Skullcandy Investor Presentation

Skullcandy
Investor
Presentation

Safe Harbor Statement
Forward Looking Statements
This presentation contains forward-looking statements. The words “believe,” “expect,” “anticipate,” “intend,” “estimate” and other
expressions that are predictions of or indicate future events and trends and that do not relate to historical matters identify forward-looking
statements. You should not place undue reliance on these forward-looking statements. Although forward-looking statements reflect
management’s good faith beliefs, reliance should not be placed on forward-looking statements because they involve known and unknown
risks, uncertainties and other factors, which may cause the actual results, performance or achievements to differ materially from
anticipated future results, performance or achievements expressed or implied by such forward-looking statements. Forward-looking
statements speak only as of the date the statements are made. The Company undertakes no obligation to publicly update or revise any
forward-looking statement, whether as a result of new information, future events, changed circumstances or otherwise. These forwardlooking
statements are subject to numerous risks and uncertainties, including, but not limited to: our comments relating to maintaining
existing sales levels with our current customers while attracting new ones; operating in international markets and expanding into adjacent
markets while strengthening our market share in our existing markets; initiating effective cost cutting initiatives; and financial projections.
The Company derives many of its forward-looking statements from its operating budgets and forecasts, which are based upon many
detailed assumptions. While the Company believes that its assumptions are reasonable, you are cautioned that it is very difficult to predict
the impact of known factors, and it is impossible for the Company to anticipate all factors that could affect its actual results. Important
factors that could cause actual results to differ materially from expectations are disclosed under the “Risk Factors” section of the 2012 10-
K filed with the Securities and Exchange Commission on March 13, 2013. All written and oral forward-looking statements attributable to
the Company, or persons acting on its behalf, are expressly qualified in their entirety by the cautionary statements in the prospectus as
well as other cautionary statements that are made from time to time in the Company’s public communications. You should evaluate all
forward-looking statements made in this presentation in the context of these risks and uncertainties.
Non-GAAP Financial Measures
This presentation contains certain information that has not been derived in accordance with generally accepted accounting principles
(“GAAP”). Reconciliations of such information to the most directly comparable information derived in accordance with GAAP are
contained in this presentation. This information should not be considered a substitute for any measures derived in accordance with GAAP.
1

Company Overview
Who We Are
• A Leading performance audio brand rooted in
action sports and lifestyle cultures
• Revolutionized the headphone market by
reinventing a uninspired category
• Pioneered the distribution of headphones in
specialty retailers focused on action sports and
the youth lifestyle
• Set-up international direct sales office in Europe;
products are now sold in more than 80 countries
• Built a world-class product development and
advanced concept engineering platform
• Implementing a multi-brand strategy to expand
into new audio segments and adjacent
categories
• Acquired Astro Gaming, the premier headset
brand in the gaming category
• Announced yesterday new Company leadership
Confidential
Select Financial Information
$M
2012
Net Sales $297.7
YoY % Growth 28.1%
Gross Margin % 47.3%
Adjusted EBITDA (non-GAAP) (1) $50.6
Adjusted EBITDA Margin % (non-GAAP) 17.0%
Adjusted Net Income (non-GAAP) (2) $28.0
Adjusted Diluted EPS (non-GAAP) (3) $1.00
1) Non-GAAP adjusted EBITDA is adjusted for bad debt expense associated with a major
retailer and litigation and settlement expense of $2.8M
2) Non-GAAP Adjusted net income is adjusted for bad debt expense associated with a major
retailer and litigation and settlement expense of $2.1M, net of tax benefit
3) Based on YE 2012 share count of 28M
Note: See the attached appendix for a reconciliation of adjusted net income to net
income, adjusted EBITDA to net income, and adjusted diluted EPS to diluted EPS.
2

The
Epicenter
Of
Youth
Culture
Confidential
3

Wide Range Of
Innovative
Performance Audio
Products
Confidential
4

Strong
Platform Of
Brands
Across
Multiple
Categories
Confidential
5

Key Investment Highlights
1
2
3
4
5
6
Large and growing
headphone market
Evolving market and
competitive dynamics
In-house design team
Proprietary sound and
technology
Portfolio of leading brands
Significant growth
opportunities
Confidential
6

Pillars Of Our Business
Leading Audio
Sound Quality
Proprietary and
Innovative
Designs
Scalable
Operating
Platform
Authentic
Brand
Confidential
7

The Global Headphone Market Is
Large And Growing Rapidly
• We estimate the global audio headphone
market to be over $5.0 billion at retail
• The US audio headphone market grew ~23.0%
over the past 12 months (YE 2012)
• Growth in headphones and other mobile
accessories is being driven primarily by demand
for smart devices and digital content
• Demand for smartphones and tablets has
proven very inelastic despite broader consumer
uncertainty
U.S. Headphone Market at Retail
$B
$2.4
23.4%
$2.9
• Worldwide smartphone shipments will post a
year-over-year increase of over 30.0%
• Additionally, worldwide smartphone shipments
are excepted to grow at a CAGR of over 18.0%
from 2011 to 2016
2011 2012E
Sources:
IDC, NPD Consumer Data, Skullcandy estimates
Confidential
8

Evolving Headphone Market And
Competitive Dynamics
Current Competitive Dynamics
Our View of the Future
• Growth in premium priced headphones
outpacing growth in earphones
• The competitive landscape is crowded,
but there is high degree of churn as
new entrants are quickly forced out
• Many new entrants lack brand
authenticity and commitment to product
development
• Earphone category becoming more
feature and price sensitive
• Amazon and other internet retailers
changing the way consumers shop
• Retail landscape is struggling and will
be forced to change business model to
survive
• Growth in headphones and earphones
will be dependent on new, compelling
feature sets and different use cases
• Headphone market will consolidate
around the top three or four leading
brands
• New brands will not survive long-term;
barriers to entry are increasing
• Internet will become a primary location
of purchase for consumer electronics
• Brick and mortar business model will
evolve (smaller footprint, higher focus
on mobility)
• Large big box retailers will garner more
market share in CE space
Confidential
9

Leading Audio Sound Quality
Skullcandy has spent two years building a leading in-house product
design and development platform
Product Development Transformation
• Built strong team of:
– Industrial designers
– Mechanical engineers
– Graphic designers
– Audio engineers
– Category managers
• Invested in materials and equipment
• Developed a proprietary sound profile
• Developed customized headphone drivers
• Moved to a dual-sourcing model
• Created a new product roadmap
• Continued focus on quality, fit, sound, and
ideation
Confidential
10

Roadmap Of New Skullcandy Products
Product strategy will focus on new products between $50 and $150,
where performance, style and brand come together
Confidential
11

2013 Key Skullcandy Product Stories
Confidential
12

2013 Key Skullcandy Product Stories
Confidential
14

Our Brand DNA
Convergence Of Product And Lifestyle
Product
Performance
+ Style + Innovation + Lifestyle =
Brand
DNA
Confidential
15

Growth Opportunities
1
2
3
4
5
6
7
Execute on dual brand gaming strategy
Aggressively expand in key international
markets
Expand into premium audio segments of the
market
Extend into new consumer audio segments
Expand U.S. distribution
Drive higher sell through in existing domestic
distribution while market consolidates
A. Improve packaging
B. Upgrade retail experience
C. Reduce off-price sales
Enter new, adjacent categories
Confidential
16

Growth Opportunity
Gaming
Gaming Market Overview and Opportunity
• Gaming headset market estimated to be $1.0+
billion as of YE 2012
• One brand owns ~50.0% market share in U.S.
• Opportunity to extend into other gaming peripherals
• We estimate the total global gaming accessories
market is ~$6.0 billion (inclusive of gaming
headsets)
• The Future: Mobile gaming could represent a large
market opportunity
Factors Driving Growth
• Upcoming launch of next generation consoles will
drive new growth in console accessory purchases
• Rising popularity of mobile gaming
• A resurgence in PC gaming and the success of the
"freemium" model, evidenced by games like League
of Legends (free to play, but pay for additional
content)
• Increasing quality of game play (graphics, audio,
multiplayer interaction)
• Popularity of online multiplayer games
Dual Brand Plan of Attack
• Reinvigorate a category
absent of brand and
lifestyle
• Gamers represent large
portion of current SKUL
consumer base
55%
• Own premium segment of
market
• Reach new consumer
segments
• Continue global retail
expansion
Sources:
NPD, The Ananya Group, Skullcandy estimates
x
Confidential
17

Dual Brand Gaming Strategy
Astro Gaming Premium Positioning
Confidential
18

Dual Brand Gaming Strategy
Skullcandy Brand Extension
Confidential
19

Growth Opportunity
International strategy: Replicate the U.S. model to export the brand
globally
Product, Marketing and Channel Alignment
• Unify brand message and communicate globally
• Coordinate global product launches
• Optimize distribution strategies
• Proliferate in-store listening stations and brand experience
Expand to serve select markets directly, through joint
ventures or via high-quality distributors
• Acquired European distribution rights in August 2011
• Built direct European office
• Leverage tax efficiencies
• Direct business in China, Japan, and Canada in 2013
Key International Markets
EUROPE CHINA CANADA JAPAN
Confidential
20

Financial
Review

Summary Of 2012 Financial Results
• Net sales increased 28.1% to $297.7 million, year-over-year
– North America net sales increased to $250.3 million
– International net sales increased to $47.4 million
• Adjusted net income (non-GAAP) increased 19.3% to $28.0 million
• Adjusted diluted EPS (non-GAAP) was $1.00, or flat to last year (based on
28.0 million diluted weighted shares)
– 2011 adjusted diluted EPS (non-GAAP) was $1.00 (based on 23.6 million
diluted weighted shares)
• Strong Balance Sheet
– Working capital at Q4 growing slightly ahead of full year sales
– Nearly $28.0M of credit availability
– Completed multi-buyer credit insurance program in November
– New credit facility in Q2 2013
Confidential
22

Strong Track Record Of Growth And Profitability
Net Sales Growth
$M
Adjusted EBITDA Growth
$M
$297.7
$50.6
78.8%
$232.5
92.3%
$39.0
$46.2
$160.6
$30.8
$118.3
$21.4
$80.4
$9.9
$35.3
$9.1
$1.0
2006 2007 2008 2009 2010 2011 2012
2006 2007 2008 2009 2010 2011 2012
YoY %
Growth
Adj. EBITDA
287.7% 127.8% 47.1% 35.8% 44.8% 28.1%
% margin
11.0% 28.0% 26.6% 26.0% 24.3% 19.9% 17.0%
Confidential
23

Initiatives To Reset Business
And Get Back On Track
• Renewed focus on sell through and customer profitability
– Improve packaging and point-of-sale retail experience
– Enhance and expand activation of marketing assets
– Reduce off-price channel sales
– Work with existing customers to reduce sales returns and allowances
– Discontinue relationships with unprofitable customers and improving pricing discipline
• Expanding global retail presence for both the Astro Gaming and the Skullcandy
Gaming brands
• Investments in serialization, reverse logistics, product warranty and compliance to
improve (back-end operating efficiencies and competitive position)
• Target supply chain savings through cost down efficiencies and volume discounts
to improve margins and offset any unfavorable trends in China
– All products now dual sourced
– Large quality control and sourcing team in China and the U.S.
– Evaluating the transfer of some production out of China
Confidential
24

Successful Acquisition And
Integration Of Astro Gaming
• Purchased Astro Gaming in April 2011 for $10.8M
• Through 2011, Astro Gaming products were sold exclusively online
– Strong brand with dedicated following among core gamers
– Gross margins were initially challenged
– Company was operating at a loss
• Strong performance in 2012
– Dominant player in the high end premium segment of gaming category
– Retail ASP over $200
– Cost improvements resulted in ability to enter retail channel
– Retail expansion resulted in an incremental $10.0M+ in 2012
– Positive operating income
• Provides gateway for Skullcandy brand to enter the gaming space
Confidential
25

Further Build-Out Of International Platform
Support global expansion and new growth opportunities
• Conversion of international distribution through acquisition and “green field”
• Acquired European distribution rights through acquisition in August 2011 for $18.6M
(including inventory)
• Expand to serve select markets directly, through joint ventures, or high-quality
distributors
• Ability to leverage effective tax rate from 43.5% in FY 2011 to 36.1% at YE 2012
Confidential
26

Diversified Growth Across All Business Segments
Quarterly Sales Growth
$M
International
21.1%
Domestic
$36.0
$7.4
$28.6
48.1%
38.2% 17.2%
$72.4
$71.0
$16.3
$60.6
$53.3 $52.4
$18.9
$14.6
$10.7 $10.0
$56.1
$42.6 $42.4
$46.0 $52.1
$83.4
$9.6
$73.8
$101.0
$18.3
$82.7
Q1 '11 Q1 '12 Q2 '11 Q2 '12 Q3 '11 Q3 '12 Q4 '11 Q4 '12
Confidential
27

Financial Highlights And Statistics
• Unit volume up +25.0%, year-over-year, as of YE 2012
• Significant mix shift to over ear and on ear products in 2012 over 2011
• ASP up high teens, year-over-year, as of YE 2012
– Geographic mix
– Mid single digit Increase in unit growth above $50 price point
• As of YE 2012, 50.0%+ of Skullcandy headphone sales were mic’d
products compared to less than 40.0%, year-over-year
• As of YE 2012, our top 15 customers made up approximately 50.0% of
gross revenues, down from approximately 60.0%, year-over-year
• Astro Gaming opened retail doors with major big box retailers
Confidential
28

Q1 2013: Reset And Get Back on Track
• Q1 2013 Revenue down ~30% from Q1 2012
– Challenging year-over-year comparison
– High channel inventory levels and low sell through heading into Q1 2013
– Reducing off-price sales
– Impact of bankruptcy with major UK retailer
• Gross margins in-line with Q4 2012
• Projected a loss of $0.25 - $0.30 per share
– $0.03 cents per share associated with departure of former CEO
– Investments in demand creation (Crusher launch)
– Higher operational costs to support Astro and International expansion
Confidential
29

Skullcandy Announces new Management
• Hoby Darling appointed CEO on March 18, 2013
– General manager, Nike+ Digital Sport
– Head of Strategy & Planning, Nike Affiliates
– SVP Strategic Development and General Counsel, Volcom
• Rick Alden, founder and board member appointed interim CEO on February 7,
2013
– Back in the business focusing on customer advocacy and retail experience
– Winning at point of sale / sell through
– New products / brand extensions
Confidential
30

Thank
You