Wednesday, March 16, 2011

Zagg ( Nasdaq - ZAGG ) -- Follow-up Report

Zagg (ZAGG $7.00) reported excellent Q4 results, far beyond our expectation.  Sales were fueled by the addition of new distribution channels.  The company added the ATT and Verizon retail networks to its thriving Best Buy relationship.  Zagg also enjoyed a surge in volume on its own website.  Revenues jumped 157% to $29.3 million.  Mobile phones represented 91% of the total.  Tablets accounted for 7%.  The ZaggMate tablet add-on was introduced in Q4, so that segment contributed a small percentage for the entire year.  Non-GAAP earnings surged 550% to $.13 a share.  An inventory write-off cost Zagg $.04 a share in Q4.  The company has to build inventory when new phones are launched.  Some of those units don't sell as well as hoped.  Write-offs probably will be an ongoing issue although Zagg is developing techniques to mitigate the damage in future periods.  An unusually high tax rate clipped income by an additional $.02 a share.  That figure promises to decline in 2011 after Zagg opens an Irish distribution center.  Besides reducing the company's tax liability the fulfillment operation should improve response times with European customers.  International business accounted for 20% of 2011 sales even though a majority of phones are used outside the United States.

The earthquake in Japan might cause growth to moderate.  Key semiconductor factories were put out of commission.  And the nation's electricity supply could be constrained for months as the nuclear power plants in Japan are recertified, or rebuilt.  Zagg's tablet related volume also might be effected by Apple Computer's new iPad cover.  That's not a direct competitor but many consumers might be reluctant to buy a second accessory.  Still, another powerful performance appears likely.  We estimate sales will improve 25%-31% to $95-$100 million to provide earnings of $.55-$.60 a share (+28%-40%).  Expanding smartphone and tablet demand combined with new product introductions are capable of propelling sales to $150-$175 million within 2-3 years.  Income could achieve $.75-$1.00 a share.

( Click on Table to Enlarge )

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