skullcandy investor presentation

7/22/2019 Skullcandy Investor Presentation

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SkullcandyInvestor

Presentation


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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-lookingstatements. You should not place undue reliance on these forward-looking statements. Although forward-looking statements reflectmanagements good faith beliefs, reliance should not be placed on forward-looking statements because they involve known and unknownrisks, uncertainties and other factors, which may cause the actual results, performance or achievements to differ materially fromanticipated future results, performance or achievements expressed or implied by such forward-looking statements. Forward-lookingstatements speak only as of the date the statements are made. The Company undertakes no obligation to publicly update or revise anyforward-looking statement, whether as a result of new information, future events, changed circumstances or otherwise. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to: our comments relating to maintainingexisting 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 manydetailed assumptions. While the Company believes that its assumptions are reasonable, you are cautioned that it is very difficult to predictthe impact of known factors, and it is impossible for the Company to anticipate all factors that could affect its actual results. Importantfactors that could cause actual results to differ materially from expectations are disclosed under the RiskFactors 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 tothe Company, or persons acting on its behalf, are expressly qualified in their entirety by the cautionary statements in the prospectus aswell as other cautionary statements that are made from time to time in the Companys public communications. You should evaluate allforward-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 arecontained in this presentation. This information should not be considered a substitute for any measures derived in accordance with GAAP.

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Company Overview

Who We Are

A Leading performance audio brand rooted inaction sports and lifestyle cultures

Revolutionized the headphone market byreinventing a uninspired category

Pioneered the distribution of headphones inspecialty 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 andadvanced concept engineering platform

Implementing a multi-brand strategy to expandinto new audio segments and adjacentcategories

Acquired Astro Gaming, the premier headsetbrand in the gaming category

Announced yesterday new Company leadership

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 majorretailer and litigation and settlement expense of $2.8M

2) Non-GAAP Adjusted net income is adjusted for bad debt expense associated with a majorretailer and litigation and settlement expense of $2.1M, net of tax benefit

3) Based on YE 2012 share count of 28MNote:See the attached appendix for a reconciliation of adjusted net income to netincome, adjusted EBITDA to net income, and adjusted diluted EPS to diluted EPS.

$M

Select Financial Information

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The

EpicenterOf

YouthCulture

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Wide Range OfInnovativePerformance AudioProducts

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StrongPlatform OfBrandsAcrossMultipleCategories

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Key Investment Highlights

Large and growing

headphone market

Evolving market andcompetitive dynamics

In-house design team

Proprietary sound andtechnology

Portfolio of leading brands

Significant growth

opportunities

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Pillars Of Our Business

ScalableOperatingPlatform

AuthenticBrand

Proprietary andInnovativeDesigns

Leading AudioSound Quality

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$BU.S. Headphone Market at Retail

$2.4

$2.9

2011 2012E

23.4%

The Global Headphone Market IsLarge And Growing Rapidly

We estimate the global audio headphonemarket 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 mobileaccessories is being driven primarily by demandfor smart devices and digital content

Demand for smartphones and tablets hasproven very inelastic despite broader consumeruncertainty

Worldwide smartphone shipments will post ayear-over-year increase of over 30.0%

Additionally, worldwide smartphone shipmentsare excepted to grow at a CAGR of over 18.0%from 2011 to 2016

Sources:IDC, NPD Consumer Data, Skullcandy estimates

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Evolving Headphone Market AndCompetitive Dynamics

Growth in premium priced headphonesoutpacing growth in earphones

The competitive landscape is crowded,but there is high degree of churn asnew entrants are quickly forced out

Many new entrants lack brandauthenticity and commitment to productdevelopment

Earphone category becoming morefeature and price sensitive

Amazon and other internet retailerschanging the way consumers shop

Retail landscape is struggling and willbe forced to change business model tosurvive

Growth in headphones and earphoneswill be dependent on new, compellingfeature sets and different use cases

Headphone market will consolidatearound the top three or four leading

brands

New brands will not survive long-term;barriers to entry are increasing

Internet will become a primary locationof purchase for consumer electronics

Brick and mortar business model willevolve (smaller footprint, higher focuson mobility)

Large big box retailers will garner moremarket share in CE space

Current Competitive Dynamics Our View of the Future

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Leading Audio Sound Quality

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

Skullcandy has spent two years building a leading in-house productdesign and development platform

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Roadmap Of New Skullcandy Products

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Product strategy will focus on new products between $50 and $150,where performance, style and brand come together


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2013 Key Skullcandy Product Stories

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2013 Key Skullcandy Product Stories

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O B d DNA


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Our Brand DNAConvergence Of Product And Lifestyle

ProductPerformance

Style Innovation LifestyleBrandDNA

+ + + =

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G th O t iti


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Growth Opportunities

Execute on dual brand gaming strategy

Aggressively expand in key internationalmarkets

Expand into premium audio segments of themarket

Extend into new consumer audio segments

Expand U.S. distribution

Drive higher sell through in existing domesticdistribution while market consolidates

A. Improve packagingB. Upgrade retail experienceC. Reduce off-price sales

Enter new, adjacent categories

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D l B d G i St t


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Dual Brand Gaming StrategyAstro Gaming Premium Positioning

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D l B d G i St t


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Dual Brand Gaming StrategySkullcandyBrand Extension

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G th O t it


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Growth Opportunity

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 experienceExpand 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 JAPANCANADA

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International strategy: Replicate the U.S. model to export the brandglobally


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FinancialReview

S Of 2012 Fi i l R lt


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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 on28.0 million diluted weighted shares)

2011 adjusted diluted EPS (non-GAAP) was $1.00 (based on 23.6 milliondiluted 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

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Strong Track Record Of Gro th And Profitabilit


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Strong Track Record Of Growth And Profitability

YoY %Growth

$9.1

$35.3

$80.4

$118.3

$160.6

$232.5

$297.7

2006 2007 2008 2009 2010 2011 2012

$1.0

$9.9

$21.4

$30.8

$39.0

$46.2

$50.6

2006 2007 2008 2009 2010 2011 2012

Adjusted EBITDA Growth

$M

Net Sales Growth

$M

Adj. EBITDA% margin

287.7% 127.8% 47.1% 35.8% 44.8% 28.1% 28.0% 26.6% 24.3% 19.9% 17.0%11.0% 26.0%

78.8%92.3%

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Initiatives To Reset Business


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Initiatives To Reset BusinessAnd 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 SkullcandyGaming brands

Investments in serialization, reverse logistics, product warranty and compliance toimprove (back-end operating efficiencies and competitive position)

Target supply chain savings through cost down efficiencies and volume discountsto 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

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SuccessfulAcquisitionAnd


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Successful Acquisition AndIntegration 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

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Further Build Out Of International Platform


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Further Build-Out Of International Platform

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-qualitydistributors

Ability to leverage effective tax rate from 43.5% in FY 2011 to 36.1% at YE 2012

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Support global expansion and new growth opportunities

DiversifiedGrowthAcrossAllBusinessSegments


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$28.6$42.6 $42.4

$56.1$46.0 $52.1

$73.8$82.7

$7.4

$10.7 $10.0

$16.3

$14.6$18.9

$9.6

$18.3

$36.0

$53.3 $52.4

$72.4

$60.6

$71.0

$83.4

$101.0

Q1 '11 Q1 '12 Q2 '11 Q2 '12 Q3 '11 Q3 '12 Q4 '11 Q4 '12

International

Domestic

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Diversified Growth Across All Business Segments

Quarterly Sales Growth

$M

48.1%

38.2% 17.2%

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21.1%

FinancialHighlightsAnd Statistics


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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 micdproducts compared to less than 40.0%, year-over-year

As of YE 2012, our top 15 customers made up approximately 50.0% ofgross revenues, down from approximately 60.0%, year-over-year

Astro Gaming opened retail doors with major big box retailers

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Q1 2013: Reset And Get Back on Track


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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

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SkullcandyAnnouncesnew Management


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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

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ThankYou

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