock of our raw materials. So that would include installation kits. Perhaps you remember last year in the second and third quarters we incurred significant costs in bringing in the installation kits because we had to air freight those in from China, which is very expensive for us.We have opted to house those, bring more of those in and maintain a higher safety stock to avoid that expedited shipping cost.We also have brought in more of the raw material film, again, so that we didn't -- it's almost like you feel like you're someone going through the depression.You're in the lean times when you didn't have a lot of safety stock, it was a painful time, so we've migrated the other side of the fence, to make sure that we have plenty of safety stock of our raw materials so that we can meet the unanticipated upside requests that we receive from our partners, that we're not short of any of our raw materials so we can fulfill those orders as they come in line.

We've seen our inventory levels for the first quarter, they've been coming down.We obviously build up a lot of that raw material and we're tapering that off a bit, trying to find that optimal level of raw materials and inventories to make sure that we don't run out, but not have too much.So we're still in that process and we feel like that our inventory balances will be in line the first quarter with where we think they need to be.

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Mike Latimore, Northland Capital - Analyst [29]

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And then back to the iPad 2 preorder, SHIELD pre-orders, how are the iPad 2 SHIELD pre-orders looking relative to the first go-round you guys had?

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Robert Pedersen, ZAGG Incorporated - Co-founder, President, CEO [30]

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That's a good question, Mike.It's been interesting with the iPad 2.Apple launched and promoted, heavily promoted, a new cover case for the iPad 2, and it doesn't have the protection that the first iPad had with the folio that Apple introduced that covered the back and the sides.It didn't have some of the cute features with the magnets and the folding. But what we have experienced with our customers, and what we have seen so far, is that it's not slowing down our sales.Just as a comparison, the first month last year Apple released the iPad 1.I believe it was on April 3.It was the first couple of days of April.We sold about 70,000 invisibleSHIELDs the first month that it was released.For the iPad 2 launch, which was just last Friday, just a few days ago, we already have orders for 125,000 invisibleSHIELDs.So if you just compare apples-to-apples, we're well ahead. And the invisibleSHIELD is fully compatible with Apple's magnetic cover. And customers, we believe, will find very quickly that they need protection on the back of it.There's no drop protection and from scratching, and it's fully compatible on the screen.Because once you take that cover off, it's naked.You need protection and it creates more grip.

And the biggest point is, is there's no keyboard with it and so the cover is -- it's really, I think, innovative.It's cute and innovative. But ultimately, I think it's missing some very key elements. Without having full protection and without having the keyboard, it doesn't do the full job. And so we're seeing customers with that cover already coming in to buying the ZAGGmate, buying the invisibleSHIELD into our retail locations.So we're definitely on top of it, wanting to see reactions and see where the market is headed. And that's very clear to us that the invisibleSHIELDs, they're selling great, selling quickly right now. And then the ZAGGmate sales are still very, very strong. And we feel that we have a full solution all the way around.

So we're excited about the iPad 2 launch.We think it's a fantastic device.We think we're going to sell a lot more accessories than we did with the iPad 1 launch. And we are excited about it and other gadgets coming to the market, like the Microsoft Zoom and other tablet computers.It's only good news for ZAGG.

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Mike Latimore, Northland Capital - Analyst [31]

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Great.Last question, just intangible assets on the balance sheet, that was up I think $9 million or so sequentially.What was that from?

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Brandon O'Brien, ZAGG Incorporated - CFO [32]

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The major drivers on the increased intangible assets were the acquisition of the Mason patents that we completed in the fourth quarter and also the consolidation of HzO. It was the HzO technology, consolidation of that came through onto the intangible lines, as well.

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Mike Latimore, Northland Capital - Analyst [33]

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Thanks a lot.

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Operator [34]

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Next question is from Mike Stratford with s Sidoti & Company.Please go ahead with your question.

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Mike Stratford, Sidoti & Company - Analyst [35]

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Hello, guys, congratulations.Just had a couple of housekeeping questions for you.Just curious about percentage of sales from international sources for the year.

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Brandon O'Brien, ZAGG Incorporated - CFO [36]

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Yes, we're finalizing that particular piece of data, Matt.It's still going to be around 20%.We'll definitely have that disclosed in the 10-Q when it's filed but that's one of the data points that we're still chasing down.

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Mike Stratford, Sidoti & Company - Analyst [37]

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Got you.And then, this is probably the same category.But I'm just curious, just with the breakdown between the SHIELD and the rest of your product line.

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Brandon O'Brien, ZAGG Incorporated - CFO [38]

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Yes, so, we have been able to see some success with launching some new products, the ZAGGmate being the chief among those.But that was only launched on Black Friday last year.So you only had the sales of that for about a month.If you look at our sales last year, we were still around 90% of our revenues were generated from the invisibleSHIELD and skin protection product lines.

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Mike Stratford, Sidoti & Company - Analyst [39]

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Got you.And then just one last one, more of a strategic overview sort of thing.Just curious what you guys see as being the effect from the shift from iPhone from Verizon, AT&T?

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Robert Pedersen, ZAGG Incorporated - Co-founder, President, CEO [40]

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I think it definitely has been a good thing for us.We're selling product that I think we wouldn't have otherwise.It hasn't been as successful in the retailers as they had hoped.I think the difference, or maybe the issue, has mostly been that you can't do the calling and the data at the same time.I think once that issue is resolved, then I think you'll get the tidal wave that we were expecting from the initial launch of it.

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Mike Stratford, Sidoti & Company - Analyst [41]

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Got you.That's all I had, thanks, guys.

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Operator [42]

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The next question is from John Hickman with MDB Capital Group.Please go ahead with your question.

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Jon Hickman, MDB Capital Group - Analyst [43]

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Hello, guys.You blew away the revenue number.Very nice.Could you tell me, Brandon, where I find the consolidated note for the ZAGGbox?

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Brandon O'Brien, ZAGG Incorporated - CFO [44]

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Yes, that would be included in the 10-K, John.As I talked about in my remarks, the 10-K, we expect to be filed -- we don't have to file that until the 31st of March.We'll be well ahead of that filing date and it will have ad nauseum the detail related to the ZAGGbox. And what it is on the actual balance sheet is it's still included at the end of the year as the related party other asset.Because that's what it was at the end of the year.The conversion to a note receivable during the first quarter so you'll see that show up on the March 31 balance sheet.

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Jon Hickman, MDB Capital Group - Analyst [45]

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Okay.Then I'm just going to try and get a little more information out of you on the inventory write-down.Was that two or three products that you thought were going to be really hot or maybe half a dozen or more?

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Brandon O'Brien, ZAGG Incorporated - CFO [46]

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It was a handful of products.There was four or five different SKUs that we had built the stock out on that turned out to just not be as big as all of -- if you were to talk to any of the industry experts, they all thought these products were going to sell very well, and in reality, the sales were very lackluster.

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Jon Hickman, MDB Capital Group - Analyst [47]

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So you talked about an iPad 2 ZAGGmate.What about Zoom or Slade or the Galaxy? Are you coming out with any models for those other tablets?

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Robert Pedersen, ZAGG Incorporated - Co-founder, President, CEO [48]

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Absolutely, John.I don't want to announce before we've actually done anything.You've probably noticed a real transition in the way that we announce things and do things.It's usually after the fact or after it's on store shelves.Most of the time, even in some of our wireless carriers, we haven't even done press releases on major announcements because we're sensitive to them and they're sensitive on their legal side to announcing things or saying things.And so really, our whole philosophy, John, now is that we are just going to let the numbers speak for themselves.And we're just trying to be low key, let the numbers speak for themselves, quarter after quarter.We're going to deliver results and in the end those who believe stay on board.I think are going to truly benefit in a big way.

And so as far as the ZAGGmate specifically, yes, we are making different versions for different tablet computers. And also, as I alluded to earlier, we need to make different keyboard versions and different keys for different markets, which we've had a lot of interest internationally from Europe, accordion keyboard from China and other locations with different various keyboards. And the demand just has to justify the need to be able to do that, and it is.And so we have some very interesting things in the works with the ZAGGmate product line. So look for press releases coming up that will show you some of our strategy as far as distribution worldwide on that.

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Jon Hickman, MDB Capital Group - Analyst [49]

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Okay.And then one more question for Brandon, I guess, or whoever.So pretty much most of last year you were pretty comfortable with margins at 50%-ish, give or take.So now it seems like you're adjusting it down to the mid-40s -- 45%, 46%, 44%.So how comfortable are you with that? Is there a rock bottom here someplace?

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Brandon O'Brien, ZAGG Incorporated - CFO [50]

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John, last year when we provided, we were talking margins, we were primarily protection.We had invisibleSHIELD.We had ZAGGskins.We had ZAGGleatherskin.We're a more diverse company now with the ZAGGmate, with the ZAGGspark.These products had a different margin contribution and so when we made the projections last year it was based off what our current product mix was. So our distribution channel mix, our sales mix, and also our individual product mix.We've got a different view now.We've got so we can see where our distribution is moving to and now we have a different product mix. And so that's the reason for the justification and the movement of that product, of the gross margin, and the other just overall sales channel mix.

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Jon Hickman, MDB Capital Group - Analyst [51]

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Okay.Thank you.

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Operator [52]

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Your next question is from Daniel Pike, a private investor.Please go ahead.

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Daniel Pike, Private Investor - Analyst [53]

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Hello, Brandon and Robert.As a shareholder, $29.3 million in sales and $0.20 of EPS, Can't ask for anything more than that.So thank you very much.In addition, getting the financing increased to $20 million, the line with USBank Corp. and getting the 10-K done on time, so great job.Just a few quick questions.Just to reiterate, the guidance, whatever you think you may lose on the gross margin line, you're still at 19% to 21% operating margin.That doesn't include any new retail partners you bring in or any new product lines that you launch this year; is that correct?

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Robert Pedersen, ZAGG Incorporated - Co-founder, President, CEO [54]

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That's correct.This is based off of what we were currently doing, who we're currently working with and our projections through those channels.

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Daniel Pike, Private Investor - Analyst [55]

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Okay.So the 95 to -- what's that?

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Brandon O'Brien, ZAGG Incorporated - CFO [56]

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Dan, I was just going to say, also, it doesn't include any additional product lines that we bring in.So you have not even any new distribution partners or product lines.

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Daniel Pike, Private Investor - Analyst [57]

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Okay.The $95 million to $100 million doesn't include either of those?

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Brandon O'Brien, ZAGG Incorporated - CFO [58]

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No.That's correct.

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Daniel Pike, Private Investor - Analyst [59]

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What do you think the tax rate can do? And, honestly, I'm not looking for next quarter or next year's first quarter, but are we talking a couple hundred basis points by opening up the Ireland facility? What can the tax rate do over time given that facility?

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Brandon O'Brien, ZAGG Incorporated - CFO [60]

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That still remains to be seen, depending on how we're able to structure the Irish facility and how we're able to run through some IT and other issues.So that's still something that we're pursuing.We do have hopes that we'll have some great savings there.But I think it's important to note that that was not the primary driver for us opening that facility.It's a nice cherry on top.But the real reason that we opened that facility is to better be able to serve the European market.

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Daniel Pike, Private Investor - Analyst [61]

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Okay.Any update on how things are going with Carphone Warehouse? Obviously a huge opportunity.That probably didn't get off to the best start ever.I know you guys have put some effort into retraining over there.Any update on them?

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Robert Pedersen, ZAGG Incorporated - Co-founder, President, CEO [62]

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I think that ties right in to what we were talking about with Shannon, Ireland and being able to facilitate a successful launch of every single new product and device, to be able to make it quickly.They have started the manufacturing over there.We ship rolls of film to Shannon, Ireland.They actually cut them, box them and ship them out of there.So it will help on the pricing to the end customers with the duties and tax issue.And it will help with the speed to market. Which are really -- price and speed to market are the two factors that have made us successful here.And the brand.We still have premium price over there.We're the premium leader in quality and in price and it works. And we want to retain that so we retain it there as well as here. And by being able to do those two things now, I think it will make a significant impact.

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Daniel Pike, Private Investor - Analyst [63]

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Perfect.The HzO raise, that is going to be done at the subsidiary level, not the corporate level?

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Brandon O'Brien, ZAGG Incorporated - CFO [64]

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That's correct.Yes, HzO is running the books on that and doing that raise so it will be done at their level.

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Daniel Pike, Private Investor - Analyst [65]

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Okay.And I think the last question I have, the inventory charge of $1.4 million, that's not inventory that came back from retailers, it was inventory you guys had in your warehouse that sales didn't materialize out in the field so you just have written it down, is that correct?

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Brandon O'Brien, ZAGG Incorporated - CFO [66]

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That's exactly correct, Dan.

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Daniel Pike, Private Investor - Analyst [67]

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Perfect.And just so I understand it, I'm going to treat it as one time.It sounds as -- you've been in business a while, you've had a lot of quarters go by and this is the first time you've had a material write-off, is that correct?

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Brandon O'Brien, ZAGG Incorporated - CFO [68]

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That's correct.

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Daniel Pike, Private Investor - Analyst [69]

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And how would you characterize as of Jan 1, would you say your inventory was clean from a KPMG standpoint?

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Brandon O'Brien, ZAGG Incorporated - CFO [70]

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Like I said, we did a very deep dive, went through ad nauseum all the SKUs and made sure if we had slow-moving SKUs or a product that was just obsolete, we took care of that.We feel like we've got a good balance and we feel like our balance sheet as far as reserves go is in better shape than it's ever been.

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Daniel Pike, Private Investor - Analyst [71]

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And now if you sell it, that, I guess, would be just pure profit, right? If you had had written it down and you sell it?

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Brandon O'Brien, ZAGG Incorporated - CFO [72]

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Right.

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Robert Pedersen, ZAGG Incorporated - Co-founder, President, CEO [73]

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That's correct, exactly.

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Daniel Pike, Private Investor - Analyst [74]

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And the last thing is the tax true-up, that was truly a one-time item.

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Brandon O'Brien, ZAGG Incorporated - CFO [75]

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That was, yes.

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Daniel Pike, Private Investor - Analyst [76]

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Like I said, $29.3 million of sales and $0.20 of EPS, thank you very much.Great job, guys.

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Operator [77]

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The next question is from [Walter Ramsley] with Wallace Partners.Please go ahead with your question.

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Walter Ramsley, Wallace Partners - Analyst [78]

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Thanks.Great quarter.Great year.Most of the questions have been answered.But I've got another one about the taxes.Do you have an estimate as to what the overall tax rate might be in 2011? It was 40% in the year just ended.

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Brandon O'Brien, ZAGG Incorporated - CFO [79]

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We're not prepared to announce that yet, Walter.We are working with some tax strategies to try and minimize that.Obviously it's a huge impact for us as a company without any NOLs.So that is a line item that we're really focusing on and hope to have some success in reducing this upcoming year just for the benefit of all the shareholders.

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Walter Ramsley, Wallace Partners - Analyst [80]

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Okay.You indicated that the tablet related revenues in Q4 which was only one month was 7%.If you multiply that up a little, do you think the run rate's more like 15% on a fully -- on a 90 day basis?

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Brandon O'Brien, ZAGG Incorporated - CFO [81]

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It's important to note that that 7%, ZAGGmate was only one month but we were selling invisibleSHIELD for the iPad since April.So we did have a few months where we were realizing sales into the tablet market.We're overall very excited about the whole growth of the tablet market and we think there's some great potential there.So as the industry continues to expand and grow, we feel like we're perfectly positioned to have products in place on device launch dates and take advantage of the overall growth in a very large market.

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Walter Ramsley, Wallace Partners - Analyst [82]

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And just one last thing, maybe I missed it, there's a lot of data here. But did you identify -- or not identify but just announce the 10% sales customers that you had, even if it's just customer A, customer B, how many?

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Brandon O'Brien, ZAGG Incorporated - CFO [83]

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We talked about the percentage of our accounts receivable.We had a couple that were over 10%.As far as revenues, we had one customer that exceeded the 10% threshold.

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Walter Ramsley, Wallace Partners - Analyst [84]

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And that will be in the 10-K?

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Brandon O'Brien, ZAGG Incorporated - CFO [85]

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Yes, it will.

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Walter Ramsley, Wallace Partners - Analyst [86]

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Can you tell us how much it was or is that still being worked on?

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Brandon O'Brien, ZAGG Incorporated - CFO [87]

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It will show up in the 10-K.

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Walter Ramsley, Wallace Partners - Analyst [88]

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Okay.Great showing.Thanks.

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Operator [89]

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The next question is a follow-up from Mike Malouf with Craig-Hallum.Please go ahead with your question.

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Mike Malouf, Craig-Hallum Capital Group - Analyst [90]

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I had to get one more question in.

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Robert Pedersen, ZAGG Incorporated - Co-founder, President, CEO [91]

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You bet.We'll make it the last one, Mike.

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Mike Malouf, Craig-Hallum Capital Group - Analyst [92]

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Okay.This will be a good one.When MC Hammer was on Oprah, one of the things he talked about was his desire to get it into Apple and meet with Apple and really explore to get the ZAGGmate offered at Apple stores.Obviously that would be a big positive for you guys.I'm just curious if you could comment, give us a little bit of color on your ability to get into the Apple stores with the new ZAGGmate and the iPad 2.Thanks a lot.

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Robert Pedersen, ZAGG Incorporated - Co-founder, President, CEO [93]

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You bet, Mike.That's actually a fun question.So I appreciate that.We're partnered with a number of people. And whether it's celebrities or not, the significant industry people behind the scenes.We do a lot behind the scenes that never get announced or anybody ever sees out in the open. But the relationship with MC Hammer has been good and strong for a long time.I actually went with him to Apple the day before the Oprah show. And he happened to be going onto the Oprah show the next day. Asked him if he was going to promote the -- not promote, but show Oprah the ZAGGmate, kind of tongue in cheek. And he said -- Absolutely.I know she loves the iPad and I love my ZAGGmate.So that's how that happened.

But I went with him to Apple and met with the executives and buyers.I can't comment on the results of that, but there definitely is some real interest and that is something that is a possibility.

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Mike Malouf, Craig-Hallum Capital Group - Analyst [94]

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Thanks a lot.Good luck and we'll look forward to listening to the next quarterly report.

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Operator [95]

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There are no further questions in queue.I'd like to turn the call back over to management for closing remarks.

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Robert Pedersen, ZAGG Incorporated - Co-founder, President, CEO [96]

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Thank you, Operator. And thank you, everybody, for your great questions.Of course, we've grown to a point where we can really only have time for analysts or largest shareholders to be able to ask questions because of the limited amount of time. But we appreciate all of the support that we have and all of our shareholders. And we want to thank everybody on the ZAGG team for their continued efforts and dedication, excellent work.And thanks for all of your participation, everybody who listened in and who will listen in and for your interest in ZAGG.We appreciate the support and look forward to speaking with you again on our first quarter conference call.Of course, we've already almost finished our first quarter and we look forward to sharing our results with the first quarter.Things are great right now in the marketplace and the overall industry, and with ZAGG, things couldn't be better.We're looking forward to a very bright 2011 and reaching all of our goals consistently.Everybody have a great day.And go ZAGG.

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Operator [97]

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This concludes the teleconference.You may disconnect your lines.Thank you for your participation.