Image source: The Motley Fool.
Zagg Inc (ZAGG)
Q2Â 2019 Earnings Call
Aug 6, 2019, 5:00 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good afternoon, ladies and gentlemen, and welcome to the ZAGG Second Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded.
I would now like to turn the conference over to your host, Mr. Brendon Frey. You may begin.
Brendon Frey -- Managing Director
Thank you, Laura. Good afternoon, and thank you for joining us today to review ZAGG's second quarter 2019 financial results. On the call today, we have Chris Ahern, Chief Executive Officer; and Taylor Smith, Chief Financial Officer. Following Chris and Taylor's prepared comments, we will open the call for a question-and-answer session.
Our second quarter earnings press release was issued today after the market closed at approximately 4:05 Eastern Time. As a follow-on to the earnings release, we published the supplemental financial information on our Investor Relations website. And we also furnished this document to the SEC on Form 8-K. You can find all our earnings documents on our Investor Relations website at www.zagg.com in the Quarterly Results section under the Financials tab. We are recording this call and a podcast of the conference call will be archived at the ZAGG Investor Relations web page under the Events tab for 1 year.
Before we begin, we'd like to remind everyone that the prepared remarks contain certain forward-looking statements and management may make additional forward-looking statements in response to your questions. These statements include, but are not limited to, our outlook for the company and statements that estimate or project future results of operations, or the performance of the company. These statements do not guarantee future performance and speak as of the date hereof. For a more detailed discussion on the factors that can cause actual results to differ materially from those projected in any forward-looking statements, we refer all of you to the risk factors contained in ZAGG's annual report on Form 10-K and quarterly reports on Form 10-Q filed with the Securities and Exchange Commission. ZAGG assumes no obligation to revise any forward-looking statements that may be made in today's release or call.
Please note that on today's call, in addition to discussing the GAAP financial results and the outlook for the company, we will discuss adjusted EBITDA and diluted operating earnings per share, both non-GAAP financial measures. An explanation of ZAGG's use of these non-GAAP measures in this call and the reconciliation between GAAP and non-GAAP measures required by SEC Regulation G is included in ZAGG's press release today, which again, can be found on the Investor Relations section of the company's website. The non-GAAP information is not a substitute for any performance measure derived in accordance with GAAP, and the use of such non-GAAP measures has limitations, which are detailed in the company's press release.
And now I'd like to turn the call over to Chris Ahern. Chris?
Chris Ahern -- Chief Executive Officer
Thank you, Brendon. Good afternoon, and thank you for taking the time to join us today. As you saw from our earnings release issued earlier this afternoon, we delivered second quarter results that were in line with most recent guidance for first half revenues and adjusted EBITDA. Similar to the first quarter, our performance was shaped by a few specific factors, namely the impact of our three recent acquisitions: Gear4, HALO and BRAVEN, all of which are heavily back-weighted in terms of sales. Although, we've carried a full operating expense burden since the beginning of this year.
Tough comparisons for our product category from the initial rollout of our first wireless charge pad to many of our retail partners in the year ago period. Early shipments of screen protection and wireless charging accessories ahead of the expected tariff increase on January 1, which pulled sales into the fourth quarter of 2018. Competition within our screen protection product category, which has negatively impacted our market share and the challenges facing the entire mobile accessory market due to softer demand for smartphones year-to-date.
With respect to the acquisitions, we continue to make good progress developing new product and distribution opportunities for these brands and expect each to exceed the full year growth guidance we established at the start to 2019. We expect each of these brands to be important contributors to the success for many years to come. On the tough comparisons of wireless charging products and early shipments of tariff-affected products, all these headwinds started to ease somewhat in the second quarter compared to the first quarter and are not expected to materially impact the back half of the year.
We participate in a number of very competitive categories, including screen protection. Although, screen protection market share appears to stabilize over the last three months at approximately 45%. We've experienced headwinds during the first half as competition has increased at several retail outlets across the price points. To address this competitive threat, one, we'll be launching additional innovation into our screen protection line during the second half of 2019 to further bolster our InvisibleShield VisionGuard products. Two, we'll be launching a segmentation strategy across a number of our retail customers that will allow us to address lower MSRP price points with less feature-rich products.
In terms of the decline in smartphone sales and the impact on mobile accessories, unfortunately did not stabilize during the second quarter as we had anticipated, following a difficult start to the year. In fact, we saw increased softness in smartphone sales as the second quarter progressed and this trend has continued into the start of the third quarter. This is clearly impacting our core categories and a slowdown of smartphone sales has been cited on several recent OEM earnings call, with several major players reporting unit sales down in mid-teen to low 20% range. Based on current trends combined with the latest tariff increase and a softer market view for smartphone demand in second half of '19, we have taken a more conservative outlook for the remainder of the year.
Taylor will go through the guidance in more detail shortly, but we now expect full year revenue to contract to a range of $520 million to $550 million. The reduction in revenues is coming from our core business, mainly screen protection and wireless charging, both of which are heavily tied to device sales. Despite these headwinds in the core business, we expect combined revenue growth specific to acquisitions, exceed our original goal targets of 5% to 10% when compared to 2018.
We are obviously disappointed with the way 2019 is playing out for the core business, as we did not foresee such a drop off in demand for smartphones. In response to the current challenges facing ZAGG and the industry at large, we are implementing a series of cost-savings initiatives in order to help preserve profitability in 2019 and beyond, they include headcount reductions, amounting approximately 10% of the global company headcount, acceleration of cost synergies from recent acquisitions into 2019, and reduction of a number of discretionary operating expense categories. We anticipate these actions will generate approximately $8 million in annual savings starting 2020.
Despite the step back in earnings we are taking this year, we are confident that our portfolio of leading brands supported by a strong product team, expansive distribution networks will position ZAGG to profitably grow our share of the mobile lifestyle accessory market in the US and overseas in the years ahead. Our confidence is supported by the following reasons: ZAGG occupies leading quarterly market share positions in several categories, including screen protection at 45%; portable battery packs at 20%, and wireless charging pads at 28%.
In addition, despite losing some battery case market share to competitor during the first quarter, we were able to increase our quarterly share from 25% to 36% compared to the first quarter 2019. And in fact, June monthly market share actually saw mophie gained the Number 1 spot at 51%. We expect to grow the screen protection and case business over time, through increasing attach rates. We continue to see improvements in both screen protection and protective case attach rates, both of which increased compared to the previous year. An increase in juice pack sales compared to last year with the launch of juice pack access, mophie's innovative wireless charging juice pack product during the second half, as it will be load-in to retail sooner than ever before during the fall OEM device launches.
We will launch a new suite of wireless charging products into key retailers during the second half of 2019. Wireless charging remains a big opportunity for the company, as majority of smartphones now come with the wireless charging technology and more smartphone user are increasingly aware of this technology. In Gear4, we have a brand that is still under-penetrated in the US, though gaining share every month. We believe D3O technology is a compelling differentiator in the protective case category and an exciting growth vehicle for ZAGG, as we've seen early evidence in our sell-through data over the last quarter.
Increased distribution of HALO products, as well as products from our existing brand portfolio through QVC and HSN, an exciting new channel. In addition, HALO gives the company a brand and power that can capitalize on the online and e-marketplace opportunities. We continue to grow in international markets, in which ZAGG products are still largely under indexed. We've seen nice growth in Europe and most recently, in Latin America, as our InvisibleShield On Demand service remains a significant differentiator in markets where there's a proliferation of devices and small retail footprints. We will continue to push cost-savings initiatives throughout the P&L to draw improved long-term profitability and better operating expense leverage.
Looking out beyond 2019, we expect innovation of 5G technology will reverse the recent downward trend in smartphone sales, as consumers adopt this new technology that will be a two- to three-year upward trend for smartphone sales. Ultimately, this will be a strong driver of our core business and we continue -- as we continue to bring new products and innovation to the market. While we remain very excited about our future and prospects, we have determined that it's appropriate to announce at this time that the company has retained Bank of America Merrill Lynch to assist the company in exploring strategic alternatives to maximize stockholder value. We do not expect to comment further on this process until we've made a decision and are prepared to announce its final outcome.
Before I hand the call over to Taylor, I'd like to reiterate that despite the headwinds we faced in 2019, we feel confident in the strategic direction for the company and have a strong experienced management team to execute the plan.
With that, I'd like to hand the call over to Taylor.
Taylor D. Smith -- Chief Financial Officer
Thanks, Chris. Since many details of our quarterly financial performance were included in the supplemental financial information issued earlier today, I would just like to take a few minutes to add some additional comments on our financial performance. Q2 net sales and adjusted EBITDA results were in line with our expectations and guidance communicated on the last call.
So I'll focus my remarks on our year-to-date performance. Net sales decreased approximately 20% to $186 million, driven by the impact of tariff-related product pulled forward into 2018 in advance of expected tariff increases, a decrease in OEM smartphone sales and a difficult first half compare due to the mophie charge pad load-ins during the prior year. These decreases have been partially offset by sales of Gear4, HALO and BRAVEN-branded products.
Gross profit as a percentage of net sales remained flat at approximately 33%. Gross profit margins has not changed significantly, however, it has been impacted by decreases in sales of screen protection, our highest-margin category, being offset by an increase in sales of Gear4 and HALO products, a reduction in discounts and credits and a continued focus on driving cost-of-goods-sold improvements.
Operating expenses increased approximately 37% compared to last year, due primarily to the impact of Gear4, HALO and BRAVEN, including the amortization of intangible assets, which increased by $3.5 million compared to the first half last year.
In addition, we saw increased marketing investments to support our growing portfolio of brands and products, including our online and Amazon channels. We closely monitor return on ad spend through our online channels and we'll invest additional marketing funds when the profit generated exceeds our internal hurdle rates. During the second quarter, we did experience some accelerated operating cost investments, primarily linked to, one, our InvisibleShield On Demand launch into Latin America and the continued InvisibleShield On Demand growth in our European business. And two, charges related to Gear4, including higher-than-anticipated placement and marketing cost to support product launches of the key customer during the second quarter and unanticipated transition cost incurred as we completed the integration of Gear4 operations, also during the second quarter.
Adjusted EBITDA was a negative $6.6 million versus $24.5 million in the prior year period, which is consistent with the guidance we've provided on the last earnings call. The decrease was a result of lower net sales and an increase in operating expenses already discussed.
Turning to the balance sheet. Compared to the year ago, accounts receivable increased 23% to $103 million, and DSOs increased from 65 days to 87 days. The increase in AR and DSOs is primarily driven by two factors: first, direct sales to Verizon increased significantly during the second quarter, which are on 90-day payment terms. Verizon-direct AR currently represents approximately 19% of outstanding accounts receivable. The second reason is an increase in mix of sales in our international business, which are generally at 90-day payment terms. The quality of our receivables remains very good.
Inventory increased approximately 59% to $111 million compared to the same period last year. Over half of the increase was due to incremental inventory associated with our recent acquisitions. In addition, we saw an increase in inventories at international to support its 2019 growth, which is projected to be approximately 40% year-over-year, and some additional inventory on hand due to the slowing of OEM handset sales during the first half of 2019. Despite the increased inventory position, the excess inventory skews our current product that has helped to mitigate some of the tariff impacts during 2019 and will continue to be sold down throughout the second half of the year. Consolidated inventory turns were approximately 5 times, excluding acquisitions down from 7.8 times in the prior year period. We expect improvement back to our historical terms in the high 6s and low 7s by the time we exit the year.
In terms of share repurchase, during the first half, the company repurchased approximately $1 million in ZAGG stock and approximately $13 million in the last 12 months. Given the levels our stock price has traded at over the last quarter, we would've liked to have been more active in stock buybacks.
However, as the amount outstanding on our credit line approaches $100 million, we're restricted in our ability to invest in share repurchase. In addition, given the back half weighting of our forecast, there are inventory investments needed in the second half that we prioritized ahead of share repurchase. As we've discussed previously, share repurchase is a long-term focus and we'll balance our long-term use of capital between share repurchase, debt service and tuck-in M&A. Given the recent acquisitions, the focus on second half execution and our announcement today that we'll be considering strategic alternatives, our focus is on servicing the debt.
Net debt, which is consolidated debt less cash, increased to $82 million compared to $1 million last year. The increase was due to cash used for three acquisitions of approximately $55 million, $13 million for share repurchase and to fund ongoing operations, particularly, with our newly acquired brands. Excluding cash paid for acquisitions and share repurchase during the last 12 months, the company would've had net debt of approximately $14 million at the end of the first quarter.
I wanted to spend a few minutes discussing the restructuring that Chris touched on in his prepared remarks. In response to the profitability headwinds and to position the company for long-term profitable growth, we initiated a restructuring plan during the second quarter of 2019, which extended into the first part of the third quarter. These initiatives include headcount reductions of approximately 10% of our global headcount, acceleration of cost synergies from recent acquisitions into 2019, and the reduction of a number of discretionary operating expense categories. 2019 results will include a one-time severance restructuring charge, totaling approximately $1.9 million, spread over the second and third quarters, which has been incorporated into our rest of year guidance. The headcount reductions are expected to provide gross annualized savings of approximately $8 million, though we'll realize some of these cost savings in the back half of 2019. From an operating expense perspective, we'd expect full year 2019 operating expenses to be approximately 30% to 31% of net sales and expect the $8 million in gross annualized savings to be achieved during 2020.
I also wanted to quickly discuss what we're doing as a company to address the impact of tariffs, given the recent news from the Trump administration late last week. First, let me give a quick recap of the tariff increases and the impact to ZAGG over the last 12 months. On September 24 of last year, a 10% tariff was levied and began to impact our screen protection and wireless charging pad products, sourced from Chinese factories. For competitive reasons, we absorbed this tariff and worked with suppliers to offset the burden with product cost savings, which we were largely able to achieve.
On May 10, 2019, the Trump administration increased tariff rates on screen protection and wireless charge pads from 10% to 25%. Given the impact to gross profit, we began working with customers to communicate that these costs would be passed along and that the wholesale price for these impacted products would increase. Our goal is to remain margin dollar-neutral. And given current estimates and discussions with customers, we believe we're on a path to achieve this.
Last Thursday, President Trump tweeted that effective September 1, 2019, tariffs on the remaining $300 billion of goods imported from China would increase by 10%. For ZAGG, that includes the remainder of our products sourced in China. Consistent with our previous actions taken, we're working closely with factories to further reduce product cost, exploring alternate manufacturing facilities outside of China, and we're approaching customers to notify them that we'll be passing along unmitigated tariff increases through increases in the wholesale price. The ultimate goal is to remain margin dollar-neutral.
Last, I wanted to spend a few minutes discussing our guidance for 2019, and what changed from our last call. As Chris and I have mentioned, we've experienced a number of headwinds, including the reduction in smartphone handset sales, which has continued to soften throughout the first half. Up until the end of June, our forecasting process for fall OEM device launches, assumed a launch consistent with last year, but reduced for the reductions in sell-through that we've experienced thus far during the year.
As sell-through has continued to soften during the first half, our forecast for the fall launches has also continued to decrease. Starting at the end of June and into July, we began receiving specific customer forecast for the fall OEM launches and found the customer forecast for the initial load-ins and subsequent sell-through is well below our original expectations. Generally, the outlook for smartphone unit sales in the second half of 2019 is expected to be lower than originally projected, as it appears many consumers will delay a smartphone upgrade until 5G phones, networks and content are available in fall 2020. This sentiment has been echoed in recent research reports by industry analysts and earnings releases from both component manufacturers and OEMs. Given these headwinds and specific customer feedback, we have made adjustments to our full year 2019 guidance range.
Net sales is now estimated to be $520 million to $550 million compared to our previous guidance range of $610 million to $630 million. Gross margins are still expected to be in the mid-30s as a percent of sales. Operating earnings per share, which excludes the tax-affected impact of transaction-related expenses, including amortization from Gear4, HALO and BRAVEN, is now estimated to be a range of $0.75 to $1 per share, down from the previous range of $1.47 to $1.60 per share on an expectation of approximately 29.7 million shares outstanding. We use operating earnings per share to help provide an easier apple-to-apples comparison with the prior year, as it excludes the impact of acquisition-related expenses. We continue to estimate our annual tax rate at this time to be approximately 25%, and we'll provide updates as we progress through the second half.
Adjusted EBITDA for 2019 is estimated at $52 million to $62 million, down from the previous estimate of $82 million to $86 million. The vast majority of the decrease in second half forecast of net sales is directly linked to sales of screen protection, our highest-margin product category, and new power products with gross margins projected to be higher than our historical average for power. Although, we'll achieve operating expense cost savings during the second half from the restructuring activities, the loss of these high-margin sales coupled with other operating expenses that are largely fixed, has resulted in the reduction of our profit compared to our prior guidance. Free cash flow, which we define as adjusted EBITDA minus capex and cash tax expense is estimated to be approximately $43 million. With regard to the timing of revenue in the second half, we expect a Q3, Q4 mix fairly consistent with our historical average, other than the fact that we're projecting the bulk of the HALO load-ins at QVC will occur during the fourth quarter. Thus, we'd expect third quarter revenue to be approximately 40% to 42% of the second half total.
With that, we will now open up the call for questions.
Questions and Answers:
Operator
Thank you. [Operator Instructions] Your first question comes from the line of Mike Malouf with Craig-Hallum. Your line is now live.
Michael Fawzy Malouf -- Craig-Hallum Capital Group LLC -- Analyst
Hi. Thanks for taking my questions. I'm just trying to focus a little bit on the back-end here. Can you take us through, again, what you think -- you said in the release that the Gear4 and the HALO business was running above expectations. Just give us a sense of what your expectations were with regards to those again, and then where you think that they're going to be now just so we get a sense of the impact of the shortfall in the screen protection?
Chris Ahern -- Chief Executive Officer
Yeah. So I think we guided between 5% and 10% growth for the acquisitions, Mike. I can tell you we're tracking above that expectation. So we're strong in the double-digit growth, particularly in Gear4, we had some nice placement in the first two quarters, which leads us to believe we're in a strong position in the second half. And HALO primarily, as we've always mentioned, is very back end-driven in terms of the HSN and QVC channel. And visibility from the POs that we're receiving already puts that business right where it needs to be and above in terms of the guided growth rates. So we feel good about the acquisitions and where we're heading.
Michael Fawzy Malouf -- Craig-Hallum Capital Group LLC -- Analyst
Okay. And when you take a look at the orders that are coming in, are you getting a sense that, you know, as you look at your mix between Android and Apple, is there a particular -- is there more particular weakness with regards to the iOS side versus the Android side?
Chris Ahern -- Chief Executive Officer
No. To be honest, Mike, with both those brands, it's all new doors. It's new distribution for us. So we haven't tracked one OEM versus the other. And when you look at HALO, it's actually non device-specific. So it's more audio and it's more general power that we're rolling into HSN and QVC. So we don't have any device-specific data on that either.
Michael Fawzy Malouf -- Craig-Hallum Capital Group LLC -- Analyst
Okay. Actually, my question was related to the weakness regarding screen protection, particularly with the 5G cycle that's ahead of us. Just trying to see if there's a sense of the impact of that cycle within those brands.
Chris Ahern -- Chief Executive Officer
Yeah. I would say we're seeing it across all, to be fair, right now. I think some of the reports that you would have seen from some of the OEMs would reflect that, right? I mean the -- there's no more I can say in terms of from a specific brand, but we're seeing softness across all.
Michael Fawzy Malouf -- Craig-Hallum Capital Group LLC -- Analyst
Okay. And then just a final question. With regards to working capital, obviously, a pretty big use of working capital in the first half so far. Just to get a sense of your free cash flow estimates of $43 million, where do you working capital for the year winding up?
Taylor D. Smith -- Chief Financial Officer
Yeah. I think I mentioned some of the headwinds with regard to inventory. We certainly expect to burn down inventories or progress throughout the year, and so I'd expect that we'd be using working capital between the inventory and also AR to drive that improvement in free cash flow. So as we move throughout the year, and I mentioned the inventory turns specifically, we'd expect those to be back to kind of more historical levels once we've kind of worked through this tariff inventory and some of the other excess that we have as we support back half of the year growth.
Michael Fawzy Malouf -- Craig-Hallum Capital Group LLC -- Analyst
Okay. Thanks for taking my questions.
Chris Ahern -- Chief Executive Officer
Thanks Mike.
Taylor D. Smith -- Chief Financial Officer
Yeah Mike.
Operator
Thank you. We have your next question coming from the line of Dave King with Roth Capital. Your line is now live.
David Michael King -- Roth Capital Partners, LLC -- Analyst
Hi, thanks. Good afternoon guys.
Chris Ahern -- Chief Executive Officer
Hi Dave.
David Michael King -- Roth Capital Partners, LLC -- Analyst
So I guess first off on the restructuring. Did you say that it's about $8 million in savings that you expect to realize and that, that's going to be mainly in 2020, Taylor?
Taylor D. Smith -- Chief Financial Officer
Yeah. So what I said was approximately $8 million in gross savings. So in terms of headcount reduction and straight costs, it will be saved over an annualized basis. We'll start achieving some of those savings in the back half of the year, approximately $3 million on a gross basis. But to help provide some guidance as to what this might mean to next year, on an annualized basis, the gross number is approximately $8 million.
David Michael King -- Roth Capital Partners, LLC -- Analyst
Okay. So then as I think about the geography of that in terms of the $3 million and then maybe the $8 million, how much of that is coming out of cost of goods sold versus OpEx to get to those -- the mid- kind of 30s gross margin guidance you gave and then the OpEx guidance you gave for next year?
Taylor D. Smith -- Chief Financial Officer
So those particular items are all operating expense. It's essentially all headcount reduction.
David Michael King -- Roth Capital Partners, LLC -- Analyst
Okay. Switching gears a bit. In terms of the second half guidance, if you will, for revenue growth, it looks like it's kind of 14% growth versus the down 10% you have this quarter. How do you see that playing out by quarter between third and fourth?
Chris Ahern -- Chief Executive Officer
Yeah. So I mentioned it in my remarks. We'd expect it to be pretty consistent with historical numbers, other than the fact that HALO is primary going to be a Q4 load-in. So approximately, if you look at the Q3, Q4 mix, it will be about 40% to 42% third quarter and then the balance, on the fourth.
David Michael King -- Roth Capital Partners, LLC -- Analyst
Okay. And then it sounds like the acquisitions in terms of HALO and Gear4, based on your remarks, Chris, it sounds like that's up maybe low double digits, so call it, $80 million of annual contribution from the acquisitions. Does that sound right? I guess how much did they contribute in the second quarter? And then sort of what are you thinking for the second half from those?
Chris Ahern -- Chief Executive Officer
I would say, I think the growth rate, more mid- to high in terms of the double digits, Dave.
Taylor D. Smith -- Chief Financial Officer
Okay. That's where we would be with just for the second half.
Chris Ahern -- Chief Executive Officer
Yeah.
David Michael King -- Roth Capital Partners, LLC -- Analyst
And how much would they contribute in the second quarter?
Taylor D. Smith -- Chief Financial Officer
The contribution in the second quarter is approximately $16 million.
David Michael King -- Roth Capital Partners, LLC -- Analyst
Okay. Great. So it's better than expected. And then, I guess, lastly for me. In terms of the guidance in the kind of $42 million of incremental revenue you expect in the back half, it sounds like the acquisitions are the bulk of that. In terms of the offsets, it sounds like iPhone launch going slower is going to be an offset. But how much of a contribution do you expect from juice packs now that you have -- you don't need the MFi approval anymore. How much of an incremental benefit do you expect to get from that?
Taylor D. Smith -- Chief Financial Officer
Yeah. As you look at the back half of the year, we've kind of talked about this directionally. I don't think we're going to get back to the 2017 days, but we'd certainly expect growth over last year in the back half of the year. We've talked about how successful we've been in the past with launching after an Apple launch. The best we've ever done was in the late December of '17 when we got products launched. We would expect we'd be able to do a little bit better than that this year, certainly kind of a near November time frame. And so getting it in before holiday will definitely be incremental to us and the business. But again, we should be over last year but not over the 2017 year.
Chris Ahern -- Chief Executive Officer
Yeah. And I'll just add to that as well, David. The reception on the product itself has been very, very encouraging from consumers and feedback, etc. So we feel really good about us, and the latest NPD data reflects that, right? So we're back at 51% market share. So we feel good about the juice pack access this year.
David Michael King -- Roth Capital Partners, LLC -- Analyst
Okay, perfect. Thanks for taking all my questions and good luck for the rest of the year.
Chris Ahern -- Chief Executive Officer
Thanks Dave.
Taylor D. Smith -- Chief Financial Officer
Thanks Dave.
Operator
Thank you. We now have your next question coming from the line of Elliot Alper with D.A. Davidson. Your line is now live.
Elliot Alper -- D.A. Davidson & Co. -- Analyst
Great. Thank you for the questions. Wanted to first ask, how should we think about your ability to continue to grow the business during a time when the smartphone industry is experiencing these declines? And then secondly, if you could speak to where specifically the 10% cut in headcount will come from.
Chris Ahern -- Chief Executive Officer
Yeah. So I'll take the first question, Taylor, and then I'll pass over to you on the cost restructuring. So in terms of how are we going to make sure we continue to grow, Elliot, it's all around product launches for us. It's opening new doors. It's innovation. So we have a lot of exciting new products slated for Q3 and Q4, and we feel really, really strongly that we are well accepted from our partners' base. So for us, it's continue what we do and it's all around product and our distribution footprint in terms of growing new doors, particularly international space with ISoD. It continues to be opening new doors. More recently, Latin America has been an eye-opening growth area for us. That is taking off really, really quickly. So we continue to look at building our international growth and as well as the mark-to-market growth.
Taylor D. Smith -- Chief Financial Officer
Yeah. And then in terms of -- was your question what departments did we tend to see or geos did we remove heads as part of the structure?
Elliot Alper -- D.A. Davidson & Co. -- Analyst
Yeah. Exactly.
Taylor D. Smith -- Chief Financial Officer
Yeah. So I mean the headcount reduction -- really, it was a global initiative. And really, we looked across departments and looked at areas in which we believe we could be more efficient in terms of product development, marketing, back office, and ultimately, we had to make some very difficult calls to remove some people from the business. We have a great team globally, but as we look to the back half of the year and clearly experienced some headwinds in the first half in terms of profitability, the goal was to set ourselves up for success this year but really set ourselves up for long-term success. And so like I said, globally, we had to make a number of tough calls across all departments, and ultimately, we arrived at about $8 million in annualized savings.
Chris Ahern -- Chief Executive Officer
Yeah. And just to confirm, it impacted every one of our geos.
Taylor D. Smith -- Chief Financial Officer
Yes.
Elliot Alper -- D.A. Davidson & Co. -- Analyst
All right. Thank you.
Chris Ahern -- Chief Executive Officer
Thanks Elliot.
Operator
Thank you. We have your next question coming from the line of Jon Hickman with Ladenburg. Your line is now live.
Jon Robert Hickman -- Ladenburg Thalmann & Co. Inc. -- Analyst
Hi, thanks. Chris, could you elaborate a little more on your expectations for maybe next year as the 5G thing starts to take off? I mean how big is the rebound going to be?
Chris Ahern -- Chief Executive Officer
It's hard to say how big is the rebound going to be, Jon, because it's all going to be based on the number of devices that come with 5G-enabled, how quickly the network can be, infrastructure gets rolled out. But speaking with our partners, there are very encouraged about what 5G will do for the industry. They expect that it's one to two to three year roll out. It's not going to be a one big bang. I think it's going to be extended over a number of years. And essentially, I really see it as the next big growth engine for the entire industry. So we feel good about it. And as you read into the technology, I think we're uniquely placed with our products and we have to take advantage of it. So overall, we're very encouraged with the rollout of 5G and what it can bring for us.
Jon Robert Hickman -- Ladenburg Thalmann & Co. Inc. -- Analyst
So I know that 5G phones are going to like give us more speed and we'll be able to do things faster. What's it going to do to battery life on the power side? Are they going to going to eat up our battery faster?
Chris Ahern -- Chief Executive Officer
Yeah. So what we're reading and learning, Jon, is it is more power-hungry consumption. So I think it's a really nice, unique opportunity for the multi-brand to be able to touch on to 5G as it needs more power consumption required.
Jon Robert Hickman -- Ladenburg Thalmann & Co. Inc. -- Analyst
Okay. Thank you. I appreciate that.
Chris Ahern -- Chief Executive Officer
Thanks Jon.
Taylor D. Smith -- Chief Financial Officer
Thanks Jon.
Operator
Thank you. And we have your next question coming from the line of Jeff Van Sinderen with B. Riley FBR. Your line is now live.
Richard Frederick Magnusen -- B. Riley FBR, Inc. -- Analyst
Hello. This is Richard Magnusen in for Jeff Van Sinderen. Thank you for taking our call. My first question is, and I may have -- in case I missed this, how much do you expect the legacy screen protection to be down this year? And then out of all your revenue lines, where do you expect the biggest shortfall for this year?
Taylor D. Smith -- Chief Financial Officer
We don't guide specifically by the category level, but I can tell you that on a year-over-year basis, there's a couple of things to consider. So when we compare '18 to '19, we talked about a couple of headwinds, one of them being that we pulled some revenue into 2018 in anticipation of what we thought was an increase in tariffs on January 1. As we've looked at that over the last couple of months to try to get an idea ultimately how much that was because, at that time, we had estimated it approximately was six to eight weeks of inventory. But with the slowdown in handset sales, it's clearly made it longer than that. So between that load in last year and then the expectations for this year, it creates a bit of an unusual comparison 2018 to '19. I think, certainly, we expect screen protection to be down on a year-over-year basis, but yeah, other than that, we don't provide specific guidance at a category level.
Richard Frederick Magnusen -- B. Riley FBR, Inc. -- Analyst
Okay. And you mentioned the tariffs. You mentioned in the call about perhaps moving some of your business outside of China. Could you give any more details on that regarding the time line?
Chris Ahern -- Chief Executive Officer
Yeah. So right now, Richard, we have one or two CMs [Phonetic] that we partnered with that are actually in the process or had moved already. So it's going to be an ongoing process for us and by category. But I would expect that through the course of 2019, the back half of 2019, we'll see another one or two CMs that we work with closely move production facilities. And then throughout 2020, depending on where we land on tariffs, I would expect that we should see more of that partnership from a production perspective.
Richard Frederick Magnusen -- B. Riley FBR, Inc. -- Analyst
Okay. And then just my final question. Regarding acquisitions, are there any other product categories you may consider adding to your portfolio?
Chris Ahern -- Chief Executive Officer
Yeah, for sure. So we're always looking out in terms of what makes sense for us as a company. We have a dedicated business development group. So we have a number of opportunities we're looking at, but we have nothing to say right now.
Richard Frederick Magnusen -- B. Riley FBR, Inc. -- Analyst
All right. Well, thank you very much.
Chris Ahern -- Chief Executive Officer
Thanks Richard.
Taylor D. Smith -- Chief Financial Officer
Thanks Richard.
Operator
Thank you. And I am showing no further questions at this time. I would now I'd like to turn the conference back to Mr. Chris Ahern.
Chris Ahern -- Chief Executive Officer
Thank you. Thank you all for joining us for the Q2 earnings call, and I look forward to updating you again on our next call. Thank you for joining us.
Operator
[Operator Closing Remarks]
Duration: 70 minutes
Call participants:
Brendon Frey -- Managing Director
Chris Ahern -- Chief Executive Officer
Taylor D. Smith -- Chief Financial Officer
Michael Fawzy Malouf -- Craig-Hallum Capital Group LLC -- Analyst
David Michael King -- Roth Capital Partners, LLC -- Analyst
Elliot Alper -- D.A. Davidson & Co. -- Analyst
Jon Robert Hickman -- Ladenburg Thalmann & Co. Inc. -- Analyst
Richard Frederick Magnusen -- B. Riley FBR, Inc. -- Analyst
