Zagg Downgrades Q4 Projections As Audio and Screen Protector Sales Dip
Zagg cut financial guidance for Q4 based on lower sales of its high-margin invisibleShield screen protector products and “lack of sales execution,” said CEO Randall Hales on the company’s Q3 earnings call Tuesday. Chief Financial Officer Brandon O'Brien cited “missed sales opportunities in the third quarter,” and said Q4 sales will fall below targeted levels, leading to a revenue guidance downgrade for the holiday quarter to $212 million-$218 million versus previous estimates of $245 million-$252 million.
On the sales side, Zagg “did not sell more to existing customers” and didn’t expand distribution either domestically or internationally as the company had hoped, Hales said. Strategies put in place in Q2 to address sales shortfalls resulted in “limited progress” as “commitments were not met,” Hales said. As a result, Zagg let go some employees in Q3 and replaced them with ones with “relevant experience,” including a wholesale and franchise team manager, an international sales team manager, a Latin America sales manager and several account managers, Hales said. The company has hired an executive search firm to find a new executive sales vice president, and sales management will report to Hales in the meantime. Zagg signed new distribution agreements with D&H Distributing for domestic sales and Australian CE retailer Dick Smith, Hales said.
The invisibleShield line was 47 percent of sales versus 51 percent in the year-ago quarter, due to a lack of major device launches in the quarter, no new form factor from the iPhone 5 and more competitive alternatives including ruggedized and waterproof casings, Hales said. Competitors have also introduced glass screen protection which has “displaced” some invisibleShield film sales. The company is responding with an invisibleShield glass that will strengthen its device protection line, Hales said.
To react more quickly to customers’ needs, Zagg is in the alpha test stage of an on-demand process that allows retailers to deliver custom invisibleShield designs to customers in store, Hales said. Hales said the patent-pending technology allows retailers to produce an invisibleShield in less than a minute “for nearly any device” by downloading a file from a cloud-based library to a desktop plotter that cuts film to size.
The benefits to retailers are that a store can have a new product at launch for all new devices, the process reduces a retailer’s inventory commitment and a store doesn’t have to turn away a customer because it doesn’t have the right shield for a particular device, Hales said. The process could have life outside of traditional invisibleShield applications since retailers can produce a film as large as a laptop screen and as small as a protector for watch faces, he said.
Zagg suffered a setback in June when Apple announced a new standard for game controllers, and the company had to “hit the reset button,” Hales said. The company was on the verge of launching its Calypso controller when Apple announced the change, and Zagg had to “realign with what Apple announced they would support,” Hales said. That caused Zagg to start the design over to accommodate a Lightning port, he said. The company then had to “work very closely with Apple, all the way through the process,” Hales said. Zagg is awaiting approval from Apple for the controller and will then “enter the category in a big way,” he said.
Net sales at Zagg dropped in Q3 to $49.9 million from $59.8 million in the year-ago quarter, Zagg said. Keyboard sales were 28 percent of sales versus 19 percent a year ago and iFrogz audio products slipped from 15 percent of sales to 14 percent, it said. Net income for Q3 dipped to $3.2 million from $3.4 million in Q3 2012, it said. Shares fell 13 percent Wednesday to close at $4.12.