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Skullcandy Management Discusses Q2 2012 Results - Earnings Call Transcript

With that, I'll turn the call over to Skullcandy's President and CEO, Jeremy Andrus.

Jeremy Andrus

Hi, everyone, and thanks for joining our second quarter earnings call. We are pleased with our second quarter results. Net sales increased 38%. Gross margin improved sequentially and net income increased 60%. Our sales growth was broad-based, with all of our major channels of distribution increasing on both the domestic and international sides. Sales growth was driven by sell-through and SKU growth with existing accounts, a double-digit increase in ASPs and the transition to a direct selling model in Europe. Also benefiting sales was the earlier timing of back-to-school shipping, which began about a week earlier this year and shifted some sales in the second quarter compared to the third quarter last year.

Second quarter gross margin increased 40 basis points sequentially from the first quarter and benefited, primarily by a more favorable mix of revenue and improved margins from 2012 model products. In the expense side, SG&A increased slightly above sales growth and were aligned with expectations. While we continue to invest in key areas of the business, the rate of investment has slowed and we are beginning to generate incremental revenue from those investments.

We're extremely excited about the second half of this year. We will be launching a new redesigned line of Astro Gaming headphones, a new line of Skullcandy gaming headphones and a number of internally designed and developed headphones from both our Skullcandy and 2XL brands. We believe Astro Gaming is the best premium gaming headphone brand on the market and there are many long-term opportunities to continue to develop this brand. When we acquired Astro in April of last year, we knew there were significant number of synergies between gaming and audio headphone categories. These synergies includes product development, supply-chain, sales channels and the customer base. The gaming headphone category is growing, especially at the high-end and there are limited number of established brands in this space. Barriers to entry are high because of the sophistication in technology involved with developing and distributing such a complex product. At the time of acquisition, Astro was a small niche business with great products and a strong brand, but have limited distribution and a cost structure that did not support traditional retail channels. The company's products were targeted primarily at hard-core gamers and sold exclusively online.

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