Do It Yourself Stock Investor

Saturday Night RORC: Skullcandy, Inc.

May 21, 2016

Skullcandy, Inc. (NASDAQ: SKUL) produces gaming headsets under the Skullcandy brand and Astro. This is sometimes forgotten as they are more commonly known for all-purpose headsets and earbuds. The gaming headsets directly compete with Turtle Beach (NASDAQ: HEAR) headsets, often sharing the same retail shelf space.

In an article published on June 29, 2015, "Bullish Sentiment For Turtle Beach Corp.: Deaf To Losses And Skullcandy's Resounding Growth" the competition was analyzed and showed that Skullcandy was the better stock of the two. Since then Turtle Beach has traded under $1 PPS and has released a pseudo-medical device, HyperSound, that has not posted any significant revenue or adoption.

Skullcandy has added new BlueTooth headsets and earbuds. They have also added a new business partner via equity sharing with Kyrie Irving of the Cleveland Cavaliers (NBA Basketball).

Skullcandy Inc. FinViz chart

While Skullcandy's revenue growth persists and margins remain healthy, the PPS has fallen during the recession-like bear market. This has been further exacerbated by insider selling, specifically by Rick Alden and his holding company.

To read more about the insider selling, see "Can Skullcandy Value Investors Survive Insider Activity?".

Skullcandy's Research and Innovation

Skullcandy has two unique expenditures that appear to be consolidated in their Selling/General/Admin Expenses. In their 2015 SEC 10-K annual report, "Demand Creation" and "Research and Innovation" are explained as follows:

"The Company expenses demand creation marketing costs, or advertising costs, generally as they are incurred and they appear in the selling, general and administrative portion of the consolidated statement of operations... Total demand creation marketing spend was approximately $28.2 million, $26.0 million and $27.1 million for the years ended December 31, 2015, 2014 and 2013, respectively. Amounts capitalized on the balance sheet as prepayments were $373,000 and $260,000 as of December 31, 2015 and 2014, respectively. Amounts paid to individuals and teams for contractual sponsorships were approximately $1.3 million, $1.8 million and $2.3 million for the years ended December 31, 2015, 2014 and 2013, respectively.
In recent years the Company has increased employee headcount and spend towards research and innovation. Total research and innovation spend was approximately $1.4 million, $1.0 million and $454,000 for the years ended December 31, 2015, 2014 and 2013, respectively."

Skullcandy does not show a large R&D expenditure. They spend more on marketing and sponsorships, which is why the Return on Marketing Investment (ROMI) metric would be more telling than Return on Research Capital (RORC).

Saturday Night RORC: Skullcandy

For every dollar of R&D spent by Skullcandy in 2014 they made $266 in gross revenue for 2015. Turtle beach showed a modest RORC of $17 per each dollar of R&D spent the year before. Both companies showed a decline in their RORC from 2014. Again, Skullcandy shows to spend proportionally more on Demand Creation than on research.


Disclosure: I am/we are long SKUL.