ZAGG Update: Expect Significant Growth in 2010 - Raising Price Target to $8.25

11/17/2009

MDB issued a research update today on ZAGG, Inc. (ZAGG) reiterating its buy recommendation and $8.25 Price Target.

ZAGG Incorporated’s financial results for the third quarter of calendar 2009 included a fifth consecutive quarter of record revenues as total revenues climbed to $9.7 million – right in line with our estimates. Revenues increased 42% year-over-year and roughly 7% sequentially driven by continued strong sales of the invisibleSHIELD™ product both in the U.S. and internationally. A point of concern in the quarter was the gross margin line as the sales mix continues to shift toward the retail channel. For the 3rd quarter 66% of total revenues (vs. 56% in Q2 or 2009) came from retail, resulting in a decline of about 600 basis points in gross margins compared to the previous quarter. Management is quite confident that gross margins will rebound with the upcoming launch of ZAGGskins which will be sold exclusively through the ZAGG.com web site and with expected savings on the cost of raw materials. Operating expenses at $3.7 million were somewhat lower than we anticipated and mitigated to some extent the lower gross margins. The resulting operating profit came to approximately $1.4 million, an increase of 7% year-over-year. GAAP net earnings were $0.9 million ($0.04 per share) for the quarter. This number was roughly $0.3 million below our estimate of $1.3 million solely due to the lower than expected gross margins. Cash earnings were $1.1 million or $0.05 per share. Other highlights from the quarter and conference call included:

• Management’s preliminary guidance for calendar 2010 with revenues of $60 million and GAAP earnings per share of $0.40;
• the signing of a distribution partnership with Cricket Communications to carry the invisibleSHIELD in all Cricket stores;
• the scheduled official launch of ZAGGskins for Friday November 20th through the company’s web site;
• the announced opening of the company’s first inline retail mall store through a licensed vendor; and
• the official launch of ZAGGbox is now scheduled for January 2010 at the International CES in Las Vegas.

We continue to be impressed with ZAGG’s revenue growth and management’s continued execution as evidenced by the signing of a distribution agreement with Cricket Communications. Given ZAGG’s third quarter results and management’s early guidance for calendar 2010, we are introducing our earnings model for 2010, with a revenue estimate of $57 million (a 50% year-over-year increase), gross margins of 54.5% and GAAP earnings per share of $0.33. We believe this is a relatively conservative model and as such we are once again raising our target price to $8.25 and strongly reiterating our Buy rating.