Skullcandy Management Discusses Q2 2012 Results - Earnings Call Transcript

Skullcandy (SKUL)

Q2 2012 Earnings Call

August 02, 2012 4:30 pm ET

Executives

Seo Salimi

Jeremy Andrus - Chief Executive Officer, President, Chief Operating Officer and Director

Ronald Ross - Vice President of Finance and Principal Accounting Officer

Analysts

Edward J. Yruma - KeyBanc Capital Markets Inc., Research Division

Robert F. Ohmes - BofA Merrill Lynch, Research Division

Jay Sole - Morgan Stanley, Research Division

Adam F. Engebretson - Piper Jaffray Companies, Research Division

Michael Fawzy Malouf - Craig-Hallum Capital Group LLC, Research Division

Amanda Sigouin - Jefferies & Company, Inc., Research Division

Daniel R. Wewer - Raymond James & Associates, Inc., Research Division

Ryan Macdonald

David M. King - Roth Capital Partners, LLC, Research Division

Presentation

Operator

Good day, ladies and gentlemen. Thank you for standing by, and welcome to Skullcandy's Second Quarter 2012 Earnings Conference Call. Presenting on today's call will be Jeremy Andrus, President and CEO; and Ron Ross, Vice President, Finance and Principal Accounting Officer. As a reminder, today's call is being recorded. [Operator Instructions] I would now like to turn the conference over to Mr. Seo Salimi, Associate General Counsel. Please go ahead, sir.

Seo Salimi

Good afternoon, and welcome to Skullcandy's second quarter 2012 earnings call. Certain statements made on today's, during the prepared remarks or in response to your questions, may constitute forward-looking statements and are made pursuant to and within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to both known and unknown risks and uncertainties that could actual results to differ materially from such statements. Those risks and uncertainties are described in Skullcandy's registration statement on Form S-1 and its quarterly and annual reports on Form 10-Q and Form 10-K. Investors should not assume that the statements made today during the conference call will remain operative at a later time and Skullcandy undertakes no obligation to update any information discussed on today's call.

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.

After years worth of product redesign and factory resourcing, Astro's entire product line now carries retail-ready margins, giving us the ability to expand Astro's distribution into traditional retail channels. On July 20, we launched Astro's first new product since the acquisition, the $299 A50 Wireless gaming headset. A50 is Astro's most technologically advanced product in its award-winning line of headsets. It features cutting-edge KleerNet 5.8 gigahertz wireless technology, Dolby Digital 7.1 surround sound, and built in MixAmp 5.8 and multi-platform compatibility. The A50 is professional tuned for audiophile level performance when gaming, watching movies or listening to music. It functions natively across all manner of entertainment devices, including gaming consoles, PCs, Macs and home theater systems.

Since the launch of the A50 less than 2 weeks ago, we have sold a significant number of units from the astrogaming.com website. And the early buzz around the product has been very positive. Just this week, it was awarded the Editors' Choice for gaming headsets in PCMag.com and a recent YouTube video featuring the unboxing of the new A50 has already received 230,000 views. Technology publication, The Verge, commented, "Astro's headset range has been praised for its sound quality, but the A50 may be the company's most versatile and best-sounding product yet." Astro's always built their products on that solid foundation and the A50 is no exception. The Astro A50 is, without question, one of the best gaming headsets on the market.

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