ZAGG Zigs When the Market Zags


For the first time since early last year, ZAGG found a way to impress the market.

The maker of third-party accessories for tablets, smartphones, and other consumer electronics gadgetry posted refreshingly robust quarterly results after Tuesday's market close.

Net sales soared 30% to $87.5 million, well ahead of 24% uptick that analysts targeted. ZAGG barely broke even, but the reported results were weighed down by a non-cash impairment charge. Back that out and ZAGG's adjusted profit of $0.37 a share landed well ahead of the $0.29 a share that Wall Street forecasted.

Things aren't perfect at ZAGG.

Margins took a hit, and it has Apple largely to blame.

The holiday quarter's release of the iPhone 5 and iPad mini forced ZAGG to airfreight merchandise to meet demand. This is ultimately a good problem to have, but Apple's secrecy forces third-party component makers to scramble at the last minute of new introductions.

Margins also slipped because invisibleSHIELD -- the thin protective film covering for tablet and smartphone screens that once accounted for the vast majority of ZAGG's sales -- is a smaller part of the product mix. This is ZAGG's highest-margin product line, but a 164% surge in tablet keyboard sales finds invisibleSHIELD slipping to just 43% of the company's sales.

This may also be a blessing in disguise. Cynics have argued that ZAGG was susceptible to being a one-trick pony with its highly marked-up invisibleSHIELD. With Corning continuing to enhance the scratch-resistant Gorilla Glass that many smartphone and tablet makers use, there may very well come a day when ZAGG's flagship product would be obsolete.

Diversification led ZAGG to acquire iFrogz two years ago, and the move to broaden its product categories is paying off.

The future also seems promising. ZAGG is initiating its 2013 guidance, calling for adjusted EBITDA of $69 million to $71 million on net sales of $313 million to $318 million. ZAGG generated $62.6 million in adjusted EBITDA on $264.4 million in net sales last year.

Analysts were only projecting $308 million in net sales for 2013, so Wall Street is going to have to move its target higher.

ZAGG had been a consistent analyst beater until the second and third quarters of last year. It's good to see ZAGG back on track.

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Longtime Fool contributor Rick Aristotle Munarriz has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Apple and Corning. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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