ZAGG (ZAGG) Q1 2019 Earnings Call Transcript
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ZAGG (NASDAQ: ZAGG)
Q1 2019 Earnings Call
May. 07, 2019, 5:00 p.m. ET
Contents:
Prepared Remarks
Questions and Answers
Call Participants
Prepared Remarks:
Operator
Good day, ladies and gentlemen, and welcome to ZAGG's first-quarter 2019 earnings conference call. [Operator instructions] As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Brendon Frey. Sir, you may begin.
Brendon Frey -- Investor Relations
Good afternoon, and thank you for joining us today to review ZAGG's first-quarter 2019 financial results. On the call today we have Chris Ahern, chief executive officer; and Taylor Smith, chief financial officer. Following Chris and Taylor's prepared comments, we will open the call for a question-and-answer session. Our first-quarter earnings press release was issued today after the market closed at approximately 4 p.m.
Eastern Time. As a follow-on to the earnings release, we published a supplemental financial information on our investor relations website. And we also furnished this document to the SEC on Form 8-K. You can find all our earnings documents on our investor relations website at www.zagg.com in the Quarterly Results section under the Financials tab.
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We are recording this call, and a podcast of the conference call will be archived at the ZAGG investor relations web page under the Events tab 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 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 as of the date hereof.
For a more detailed discussion on the factors that can cause actual results to differ materially from those projected in any forward-looking statement, we refer all of you to the risk factors contained in ZAGG's annual report on Form 10-K and quarterly reports on Form 10-Q filed with the Securities and Exchange Commission. ZAGG assumes no obligation to revise any forward-looking statements that may be made in today's release or call. Please note that on today's call, in addition to discussing the GAAP financial results and the outlook for the company, we will discuss adjusted EBITDA and diluted operating earnings per share, both non-GAAP financial measures. 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 the SEC Regulation G is included in ZAGG's press release today, which again, can be found on the investor relations section of the company's website.
The non-GAAP information is not a substitute for any performance measure derived in accordance with GAAP and the use of such non-GAAP measures has limitations, which are detailed in the company's press release. And now, I'd like to turn the call over to Chris Ahern. Chris?
Chris Ahern -- Chief Executive Officer
Thank you, Brendon. Good afternoon, everyone, and thank you for taking the time to join us today. I'm going to start today's call by reviewing the main drivers for our Q1 results, which were consistent with our outlook, and then discuss how we anticipate the remainder of the year unfolding. As we outlined on our previous earnings call, we expected the first half, particularly the first quarter, to be very challenging for several reasons.
From a top line prospective, our core business faced a few specific headwinds. First, our power category was up against a tough comparison from last year as we continue to roll out our initial wireless charge pad shipments to many of our retail partners. Second, as we approached a potential tariff increase on Jan 1, several domestic accounts requested early shipments of screen protection and wireless charging accessories, which pulled some sales out of our first quarter into the fourth quarter. Third, the soft demand for smartphone devices has created a challenging -- challenges for the entire mobile accessory market year-to-date.
These headwinds have been partially offset by increased sales from the juice pack access and revenue contributions from our newly acquired brands. With flat glass screen protection and wireless charging being two of our higher-margin product lines, the decline in sales had a meaningful impact in the first-quarter gross margins. On top of this, we are carrying additional expenses from our recent acquisitions without the full top line benefits as annual sales for Gear4, BRAVEN and HALO are heavily back-half weighted, which resulted in significant deleverage. Over the past several months, we have made good progress developing new product and distribution opportunities for these businesses and fully expect that each will contribute to our success this year and beyond.
Despite some challenges during the first half of '19, we are confident in our ability to deliver sales and profitability within the guidance ranges we originally established for the full year. Excluding difficult environment for device sales, the factors that we anticipate negatively affecting our core business in the first half will not carry over into the second half, mainly the tough comparison for the charge pads that pulled power for our Q1 shipments into late '18. Our traction will start to build in the second quarter and continue to the back half of the year, where we'll benefit from new product launches in our core and newly acquired brands, expand the distribution domestically as we take our newly acquired brands to our core footprint, and further international growth in Europe, Asia, Latin America and Canada. In our core business, we expect success with the multi-brand through launching wireless juice pack access products closer to OEM device launch this fall, and an exciting new line of our power and wireless products that we will be loading into retail over the next several months.
We continue to drive innovation in our InvisibleShield brand as we expect our blue light blocking VisionGuard screen protection to expand the customer penetration and market awareness campaigns. In addition, we've increased our focus on driving attach rates at retail, particularly with the launches this fall. We expect a strong second half for audio as we continue to expand our iFrogz true wireless product lineup, including some nice placement opportunities for these products on HSN and QVC. With regard to our acquired brands, we are very pleased with the integration progress on all three brands.
In fact, we are ahead of our integration plan from a timing perspective. We've seen outstanding customer reception for Gear4 products. In fact, this month, we placed Gear4 product with a key retail partner as a test in advance of the fall device launches which positions us for greater success in the second half of the year. Beyond this placement, we've been able to secure multiple distribution wins in the second half in advance of the fall launches and holiday sales period.
We're very excited for our new BRAVEN lineup that will launch during the second half in advance of holiday. We're expecting continued penetration in multiple strategic channels with this new revamped BRAVEN product line. The HALO investment thesis is playing out nicely as anticipated. We're working toward not only multiple HALO features on QVC during the back half of '19, but we're -- but also grow in that channel with our other core brands.
As HALO and our other brands are featured on air, it drives additional sales through the various online channels and allows us to maximize the overall sales opportunity. In closing, we are confident in the strategic course we set for ZAGG. Our focus continues to be on serving the consumer with a portfolio of innovative products that enhance the mobile lifestyle, particularly in the area of protection, power, audio and productivity. We've built a house of market-leading brands, supported by a tremendous research and development team and powerful distribution relationships which we will leverage to drive sustainable growth and increase profitability.
Looking ahead, we believe we are well-positioned to capitalize in the many global prospects that lie ahead and generate increased value for our shareholders over the long term. With that, I would like to turn the call over to Taylor.
Taylor Smith -- Chief Financial Officer
Thanks, Chris. Since many of the details of our quarterly financial performance were included in the supplemental financial information issued earlier today, I would just like to take a few minutes to add some additional comments on our recent financial performance compared to the first quarter of last year. Net sales decreased approximately 30% to 79 million in the first quarter, due primarily to, one, a difficult year-over-year comparison from the continued load-in of the new mophie charge pads during the first quarter of last year; two, the impact of certain customers pulling forward tariff-impacted products into the fourth quarter of 2018; and three, the continued slowdown of handset sales. Partially offsetting these headwinds was a 22% increase in sales of power cases from the launch of the new juice pack access, as well as sales from our newly acquired brands.
Results were at the high end of the guidance range we provided on our last call of 75 million to 80 million in the first quarter. Gross profit as a percentage of net sales decreased by approximately 300 basis points due to a higher mix of curved screen protection associated with the launch of the new Samsung Galaxy handsets, along with the impact of lower charge pad sales during the first quarter of 2019, which along with screen protection, is a higher-margin product category. .Operating expenses increased 38% compared to last year due primarily to the impact of the acquisitions of BRAVEN, Gear4 and HALO. As we mentioned on the last call, we're carrying the full operating expense burden of these new brands for all of 2019.
However, the bulk of the revenue contribution will occur in the second half of the year. Because of this, profitability for these brands and the company will be lower in the first half of 2019. Adjusted EBITDA was negative 9 million versus 13.5 million in the prior-year period. The decrease was the result of lower net sales and gross margins and the operating expense burden associated with our newly acquired brands.
Turning to the balance sheet. Compared to a year ago, accounts receivable increased 27% to 94 million, due primarily to holiday payment terms extended to key customers at the end of 2018, with corresponding DSOs increasing for the same reason to 107 days compared to 59 days last year. The quality of our receivables remains very good, and we expect DSOs to return to more historical levels by the end of the second quarter. Inventory increased 27% to 100 million compared to the same period last year.
Approximately half of the increase was due to the incremental inventory associated with our recent acquisitions, with the balance of the increase due to slightly higher inventory levels at international to support its 2019 growth, along with some additional inventory on hand due to the slowing of OEM handset sales during the first half of 2019. Despite the increased inventory position, the excess inventory skews our current product and will continue to be sold down throughout the second and third quarters. Consolidated inventory turns were approximately six times, excluding acquisitions, down from seven times in the prior year period. We expect significant improvement to our historical turns in the -- we expect significant improvement back to our historical terms in the high-6s and low-7s by the time we exit the year.
In terms of share repurchase, during the quarter, the company repurchased $1 million worth of shares for a total of $13 million in the last 12 months. Net debt, which is consolidated debt less cash, increased to 77 million compared to 5 million last year. The increase was due to cash used for the three acquisitions of approximately 55 million, 13 million for share repurchase, and to fund ongoing operations, particularly with our newly acquired brands. Excluding cash paid for acquisitions and share repurchase during the last 12 months, the company would have had net debt of 9 million at the end of the quarter.
Last, I wanted to spend a few minutes discussing our guidance for 2019. Net sales continue to be estimated at 610 million to 630 million, or a growth of 13% to 17%. Gross margins are still expected to be in the mid-30s as a percent of sales. We continue to estimate our annual tax rate at this time to be approximately 25%, and we'll provide updates as we progress through the year.
Operating earnings per share, which excludes the tax-affected impact of transaction-related expenses, including amortization from the Gear4, HALO and BRAVEN acquisitions, is still estimated to be between $1.47 and $1.60 compared to $1.44 in 2018, on approximately 29.9 million shares outstanding. We believe this is a better representation of our operating results and allow us an apples-to-apples comparison with the prior year. Adjusted EBITDA for 2019 is estimated at 82 million to 86 million. This assumes incremental expenses associated with marketing, product placement and other miscellaneous expenses to build meaningful sales traction for our newly acquired brands.
Free cash flow, which we define as adjusted EBITDA minus capital expenditures and cash tax expense, is estimated to be approximately 65 million at the midpoint of our range. As we discussed in the March earnings call and have reiterated today, we expect a majority of sales associated with our recent acquisitions to occur in the second half of the year. This aligns the Gear4 sales with second half OEM device launches and HALO sales with their traditional third and fourth-quarter sales on QVC. For BRAVEN, we are planning a fall launch of their new products into the market.
Our best estimate at this time is that approximately 30% of annual sales will fall in the first half with approximately 70% in the second half. Adjusted EBITDA for the first half is estimated to be negative in the mid-single digits due to the timing of sales and expenses associated with the acquisitions, coupled with the pressure from the slowdown in OEM device sales. With that, we will now open up the call for questions.
Questions & Answers:
Operator
[Operator instructions] Your first question comes from the line of Mike Malouf with Craig-Hallum Capital Group.
Mike Malouf -- Craig-Hallum Capital Group -- Analyst
Hey guys. Thanks for taking my questions. Can we start off with the battery cases? Can you just flesh that out a little bit more about kind of where you are with the release of that? And obviously, the market share came way down. Just trying to get a sense of competition and where you sort of see that playing out over -- throughout the year?
Chris Ahern -- Chief Executive Officer
Yes, sure. So Mike, on the battery cases, we have basically just been hitting retail stores this month, maybe late last month. Reception has been very, very good. Reviews have been strong.
Online with our mophie customers has been accepted really, really well. In terms of market share, yes, we dropped the market share. Obviously, you've seen Apple have brought their own battery cases and had a lead to market. So we anticipated that.
But we're very happy with the acceptance of the juice pack access, and we would anticipate that that gets more momentum as we get out to more and more of our partners offline.
Mike Malouf -- Craig-Hallum Capital Group -- Analyst
Now are you planning on just having the access? Or are you having the other older products as well? Or is this a full-queen switch over to the wireless charging without the plug-in?
Chris Ahern -- Chief Executive Officer
We will continue it on both pads because there's different channels that we can play in with both sets of products.
Mike Malouf -- Craig-Hallum Capital Group -- Analyst
Got it. OK. And then with regards to the HALO acquisition, can you talk a little bit about potential synergies? I know you talked a lot about that when you made the acquisition. It's been a little while now.
Can you just flesh out a little bit where we are with those potential especially on the IP side?
Chris Ahern -- Chief Executive Officer
Yes. Well, in terms of synergies, the biggest one for us is being on the actual channel itself in terms of HSN and QVC. Since we've acquired HALO, we've had a number really, I would say, positive meetings, not just on the HALO brand, but our entire house of brands, whereby we see some really nice opportunities across all those brands. And you'll hear more about that in the second half of this year.
If you look at the integration, primarily, we started with HALO to really focus on their own business for '19. But I would tell you, we're ahead of timing in that where we look at synergies from a warehousing perspective just general support from finance, operations. So we're starting to really get ahead of that. And we would anticipate, by the end of the year, we'd be pretty much done in terms of integration.
So we're very pleased where we are. The IP aspect to your question, they've brought some strong IP with the business as it came across, and we're really looking at how we leverage that now from an offense perspective. But yes, it has a lot of opportunities for us.
Mike Malouf -- Craig-Hallum Capital Group -- Analyst
OK, great. And then just a final follow-up. You -- I think you said that 30 -- what was the 30 and the 70? And then just -- can you just go over that again? The 30%, 70%? Was that the revenue you expect for the year?
Chris Ahern -- Chief Executive Officer
Yes. So we anticipate for the first half, 30% of our revenue will be achieved.
Mike Malouf -- Craig-Hallum Capital Group -- Analyst
Of the total revenue. And then the negative EBITDA in the mid-single digits, is that what you said?
Chris Ahern -- Chief Executive Officer
That's correct, in the first half.
Mike Malouf -- Craig-Hallum Capital Group -- Analyst
So obviously, just slightly positive in the second quarter to make that? OK.
Chris Ahern -- Chief Executive Officer
Yes.
Operator
Your next question comes from the line of Tom Forte with D.A. Davidson.
Tom Forte -- D.A. Davidson -- Analyst
[Inaudible]
Chris Ahern -- Chief Executive Officer
There's a bit of feedback in your line.
Tom Forte -- D.A. Davidson -- Analyst
I'd get back in the queue so I could straighten out my end.
Operator
Your question comes from Dave King with ROTH Capital Partners.
Dave King -- ROTH Capital Partners -- Analyst
Thanks for joining guys. So maybe first on the guidance. Looks like the expenses were up, I think like 11 million or so year-on-year in Q1 following the acquisitions that came mainly near year-end. It looks like the guidance signify less of an increase over the subsequent quarters and even Q4.
Are you assuming a fair amount of cost synergies there, or specific savings you could talk about?
Taylor Smith -- Chief Financial Officer
Yes. I think just generally, if you look at opex for the year, I think there are some savings in some instances. I think we talked about BRAVEN and Gear4 both being carve-outs. And so in those cases, there were some savings.
But in some cases, we had to add some cost to help fund planners and other things like that that just didn't come over because it was a carve-out. As you're looking at SG&A for the year, I think probably beneficial if we give you just a little bit more guidance on that. But we're estimating for the full year, SG&A to kind of be between 25 and a half and 26% of sales. We'd expect, if you're kind of comparing Q1 to Q2, a nice reduction from Q1 to Q2 kind of in the $38 million to $39 million range for Q2.
And then as we move into Q3 and Q4, there's a certain amount of opex that is variable and discretionary. And as we look at how the year's kind of playing out, we have the ability to pull back on some of that. And so as we see how sales and profitability is rolling out in Q3 and Q4, we have the ability to kind of pull back on some of that. But I think if you're generally in the range of 25 and a half to 26% of sales for the full year, you're kind of right in line with what we're projecting.
Dave King -- ROTH Capital Partners -- Analyst
OK. That helps. And then on the guidance for Q2 in particular, especially on the revenue side. It sounds like you're guiding toward like a 10% decline year on year.
How should we be thinking about that across the various product lines? Should power cases be up now? I mean, I feel like some of the benefit you had this quarter was load-in. But should we expect that to be up? And then how are you thinking about the other categories?
Taylor Smith -- Chief Financial Officer
Yes. So you probably saw -- or hopefully, you saw in our CFO commentary, we've tried it, because of the addition of some additional categories over the last couple of years. We're trying to simplify the reporting. And so we talked about protection, power, audio and then productivity.
I could say generally, we've talked about some of the headwinds that have impacted us on screen protection and wireless in the first quarter. Some of that continues into the second quarter. We certainly, for power cases, expect to receive -- some of the benefit of the sell-through of the juice pack access is that product's being launched now into retail. So I think, generally, we'd see definitely an increase in that particular category, whereas for screen protection and wireless, we're probably down year over year for those particular categories.
Dave King -- ROTH Capital Partners -- Analyst
OK. Perfect. And then I guess one more quick one. How much did Gear4 and HALO contribute to revenue in the quarter? Was it like 3 and a half million or so? Is that the right way to think about it?
Taylor Smith -- Chief Financial Officer
So this will be published in the 10-Q when it comes out. HALO was a little over $1 million, largely online sales. They tend to run their QVC-related programs later in the year, so really, it's a lot of online sales. Gear4 during the quarter was approximately $6 million.
Operator
Your next question comes from the line of Thomas Forte in with D. A. Davidson.
Thomas Forte -- D.A. Davidson -- Analyst
Try this again. So wanted to ask two questions. So the first question I had was it seems to me that the market is misunderstanding or mispricing your stock on two basis. No.1, you historically -- one of your core competencies has been to find M&A acquisitions and then materially improve the sales of the companies you acquire by plugging them into your distribution.
And No.2, while it's not necessarily maybe helpful that you're seeing slowing unit sales in iPhones and some of the other high-end units, it doesn't necessarily mean that your business won't be able to generate over time the consistent high single-digit, low double-digit revenue. So can you talk about both of those things? Is there anything different about HALO or Gear4 or BRAVEN that would suggest that they won't perform the way others have in the past?
Chris Ahern -- Chief Executive Officer
Great question. Thanks, Tom. So no, to answer your question very, very quickly. There is nothing different.
We're extremely happy with where we are with all three acquisitions. I think will come into play into the second half, as we've been stating for the last quarter or so. When you look at the acquisitions, we're very, very pleased in terms of the early reception from our current base of consumers, our partners. But also we've been opening a number of new doors internationally with those brands as well.
So we're really, really pleased with the performance of the new acquisitions just from feedback alone, right? So we really look at the second half of you'll see some nice growth on those acquisitions. What was your first point, Tom?
Thomas Forte -- D.A. Davidson -- Analyst
Yes. The first point was that, while it may not necessarily be ideal that you're seeing year-over-year declines in unit sales for iPhones, I think the market's runway, assuming that that means that you're not going to be able to generate your historic performance when it comes to leveraging multiple device opportunities of high single-digit, low double-digit revenue growth over time.
Chris Ahern -- Chief Executive Officer
Yes. So while it is seen as a headwind, obviously, we've seen the reports in terms of some OEM year-on-year, quarter-on-quarter declines. We are taking over a number of activity that will help in terms of our sell-through. So we've doubled our MSM team, which is our marketing sales team, to basically help educate the retailers, the consumers, and essentially help drive sell-through at those retail units.
Also we're investing a lot at the point of sale, drive extra sell-through looking at some campaigns that we can roll with some of our larger retailers. And as we look at 5G coming down the pipe, we see that as a real benefit and really help us kick on with some of the sell-through, particularly the back-end of this year and going into next year in particular. Outside of that, diversification of the portfolio, we're looking at, obviously, not just device-specific products. So we're really looking across all of our trends in terms of how can really drive sell-through that's not exactly tied to a specific smartphone device.
So we're very at ease with where we are, Tom. I think we can continue to drive sell-through for this year. And to answer your question, why it is a headwind. We're pretty confident with the plans that we have in place so we can continue to drive increased sales.
Operator
Your next question comes from the line of Jeff Van Sinderen with B. Riley FDR.
Jeff Van Sinderen -- B. Riley FBR, Inc. -- Analyst
Good afternoon everybody. Maybe you could just remind us of the key drivers you have baked into your guidance for second half. Perhaps touch on the assumptions you're making for screen protection, particularly in domestic around the new Apple iPhone launches. And I know you just mentioned 5G, so maybe you can touch on how you feel that kicks in.
And then I guess just how much of the growth in second half is coming from acquisitions? And I guess what rate of growth are we assuming for organic in second half?
Chris Ahern -- Chief Executive Officer
Yes. Sure. So just to touch on some of the key items for us in the second half. So obviously, we've got some larger OEM launches in the second half that we see some nice opportunities for us, but not only that is in terms of ISoD as well, Jeff.
We are seeing a lot of growth, particularly internationally, where we're opening more and more new doors. So while we're confident on some of the newer devices launches, we're very, very confident on where we're going in terms of opening new doors, new partnerships internationally. We're seeing some nice traction down in LatAm with ISoD as well. So we've taken our learnings from the Europe and APAC region and really applying it to the LatAm region.
So we're seeing continued new doors, new opportunities in those areas. And domestically, 5G, I've mentioned, I think as that technology gets rolled out, we do see that as almost like a shot in the arm to really kick on for our business, in the second half, really, I think that comes into more play in 2020. So I'll hand over to Taylor for the second half your question.
Taylor Smith -- Chief Financial Officer
Yes. So earlier in the year, in the March call, we kind of talked about, directionally, how we expected the core business and acquisitions to play out over the year. We said on the March call that we expected acquisitions to be approximately 10% increase in sales year over year. Certainly, the majority of that's happening in the back half of the year as we've talked about.
For the core business, we talked about growth of kind of 1% to 4% just generally. And so given some of the headwinds we've had in the front half, some of that's going to materialize in the back half of the year, and we feel good about the back half of the year certainly.
Jeff Van Sinderen -- B. Riley FBR, Inc. -- Analyst
OK, that's helpful. And then given the mix shift toward lower-margin in curved glass in Q1, what should we anticipate in terms of the mix of curved glass going forward, particularly as we think about second half?
Chris Ahern -- Chief Executive Officer
Yes. So we continue to, obviously, refine on our curved glass in terms of the margin. So while it is a lower-margin product, we've been working very closely with our CMs in ensuring that we increase our margin on that, do all the right things to make it accretive, which it is. How -- were you thinking about the second half? We continue to see sell-through, particularly in some of our OEM devices.
But we'll continue to work with our supply chain to really drive on the margin side of that.
Taylor Smith -- Chief Financial Officer
And Jeff, I'd just add a couple of things to that. So in the first half, if you'll recall, we talked about some of the tariff pull-forward. A lot of that was flat glass that was pulled into Q4 in anticipation of the -- what we thought was a tariff increase on January 1. So a lot of that flat glass pulled into Q4 as opposed to being sold into Q1.
So just by pulling that out of Q1, we had kind of a natural headwind on margin because the -- as we launched for the GS10, a lot of that -- most of that was flat glass and was a little bit lower margin. As we look to the back half of the year, the iPhones are -- tend to be flat products, and so we'd expect margins to be significantly better in the back half of the year than in the front half.
Jeff Van Sinderen -- B. Riley FBR, Inc. -- Analyst
OK. Good. And then can you just touch on the wireless charging outlook for the second half of this year? I know there were some comparison issues that made it a little tougher recently, but if you can just touch on that and the outlook for second half for wireless charging.
Chris Ahern -- Chief Executive Officer
Yes, sure. So second half, Jeff, we have some really, really I would say, strong roadmap of products that are coming out, Q3, Q4. So nicely staggered product launches to the complete back end the year. And we -- as we've always messaged, we've looked at it as an ecosystem from charging at home, in your car, in the office and on the go.
We feel really, really good. We've had a review over the last number of weeks of where we're going with the portfolio. So we feel very, very strongly about the wireless portfolio for the second half and excited for that to come to market.
Operator
I'm showing no further questions at this time. I would like to turn the conference back to Chris Ahern.
Chris Ahern -- Chief Executive Officer
Thank you all for joining us for our 2019 Q1 results. Look forward to speaking to you all in our Q2 earnings call. Thank you.
Operator
[Operator signoff]
Duration: 31 minutes
Call participants:
Brendon Frey -- Investor Relations
Chris Ahern -- Chief Executive Officer
Taylor Smith -- Chief Financial Officer
Mike Malouf -- Craig-Hallum Capital Group -- Analyst
Tom Forte -- D.A. Davidson -- Analyst
Dave King -- ROTH Capital Partners -- Analyst
Thomas Forte -- D.A. Davidson -- Analyst
Jeff Van Sinderen -- B. Riley FBR, Inc. -- Analyst
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