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Edited Transcript of ZMTP earnings conference call or presentation 1-Aug-19 1:00pm GMT

Q2 2019 Zoom Telephonics Inc Earnings Call

BOSTON Aug 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Zoom Telephonics Inc earnings conference call or presentation Thursday, August 1, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Frank B. Manning

Zoom Telephonics, Inc. - Co-Founder, CEO, Chairman & Acting CFO

* Joseph Lee Wytanis

Zoom Telephonics, Inc. - President & COO

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Conference Call Participants

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* Spencer Lehman

- Private Investor

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Presentation

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Operator [1]

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Good morning, and welcome to the Zoom Telephonics shareholder call. (Operator Instructions)

Thank you. I would now like to turn the call over to Frank Manning. Please go ahead.

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Frank B. Manning, Zoom Telephonics, Inc. - Co-Founder, CEO, Chairman & Acting CFO [2]

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Thank you, Stephanie. Welcome to the Zoom Telephonics call for Q2 2019. I'm Frank Manning, Zoom's CEO. Our President, Joe Wytanis, will also be speaking and answering questions during this call.

During this call, we'll be referring to slides at www.zoomtel.com/sq219. When you have time, please read Slide 2. We cannot predict the future, and our comments and forward-looking statements are subject to risks.

Slide 3 provides a brief overview of Zoom Telephonics. I think most of you are familiar with the facts on this slide. Zoom has been in business since 1977. We have the exclusive Motorola brand worldwide license for a large number of Internet access and local area network products. Our strongest product category is cable modems and cable modem routers, and we are also seeing growth in a number of additional product categories.

The Motorola brand, great products and excellent execution tripled our revenues from 2015 through 2018. China tariffs have dramatically impacted our business recently, and we'll discuss why we're still optimistic in spite of these tariffs.

On Slide 4, you can see that we had 10 straight quarters of increased year-over-year sales through Q3 2018. That trend was interrupted in Q4 2018 and Q1 2019 due primarily to China tariffs. We're pleased that Q2 2019 showed a resumption of year-over-year growth, with net sales up 8.5% to $8.2 million. There has been a fair amount of price chaos due to the tariffs. But over time, prices have become more stable. Q2 2019 benefited from a significant improvement in shelf space and shelf position at Best Buy, a very important electronics retailer. We also achieved good online growth, especially at Amazon. Almost 100% of our sales were in the U.S. We saw year-over-year growth in every significant product category, including cable modems, routers and other local area network products, DSL and cellular products.

Slide 5 gives an overview of Q2 2019 results compared to Q2 2018. You can see that we were able to achieve 33.9% gross margin, a significant success given that our gross margin would have been 39% without $416,000 in tariffs. Our net loss for Q2 2019 was $805,000, and slightly over half of that loss was due to the impact of tariffs on our gross profit.

On Slide 6, you can see how China tariffs severely impacted our gross profit and gross margin in Q4 2018 and Q1 2019. And you can see that they both experienced significant improvement in Q2 2019 in spite of ongoing tariffs.

Slide 7 provides a tariff update. The total impact of tariffs on gross profit was $1.25 million from late September 2018 through June 30, 2019. We did a good job of moving inventory into the U.S. right before tariff increases, or the impact would have been even higher. Right now, we're paying a 25% tariff on about 96% of our products' cost of goods as they ship into the U.S., and we are concurrently pursuing several different ways to eliminate this severe problem. Most important, we filed for relief due to severe economic harm on June 30, the first day that was allowed for our tariff tranche. If we get that relief, we will be reimbursed for all covered products starting back in September 2018. I'm sure that you'd like to know when we'll get the results of our severe economic harm filing. We may hear within just a few weeks, and we may hear sometime in Q4. We hope it's soon.

Previously, we had also filed for made-in-Mexico tariff relief, where we proposed to turn electric product assembly into a cable modem in Mexico instead of China. That proposal was initially denied, but we have appealed that decision, and we expect to get the results of our appeal very soon. We are cautiously optimistic about our prospects for tariff relief. If both the severe economic harm and made-in-Mexico appeals are not successful, we have made reasonable progress in preparing to move product assembly out of China in early 2020. We strongly hope that we don't need to do this, but we'll see.

Turning back to comparing Q2 2019 to Q2 2018. Our operating expenses increased $0.9 million to $3.5 million or 43.5% of net sales. You can see on Slide 8 that the major increases were due to increased retailer-related marketing fees, increased Motorola licensing costs and increased personnel and personnel benefits. We're okay with all those increases as we focused on return on investment, growth and profitability.

You can see on Slide 9 that our balance sheet was dramatically improved by our recent financing of $5 million less expenses. The balance sheet is strong, with a good current ratio, good equity, no bank debt and significant loan availability. This will help us to weather the short-term disruption in our business caused by tariffs and will provide us with the ability to pursue an aggressive product development and rollout plan.

Slide 10 has a lot of detail about our Motorola license that you can read later, if you like. The key point is that we have an exclusive worldwide licensing agreement for the Motorola brand for a wide range of Internet and local area network products. This has been an important part of our growth story. We know that Motorola is very pleased with the good job we've done with the Motorola brand. We are pleased, too, with the relationship, and we are aggressively working to bring out new products and to take other measures to expand the power and revenues of the Motorola brand.

Slide 11 shows our main accounts of who's who of top U.S. electronics retailers and distributors. We are very selective about where we sell our products, focusing on a small number of very strong relationships. We believe that careful marketing is a very important part of growing our revenues and supporting our retailers.

Slide 12 shows how we are progressing with some of our sales channel goals. This year, we've already expanded our shelf space and shelf position in Best Buy, and we have a focal display on the top shelf in Best Buy's stores that are in Comcast territories, that's roughly half of Best Buy stores. We very recently hired a new VP of Sales, who has excellent relationships in the service provider channel, and we're excited about our prospects. Zoom and Minim have integrated Minim's powerful technology into a new cable gateway that's coming later this year, and we'll talk more about Minim in a few minutes.

We are starting to enjoy recurring revenues with our highly reviewed Cellular MultiSensor, putting Minim technology into some of our cable modem routers -- and routers should significantly expand recurring revenues, and we're very excited about this. International sales have not been a major focus, but we are taking steps to start driving growth internationally over the coming quarters.

Slide 13 shows how our share of Amazon cable modem sales has improved. Share moves up and down every week based on a number of factors, including customer reviews, advertising dollars, buy box issues and product prices. Zoom makes a point of achieving profitable sales not just market share. And generally, we run fewer price promotions than Netgear and Arris. There are many challenges in dealing with Amazon. But overall, they are a high-volume, profitable account for us.

Now I'd like to turn the presentation over to Joe Wytanis, Zoom's President.

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Joseph Lee Wytanis, Zoom Telephonics, Inc. - President & COO [3]

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Thank you, Frank. Hello, everyone.

Slide 14 provides an update on our activity with service providers. As Frank mentioned, we recently hired a VP of Sales that has excellent experience selling to MSOs. This person will also put a concentrated focus on our existing retail business.

I just returned yesterday from the NCTC-ACA Connects Independent Show in Chicago, where we unveiled that Motorola is back and better than ever in the service operator channel. Our participation was well received, and I'm optimistic about our prospects. We are developing distributor partnerships to reach out to U.S., Canada and Mexico markets, plus we're working on necessary product certifications with service operators to sell direct to them. Finally, we're developing product solutions and packaging tailored specifically to service operators.

Slide 15 shows some of the technology trends that will help drive future growth. DOCSIS 3.1 is a fairly new and very important cable modem category. We had a successful DOCSIS 3.1 cable modem now, and we have an exciting line of DOCSIS 3.1 modem routers coming. Mesh is a high-growth technology for routers, and we are working aggressively on adding mesh to new cable modem routers and routers. WiFi 6 is an advanced WiFi standard, and we expect to have WiFi 6 products in 2020. Network management and IoT security are increasingly important as homes have more and more devices, some of which can threaten your network's performance and your personal privacy. Our alliance with Minim helps leapfrog us into this important area. We've already talked about how subscriptions and recurring revenues will be increasingly important for us. We have cellular products now. Revenues are low, but we're seeing a good growth, and we expect significant sales starting in 2020. We like this product area. We're increasingly good at it, and we see it as an important stepping stone to 5G.

Slide 16 highlights our relationship with Minim and the outstanding capabilities Minim brings to our offering. With our products and services powered by Minim under the Motorola brand, we are able to provide end users with excellent remote management and security for their wireless home networks from an app running on their smartphone. In addition, our Motorola technical support team will be able to provide best-in-class technical support to end users as they add ever-increasing devices to their home network.

At the Independent Show this week, we announced our first device powered by Minim that will ship later this year. This is just the start as we plan to incorporate Minim in our future product plans and cloud-based service offerings.

Slide 17 lists some of the new products we're working on. We're now shipping the Cellular MultiSensor. It's very well reviewed, and we intend to expand our marketing efforts to help capitalize on those reviews. That product proves our ability to design a quality product with our own hardware and firmware, cellular network access, high security, Amazon AWS functionality and a great app. It's an important product as is and also as a stepping stone in our recurring revenue plan. We're putting a major focus on DOCSIS 3.1 cable gateways, both with and without mesh. We have some high-speed Cat4 cellular products in the works, and we know we can sell these in volume.

We have a DOCSIS 3.1 WiFi 6 gateway on track for the first half of the year, and we're very excited about this product. We're doing well with MoCA adapters with good sales and strong customer ratings, and we are working on a higher-speed MoCA adapter for introduction in about 6 months. We are currently shipping 1 DOCSIS 3.0 gateway with voice, and it's a strong product. We will follow that product with a very advanced DOCSIS 3.1 cable gateway with voice. All in all, I am definitely excited about everything we have going on with our product development efforts.

Slide 18 celebrates router power. The router or cable modem/router is in a central spot in people's homes as it typically lets all devices in the home use WiFi or Ethernet to get to the Internet. It's an ideal place to monitor data going in and out and provide security. We've already discussed how Minim will help us to expand the power of the router. We're excited about what that can provide for our customers, and we're excited about the potential recurring revenues.

Slide 19 has a picture of our new headquarters building, 225 Franklin Street here in Boston. We're on the 26th floor in a Regus office that gives us flexibility we want as our company moves forward.

In summary, we're making good progress in spite of the tariffs. We're excited about our prospects, and we appreciate your support. Now let's turn to questions, Stephanie.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Spencer Lehman, private investor.

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Spencer Lehman, - Private Investor [2]

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Frank and Joe, on these tariffs, what a shame, but if you're not successful with the exemption and then if the Mexico deal doesn't work either, do I understand that eventually, by next year, you may have to move manufacturing back to the U.S.?

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Frank B. Manning, Zoom Telephonics, Inc. - Co-Founder, CEO, Chairman & Acting CFO [3]

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No. Our primary supplier for the vast majority of our products is based in Shenzhen. They purchased land and built a facility in Vietnam, and they will be -- begin production of some products but not cable modems in Q4 this year. And cable modems are targeted for Q1, if necessary. Certainly, there's always risk when you're moving a sophisticated production line to a new country, but they're certainly on the case as far as doing that. Moving to the United States is really not a practical solution because the cost would just be too high, so we...

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Spencer Lehman, - Private Investor [4]

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Cost is just too high, it would -- yes, it wouldn't make any sense. The tariff -- paying the tariffs would be cheaper than moving back to the U.S.

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Frank B. Manning, Zoom Telephonics, Inc. - Co-Founder, CEO, Chairman & Acting CFO [5]

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Yes. Well, it's -- for Vietnam, unless the policy changes, there is no tariff. So China is the one that's the real problem right now.

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Spencer Lehman, - Private Investor [6]

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So eventually, you could move everything you needed to Vietnam.

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Frank B. Manning, Zoom Telephonics, Inc. - Co-Founder, CEO, Chairman & Acting CFO [7]

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Yes.

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Joseph Lee Wytanis, Zoom Telephonics, Inc. - President & COO [8]

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That's correct.

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Operator [9]

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And there are no further questions in the queue.

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Frank B. Manning, Zoom Telephonics, Inc. - Co-Founder, CEO, Chairman & Acting CFO [10]

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Okay. Well, thanks to everyone who joined. We always like to link up with you, and we look forward to future calls. Thank you.

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Joseph Lee Wytanis, Zoom Telephonics, Inc. - President & COO [11]

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Thank you.

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Operator [12]

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Thank you. That does conclude today's conference call. You may now disconnect.