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Edited Transcript of ZMTP earnings conference call or presentation 31-Oct-17 1:00pm GMT

Q3 2017 Zoom Telephonics Inc Earnings Call

BOSTON Dec 21, 2018 (Thomson StreetEvents) -- Edited Transcript of Zoom Telephonics Inc earnings conference call or presentation Tuesday, October 31, 2017 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Frank Manning

Zoom Telephonics, Inc. - Co-Founder, President, and CEO

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Conference Call Participants

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* Bryce Thomas

North Grove Asset Management - Analyst

* Anthony Marchese

- Private Investor

* Christopher Davis

Founding Asset Management Limited - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by and welcome to the Zoom Telephonics shareholder third-quarter call. (Operator Instructions)

Thank you. I would now like to turn the conference over to Zoom's President and CEO, Mr. Frank Manning. Sir, you may begin your call.

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Frank Manning, Zoom Telephonics, Inc. - Co-Founder, President, and CEO [2]

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Okay. Thank you, Paula. Welcome to the Zoom Telephonics conference call for Q3 2017. My comments refer to the slides available at www.zoomtel.com/sq317. Let's start with slide 3, which provides several quick highlights from the quarter.

This was a milestone quarter for Zoom. We had strong organic revenue growth to $8.58 million during the third quarter. And gross margin improved to 35.7%, largely due to increased US retail sales on Motorola brand cable modems and gateways.

With this higher sales and gross profit, we broke through to net profitability of $377,000 or $0.02 per diluted share for Q3 2017. This demonstrates the traction we are gaining with consumers as a result of our Motorola brand.

During the quarter, we dramatically expanded our worldwide licensing agreement with Motorola Mobility, adding some big Internet access product areas and some smaller but fast-growing Internet access product areas. This further strengthens our Motorola licensing relationship and expands our reach in the marketplace with this valuable brand.

Slide 4 demonstrates the considerable growth that we have seen since we launched our first Motorola brand and product. Trailing 12-month revenues exceed $25 million and our first 9 months' revenue for 2017 is up 62% compared to the first 9 months of 2016.

Slide 5 provides some of our highlights from the quarter. As I mentioned earlier, revenues increased 43% to $8.58 million, marking the sixth straight quarter of year-over-year revenue growth. This growth was driven by sellthrough, not sell-in, and we saw substantial growth in sales of Motorola cable modems and gateways to our major US retailers. Sales through Amazon were especially strong.

98.6% of our sales during the quarter came from the US, by far the largest market for cable modems supplied through retailers. Our new router, MoCA, DSL, and cellular products should provide significant opportunities for international growth moving forward.

Q3 2017 gross profit largely benefited from strong sales through Amazon Seller Central, which have high gross margins. We sell directly through Amazon, which helped Q3 2017 gross margin rise to 35.7% from 32.1% in Q3 2016. Similarly, gross margin for the nine months ended September 30, 2017, increased to 34.0% compared to 31.2% for the period ended September 30, 2016.

Driving efficiency in our operating expenses is a key focus of ours, and we saw progress on this front on both a quarterly and nine-month basis. Expenses grew to $2.65 million during the quarter, mainly due to increased expenses for the Motorola royalty, advertising costs, and product certifications.

That being said, total operating expenses as a percentage of sales decreased in Q3 2017 to 30.9% from 36.4% in Q3 2016. And for the nine-month period ended September 30, 2017, total operating expenses as a percent of sales decreased to 38.3% from 46.6% in the prior-year period.

We are very pleased to have broken through to net profitability this quarter, with net income of $377,000 or $0.02 per fully diluted share compared to a net loss of $244,000 or $0.02 per share in Q3 2016. The increase in profit is primarily due to sales growth and improved gross margin.

On slide 6, we provide select balance sheet items. At September 30, 2017, we had approximately $595,000 drawn on our $3 million line of credit, with $91,000 in cash. Working capital stood at $2.9 million with a healthy current ratio of 1.5. We believe the balance sheet and available bank debt provide a good foundation for the continued growth of the business.

Now we will go to slide 7, where we turn to operations. First, during the quarter, we further expanded our Motorola agreement, as profiled on slide 7. The new amendment to our licensing agreement adds worldwide exclusive licensing for consumer cell modems and gateways, DSL modems and gateways, and MoCA adapters. It also adds cellular sensors, but on a nonexclusive basis. Motorola hasn't licensed another company for cellular sensors, but they want to keep their options open in this fast-moving new product area.

On slide 8, we detail our Motorola cable modem product line and status. We drove significant sales momentum during the quarter, and as of September 30, 2017, we had Motorola brand cable modems in over 6,689 stores. We will remain focused on product placements in only the leading retail stores, including Best Buy, MicroCenter, Target, and Walmart. We continue to stay focused on expanding our product line, increasing our product placements in the leading stores and increasing sellthrough in stores and online.

In terms of our cable modem product rollout, we have three 24x8 cable modem products in the works, including one expected to ship this year. One for next year includes telephone call capability. Additionally in 2018, we hope to introduce at least one DOCSIS 3.1 gateway product.

Slide 9 shows that we continue to gain shelf space. You can see that on slide 9, where our shelf space metric grew to 14,468 in Q3 2017, an increase of 41% over Q3 2016. You will recall that we calculate that metric by counting two SKUs in one store as two three SKUs in one store as three, etc.

Moving to slide 10, we have seen consistent success in the Amazon cable modem market as a result of our superb products, excellent customer reviews, effective advertising, and more. Five of our seven main cable modem products are rated 4.5 stars and 4 of them are labeled as Amazon's Choice, a clear indicator that our products are popular among customers. And that they are category leaders at Amazon, especially in the faster-growing high-end categories.

We have grown our Amazon share of cable modem sales from a little under 3% in February 2016 to 26.7% in the most recent week reported by Stackline. As you can see, both of our main competitors, Arris and Netgear, have lost significant market share on Amazon during the same time period.

Slide 11 provides a status of our Motorola brand DSL and local area network products. Our recent license extension has been expanded to include VDSL/ADSL modems and gateways, MoCA adapters, and cellular products.

The worldwide DSL market is large, partly because DSL is the main way to get broadband in many countries. The MoCA adopter market is smaller, but we are excited about the possibilities in the US and in other countries that have coax cable in the home.

Production of our ADSL to VDSL2+ AC1600 gateway will begin in this quarter. We plan to sell this on Amazon and to smaller service providers in the USA soon. And over time to offer it to service providers and distributors outside the United States.

We are also starting production of a Motorola bonded 2.0 MoCA adopter this quarter. This lets you send up to 1 gigabit a second over a home's coax cabling. For many homes, MoCA is the best way to connect a router to an HDTV, computer, or game station, and we are excited about entering this new product area.

This quarter, we will also be shipping our new MR1700 AC1700 router, which has four 2.4 gigahertz antennas for superior range and wireless noise immunity. We are excited about this product's performance and value and we plan to put a significant advertising push behind it.

Slide 12 discusses as a status of our industrial and consumer cell modems. We remain focused on introducing our line of industrial-strength USB cell modems as an important part of our push for success in the Internet of Things and machine-to-machine markets. We have a good pipeline of customers evaluating these products.

Most of these products include a Gemalto module, and Gemalto is recognized as one of the leading producers of cellular data modules. So we will continue to cultivate our Gemalto relationship moving forward with the hope of getting new sales leads and sales.

In addition, we will continue to focus on reinforcing our relationships with carriers such as AT&T and Verizon. We are part of the AT&T Partners program and we are getting good leads from AT&T.

Because our new license amendment with Motorola includes cellular modems and routers, we are also increasing our focus on bringing these Motorola brand LTE consumer products to market. We expect to begin shipping Motorola brand consumer cell modems in the first half of 2018.

Slide 13 provides details around our sensor plan. During Q3 2017, we were granted non-exclusive worldwide rights to use the Motorola brand for consumer-grade cellular home sensors. As some of you know, we have been developing sensors for several years and we focus on sensors that communicate through the cell network to smartphones and browser-enabled devices.

These are ideal for second homes, apartments, condominiums, and even for vacationers who want to monitor their home while they are away. Additionally, cellular sensors are easier to set up than Wi-Fi sensors since they don't need to reach the Internet through a router and a fixed broadband modem. Another selling point for consumers is that the service plan costs for a sensor can be very low because the sensor doesn't use much data.

We are targeting $100 price for one multisensor. With this product, we will offer cellular service at under $5 per month, providing recurring revenue for Zoom moving forward. That service is billed separately and you can use a service provider that's completely different from your smartphone's service provider. Our goal is to ship our first Motorola cellular sensor product in early 2018.

Slide 14 summarizes our target Motorola product rollout timeline. As you can see, we plan to introduce a new router, a 24x8 cable modem, our first VDSL/ADSL gateway, and our first MoCA adaptor this quarter, Q4 2017. In addition, our goal is to begin shipping Motorola brand cellular sensors and a cellular ethernet modem in 2018. We also intend to launch our Motorola brand AC2600 router as well as Motorola brand mesh products.

This was truly a breakthrough quarter for Zoom, with increases in sales and gross profit and a return to net profitability. We have proven our ability to sell Motorola brand cable modems in the US and now we have the opportunity to sell other types of Motorola products in the US and other countries. We have a great team here at Zoom and we welcome the challenge.

Now let's turn to questions, Paula.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Bryce Thomas, North Grove Asset Management.

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Bryce Thomas, North Grove Asset Management - Analyst [2]

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Will all the products that you plan to roll out in Q4 and into 2018 be sold through the same sales channels as the current products?

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Frank Manning, Zoom Telephonics, Inc. - Co-Founder, President, and CEO [3]

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Good question. Because we have so many products, to answer that question I need to go through the product categories and comment individually. So for cable modems, the answer is definitely yes. We will continue to sell through US retail. And we will continue to try to sell to service providers, although that's less important to us.

For routers, generally the answer is, yes, the same channels. But I do want to say that retail shelf space is very tough in the United States, where you have Netgear, for instance, a very strong and other strong contenders. So we will probably have less shelf space in the United States than for cable modems, but we think the online opportunity is big. And we also think there's a good opportunity internationally for routers.

For MoCA adapters, we think that is mainly an online market in the United States. A lot of people -- it's not a big volume category, although it is fairly strong volume online. And so that means it's more difficult to get shelf space in the United States. There are also opportunities internationally, especially online, and we plan to go after those opportunities.

For DSL, basically we think there actually is a good chance at retail. If you look at the shelves at, say, Best Buy, you will find DSL products and we think we can be competitive with those products. We also think there's a good online opportunity in the United States. And there's also an opportunity with service providers, especially smaller ones. And internationally, there's good opportunity for online and distributors and service providers. I know this is a long answer, sorry, but I'm almost done.

For cellular, for cellular modems, we think that first of all, our industrial products will be targeted at a new channel, which is basically system integrators and other people creating systems where they need a cellular modem.

For consumer cell modems, we think online will be especially strong. And one thing that's exciting to us about cell modems and cell routers is that obviously the Motorola brand is very famous for smartphones and they have great distribution to the people -- to the cellular service providers.

And they have some new ways to try to get products into that channel that aren't necessarily cell phones. In other words, cell phones are an obvious thing, but there's also related cell products and we will have some of those. So we are hoping to be able to use that Motorola brand strength with that new channel.

And then finally, cellular sensors. We think there's a good opportunity in the United States online and at retail stores. And there's an opportunity with some new types of customers, like insurance companies and installers. And we think there's a good international opportunity.

So that's a long answer, but the short answer is that the channels we have will be very important. But we'll also be able to expand into some new channels, both in the United States and internationally.

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Operator [4]

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(Operator Instructions) [Anthony Marchese], private investor.

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Anthony Marchese, - Private Investor [5]

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First of all, great results. Secondly, I noticed your level of R&D went up fairly dramatically this quarter. Should we anticipate that to stay the same or come down?

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Frank Manning, Zoom Telephonics, Inc. - Co-Founder, President, and CEO [6]

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Well, there's a couple things that make that number vary, namely personnel and outside consultants and certifications. So that can vary by quarter depending on what products are being certified.

And it's true that we have added some resource in this area for more development and also for testing. So I think that there can be variation based on the certifications, but I think that generally that number over time will trend up as our sales increase and as we continue to try to develop exciting new products.

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Operator [7]

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(Operator Instructions) Christopher Davis, Founding Asset Management.

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Christopher Davis, Founding Asset Management Limited - Analyst [8]

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An excellent set of results. Congratulations to all of you. That is really formidable stuff. Thank you. My question relates, Frank, to the ad spend going forward. Is this going to be -- what are your plans for the ad spend and how are you going to apportion it tactically?

Question two is now that you've got products in the channels and have understood the mechanics behind this, do you feel more confident in making projections for any of the product lines and projections for earnings overall?

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Frank Manning, Zoom Telephonics, Inc. - Co-Founder, President, and CEO [9]

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Okay, those are good questions. So in terms of the ad spend, first of all, I've commented on where we are spending our money. We spend our money primarily online with Amazon and also with Google and Facebook.

And it's a very return-on-investment-driven, so I think that that will tend to go up over time. And we hope it won't go up as a percentage of sales. And frankly, we've been trying to spend more money on Amazon. And it's not always predictable because you are bidding against other people that are also bidding for things like keywords and ad position.

So it's not totally predictable. And, frankly, nothing makes me happier than to have advertising do so well that I spend more money on it and drive more sales. So I think that it's hard to give an absolute number, but I think it's in good control and should not go up as a percentage of our sales.

In terms of projections, I think we've demonstrated an ability to grow the Company and we expect to continue to grow it in a significant way. I'm going to stay away from numeric projections, but I think that the prospects are very good for significant revenue growth next year and profitability that goes with that.

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Operator [10]

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(Operator Instructions) At this time, we have no further questions.

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Frank Manning, Zoom Telephonics, Inc. - Co-Founder, President, and CEO [11]

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Okay. Well, thank you for joining the conference and I look forward to speaking with you in the future. Thanks very much.

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Operator [12]

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Ladies and gentlemen, thank you for your participation in today's conference. This concludes today's call. You may now disconnect.