Money McBags apologizes for the delay in getting this up but he had a brilliantly written piece with prose that would have made even Roberto Bolano shudder but somehow he screwed up in saving it and all was lost (like Alan Greenspan’s credibility or Kelly Brook’s bikini in the upcoming Piranha 3D) so he’ll try to recreate it, but just know it will never be the same.

That said, ZAGG is a company Money McBags excoriated just a few weeks ago because they sell a commodity product at a high price point in a getting more competitive market with margins shrinking, eps that was hurtling towards zero, and they don’t even own the patent on the materials they sell.  It is a company with a limited window to succeed and that window is getting closer to shutting every day, like Charlie Rangel’s political career.  However, the company gave a big middle finger to Money McBags earlier this week and posted a solid top line quarter.  So without further ado (and Money McBags has no idea what ado is, but he’s glad there will be no further of it) here is Money McBags’ analysis of the Q:

The Good

1. Revenue spiked up to $15.1MM which is up 71% sequentially and 65% year over year.  The jump in revenue was due to a confluence of positive events for the company including three new Apple releases (the iPhone 4, the iPad, and Steve Jobs’ bowels) and a new deal with AT&T ramping up.

2.  EPS was up to $.08 which is more than double last Qs awful $.03 and greater than last year’s $.05 eps Q2.

3.  They are actively looking at getting more wholesale distribution deals including a relationship with Staples (Money McBags hears they like-like each other, but are not sure yet if they want to go steady) and seeking out corporations and sports teams to try sell them branded invisibleShields.  Money McBags likes this idea as it is a new way to get customers and open up new channels.  That said, it likely comes at much reduced margins as corporations are going to look to pay way below retail to get bulk deals.

The Bad/Questions:

1.  Gross profit margins once again dropped. They fell to 50% down from 60% last year and 56% in Q1 and the company blamed the drop on mix shift to more wholesale products and increased costs in order to expedite materials from China when their AT&T business sold out quicker than they or AT&T expected.  So it’s good that they beat expectations with AT&T but expectations could have been 1 so it’s not clear how low the bar was and with this promotional management team, one never knows.  On the call, management said margins should be in the mid to low 50s but in the 10Q it says There are no assurances that we will continue to recognize similar gross profit margins in the future.  So which is it?  Are margins going to tick back up or is 50% the new 60%?

2.  The internet business is stuck, or is it? In Q1 of last year, the company had $8.09MM of sales and per their 10Q, 45% of that was direct through our website to retail customers” which would have made internet sales ~$3.64MM.  This past Q, the company had $15.1MM of revenue and yet only 23% of that was direct through our website to retail customers” which means only ~$3.47MM was from the internet.  So direct sales were below where they were a year ago and yet on the call, management said this was a record quarter for internet sales.  Now look, Money McBags is no mathematician (though he knows the difference between Euler, Euclid, and Eugenia Silva), but he pulled those number directly from the 10Qs so unless he is multiplying wrong, he fails to see how this was a record Q for internet sales.  While it seems like a minor point, it gets to one of Money McBags’ main issues with this company and that is that management is way too promotional in trying to pump up this business.  For fucksake they have one product and these guys talk like they have found the Fountain of Youth or the keys to Alexis Texas‘ backdoor.  A year ago they were talking about opening up Zagg stores when they should have been concentrating on being successful with more than just one product, and again, it’s a product for which they only own the marketing rights.  Remember how big their online App store thingamigjig was going to be?  And now not a peep about that.  Money McBags believes this company is about zero for at least their last three in trying to gain traction with anything other than the invisibleShield so do’t blow smoke up our asses.  You know who the guy is who invented the Wacky Wall Walkers?  Of course you don’t and you know why?  Because he never came up with another product and the ZAGG invisibleShield is a bit like the Wacky Wall Walker of the mobile wireless accessory space, only a fuckload more expensive and harder to set up. So management needs to be alot more realistic/reasonable on their calls.

3.  A/R was up huge from $4.6MM at the end of last Q to $9.2MM this Q which is a jump of $4.6MM on $15.1MM of sales and makes the days receivables somewhere around “oh shit.”  The most bizarre part about this is that during the quarter they paid $75k to end their factoring deal with FGI and the timing of that is like if CVS pulled all the condoms from their shelves the day before Paris Hilton was coming to town.  On the call the CEO brushed this aside and said they are confident in their customers’ credit and that they will be able to collect, but remember, just minutes before that he said they had record internet sales and Money McBags just double checked his math using a slide rule and all of his appendages and is pretty sure that is not true.  This bears watching, but this bears watching even more.

4.  Even with strong growth, they still maintained guidance. Yep, guidance is for 30% topline growth and 20% operating margins which gets them to $50MM revenue, $10MM operating income, and ~$.27 eps after taxes.  But the thing is, they have already brought in ~$24MM in revenue in the first 6 months so they are only expecting the second half of the year to be up <10% sequentially from the first half (see how I used that number instead of saying up 24% from the second half of last year to make my case seem better) with each quarter likely being below this past Q (mathematically, it is only possible for one to outperform Q2, but it’s likely they both come in lower).  On the call, management talked about how they expect the second half of the year to be much stronger than the first half but unless <10% is much stronger, we’re just getting more promotional spin.

5.  As always, Money McBags would love for someone to explain this to himAmounts invoiced to customers for shipping and handling are included in sales and were $762,307 six months ended June 30, 2010.  Actual shipping and handling costs to ship products to customers are included in cost of sales and were $3,230,777 for the six months ended June 30, 2010.” Honestly, Money McBags doesn’t follow alot of shitty one product consumer companies so perhaps they all handle shipping like this but it just seems bizarre that they are essentially only charging ~20% of actual shipping costs.  Can someone help an analyst out here?  WTF?

6.  Alice Eve has not yet reached out to Money McBags to help her get in touch with her inner beauty.  This has nothing to do with ZAGG, but it is certainly a bad thing for Money McBags.

7.  They’re not really generating cash.  In the first six months of the year, the company had <$1MM operating cash flows and for a company with only ~$6.5MM cash on the balance sheet that is trying to grow their inventories and seeing A/R spike, this isn’t much of a cushion.  It’s no wonder they entered in to a $5MM line of credit with US Bank during the quarter.

So that is Money McBags’ analysis of the Q.  The company put up a nice revenue quarter thanks to an aberrational confluence of positive events which included the launch of two new Apple products and signing up a nice channel partner.  Could this happen again?  Maybe.   But ZAGG is either going to need to find another product that works soon, or they are going to have to lower their prices and cram product in to wholesale channels and hope for the best.

As for a forecast, it’s kind of hard to say right now.  If we put our happy faces on and give them the benefit of the doubt, we can assume they grow 20% topline next year (about what their guidance is for the second half of this year), have 50% gross margins (but since all of the growth is coming through wholesale channels, this may be too high of an estimate), and ~$18MM of operating costs (they had $4.2MM last Q, so just a marginal uptick).  That gets them to 20% operating margins on $60MM of revenue which is ~$.32 eps and the company is trading at ~11x that.  That said, Money McBags sees that as a best case scenario since their expense management has been iffy at best and again, competition is getting stronger.

You can quibble with Money McBags spin on the numbers all you want, and he freely admits he thinks this is a crappy little company for all of the reasons he has listed, but the number are the numbers.  Money McBags prefers to invest in companies with exploitable long term technologies or competitive advantages and this ZAGG invisibleShield isn’t such a product so he continues to think this is overvalued even in a best case scenario.

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