Edited Transcript of ZMTP.PK earnings conference call or presentation 12-Aug-20 2:00pm GMT

Over the next few quarters, we will be discussing our long-term plan. Today, you’ll get to hear a couple of elements of that plan. The leadership team here at Zoom is great. I’d like to mention them and thank them, our CFO, Jacqueline Barry Hamilton; our COO, John Lauten; our CTO; Phil Stanhope; and our CMO, Marlana Trombley. Their average tenure is less than a year, but I’m happy with how the team and the company is settling in.

All companies change and evolve, some through a more gradual phase and others like ourselves as a more episodic phase. We are in the midst of a CEO search, and we expect to report more about the search in the future outside of this call. Zoom is built on a foundation of quality engineering and home connectivity space which is dynamic and competitive. The company has a proven track record to deliver products that consumers are demanding. And increasingly, we see signs that we will be able to demonstrate profitability, and I’m excited about the results as a team that we can deliver to all of our investors.

With that said, I’ll turn to the numbers for the quarter. Net sales were $10.3 million, up 26% year-over-year. Gross profit was $2.1 million, and our margin represented was 21%.

Non-GAAP net income was $0.4 million after adjusting for COVID and tariff expenses, and our GAAP income was a net loss of $1.5 million. Jackie will provide more color on the financial results in a little bit.

There are 4 major themes that are top of mind for us. First is transformation. The company is under a major transformation and our primary focus is on our team. We currently have about 50 employees and anticipate going through a sizable change in our workforce. This is to increase the engineering and value creation that we perform as a company. New products will be launched with more velocity and certainty. Our products can be of even higher quality and more unique, which will capture more value and more market share. We will be able to compete in more product categories and increase our addressable market.

Second has been our immediate reaction to COVID-19, which is also reflected in our numbers. Every company has had to deal with a stress and change for their supply chain and Zoom is no different. We have been able to grow our manufacturing base to meet most of the surge of demand that we experienced and continue to see in the market. As consumers are home more, the value of their home Internet connection for work, play and now social connection has dramatically increased.

This is a trend we expect to see for some time. We are now in position to double manufacturing capacity from the beginning of the year. At this time, we’re manufacturing in product and regions — manufacturing products and regions, which are not currently affected by tariffs imposed in the United States.

You will see the impacts of our financial results reflected over the next 2 quarters as our margins will increase. Also related to COVID-19 was our decision to collapse some of our supply chain to deliver our products by air freight and get more product in market faster. This added a significant additional cost per quarter, but we felt it was the right decision to make our products available to our customers even at an additional expense.

You may notice some large swings in inventory, which point to moves our team was able to make. Over the next quarter or 2, we will migrate a vast majority of our freight to sea, which will positively impact our margin. There’s a lot of moving pieces here, but that’s the high level situation.

Third is an update on some of our upcoming product launches. This quarter, we will be launching a Whole Home mesh WiFi management product, the MH7022, a reliable and value-oriented product in the WiFi category. This segment is highly competitive, but also 5x the size of cable modems. Consumers are looking to blanket their home in Wifi and this product is a great answer.

Fourth is the other major product launch, our software platform MotoManage. We envision a world in the not-too-distant future, where all of our products will include a warranty and device management platform, so we will be able to have a direct relationship with all of our customers.

We will also be able to deliver software services sold as recurring revenue. MotoManage will debut on the Whole Home mesh WiFi product sold in single, double and triple packs in this quarter. Software is an area that this company is heavily investing in and we’re delighted to see it launched.

Finally, we look forward to refreshing our product portfolio with DOCSIS 3.1 products in Q4 and Q1 of 2021.

I’ll now turn things over to Jackie to take us through the numbers.

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Jacquelyn Barry Hamilton, Zoom Telephonics, Inc. – CFO [4]

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Thank you, Jeremy. I will be reviewing our financials for both the second quarter and year-to-date 2020. For those who are following with our earnings presentation from our website, I will be starting with Slide 6.

Broadly speaking, 3 main things according to our second quarter results. Growth in revenue reduction, although not yet elimination of tariff expense and the temporary increase in freight expense incurred to deliver our products from China and Vietnam to the U.S. in response to strong demand and recovery from the COVID-19 related supply chain disruptions experienced in the early weeks of the pandemic.

On the top line, our revenues remained strong, with Q2 revenues of $10.3 million, up 25.9% from the same quarter in the prior year. On a sequential quarter basis, Q2 revenues were down 14.1%. Year-to-date, our revenues were up 37.5% to $22.2 million. Growth in our top line continues to be driven by strength in e-tail companies such as Amazon and brick-and-mortar retailers, such as Best Buy.

Tariffs related to the company’s imported products from our primary outsourced manufacturing partner based in China continue to have a significant impact on the company’s profitability during the second quarter and on a year-to-date basis.

However, this negative impact declined by $0.5 million between Q1 2020 and Q2 2020 as we transition to manufacturing operations from China to Vietnam. This transition was substantially complete by June 30, 2020, with production of all our current product models fully transitioned to Vietnam.

Our Q2 2020 gross margin was 20.7%, which includes $1 million of tariff expense. Without these tariffs, our gross margin would have been 30.8%.

Additionally, during the second quarter, the company incurred additional freight expense by using primarily airfreight as opposed to ocean freight to ensure a quick delivery of our products to meet customer demand in the U.S. This additional freight expense added $881,000 to cost of sales. Without this temporary additional expense, our gross margin would have been 39.4%. On a year-to-date basis, gross margin was 23.5%. Without tariffs and the temporary use of primarily air freight, gross margin would have been 38.8% and gross profits would have been $3.4 million higher.

On Slide 7 of the earnings presentation, we show our revenues by quarter and by year going back to 2016. As you can see, we continue to grow our top line with 16.4% year-over-year growth between 2018 and 2019 and a 25% compound annual growth rate between 2016 and our trailing 12-month revenue of $47.3 million.

Over the past year, our company and products received several positive reviews in the trade press. Consistent customer demand for our products has resulted in consistent year-over-year growth in sales each quarter.

As Jeremy mentioned, during the remainder of 2020, we will be introducing several new products to the market, expanding and refreshing existing product families and continuing the development and introduction of a new software application which will introduce a subscription software recurring revenue base to our mix in late 2020 into 2021.

Slide 8 shows the impact of tariffs each quarter between Q1 2019 and Q2 2020. The third and fourth quarters of 2019 and the first quarter of 2020 would have been profitable at the net income line presumed without the impact of tariffs, contributing just under $1 million before the impact of tariffs for the second half of 2019 and contributing $741,000 before the impact of tariffs in Q1 2020.

The red line on the chart shows the level of tariffs each quarter rising steadily between Q2 2019 and Q1 2020 as our business grew. And dropping down to just over $1 million in Q2 2020, reflecting the beginning of our impact of our transition of manufacturing from China to Vietnam.

We expect to see this curve continue to drop in Q3 and in Q4 2020, as we sell-through the inventory manufacturing in China and to limit our manufacturing in China to only the initial product — production runs of new products.

The impact of tariffs close through the income statement directly from gross profit to net income resulting in the net loss in the second quarter 2020 of $1.5 million. Again, as mentioned during the discussion of gross profit, tariff expense in the second quarter was $1 million, and supplemental airfreight expense was $881,000.

On a year-to-date basis, net losses were $2.3 million, including $2.5 million in tariffs. Excluding tariffs, non-GAAP net income year-to-date is $253,000, including the temporary supplemental airfreight expense of $881,000 incurred in Q2 2020. Excluding both the temporary supplemental airfreight expense incurred in Q2 2020 and tariffs year-to-date non-GAAP net income is $1.1 million.

Slide 9 in the earnings presentation shows freight expense for the company by quarter between Q1 2019 and Q2 2020. As shown in the Q2 2020 column on the far right side of the chart, the expense impact of using primarily airfreight as opposed to primarily ocean freight was significant during Q2. The benefit of using primarily airfreight took approximately 35 days off the time to deliver finished goods from China and Vietnam to the U.S.

As our suppliers and the economy recovered from the supply chain disruptions experienced during the second quarter due to COVID-19, getting our product to customers as fast as possible was a primary operating initiative for the company during the quarter. The company’s use of airfreight is expected to decrease significantly over the next 2 quarters.

Slide 10 summarizes our gross profit and gross profit margin history going back to Q1 2019. As can be seen in the chart, which plots gross profit, reflecting in the blue and green bars and gross margin reflected on the orange line plotted over the bars on the chart. Our business model has been successful in sustaining gross margins in the mid- to high 30s prior to the introduction of tariffs for goods produced and imported from China.

Both Q4 2019 and Q1 2020 gross margins would have been in this range, if not for the imposition of tariffs. The green bar in the chart representing Q2 2020, reflects both the impact of tariffs and the supplemental airfreight expense incurred during the quarter as previously reviewed. Excluding the impact of tariffs and the temporary supplemental airfreight expense in Q2 2020, our business is performing well at its core.

Slide 11 provides some balance sheet highlights. The company had $8.4 million in cash as of June 30, 2020, which includes $3.4 million from the May 2020 PIPE investment. Additionally, during Q2 2020, we increased our working capital line of credit from $3 million to $4 million, and we were successful in negotiating a short-term extension of payment terms with key vendors, each focused on providing a margin of protection for the company against what was at the time, a period of uncertainty of the availability of access to capital in the marketplace related to the impact of COVID-19.

We exit the quarter with a strong balance sheet. And an improved understanding of the impact of COVID-19 on our business. The company ended the quarter with a current ratio of 1.61; working capital of $6.9 million and stockholders’ equity of $7.6 million.

With that, I’ll hand the call back to Jeremy.

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Jeremy P. Hitchcock, Zoom Telephonics, Inc. – Executive Chairman & Interim Principal Executive Officer [5]

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Thanks, Jackie. As I began, it’s an exciting time, and we look forward to keeping you updated on our progress.

We’ll now open it up for any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Spencer Layman.

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Spencer Lehman, [2]

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Jeremy, you know what’s been going on with the Whole Home networks market with stocks. The big Zoom video performance. And I’m just wondering — I know you’ve been so busy developing the company, but you got to make some hay while the sun shines too. I’m just wondering what you guys can do to get a little bit more on the Wall Street radar and because it’d be sort of a shame to miss out on all the action with what’s going on with the home electronics.

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Jeremy P. Hitchcock, Zoom Telephonics, Inc. – Executive Chairman & Interim Principal Executive Officer [3]

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Thanks for the question. We think that the long-term impact of — certainly the COVID impacts regarding people being at home and home connectivity is going to be trend that it’s probably accelerating. I think we’re in the midst of seeing probably what you would consider a spike, but an increased plateau after that. The company has to be in a position where it has products in different categories and also have the manufacturing capacity to meet that demand. And we were no different from having supply chain challenges and having product out in market. We saw many of our competitors also having similar constraints.

And well, I agree. I think everybody wishes that they had 100% coverage of product in market in all the categories they want. I think that’s one of the areas that we, as a company, feel better about that we’re better positioned to get products out to market faster. And you’ll see those activities over the next months and quarters as the company is able to deliver on products and introduce new ideas and new concepts and new categories.

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Spencer Lehman, [4]

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Yes. But I’m thinking more about the stock itself and it’s a very thin market. And obviously, there’s always sellers but the buyers are sparse and from time to time, sometimes that it didn’t trade for quite a long time. I’m just wondering if you — what your plans are as far as getting — you’ve got a great story now. I mean, it’s a super story, and it fits so well into what’s going on. What are your plans for maybe getting that story out a little more?

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Jeremy P. Hitchcock, Zoom Telephonics, Inc. – Executive Chairman & Interim Principal Executive Officer [5]

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I think you’ll see us at few conferences coming up for shareholder conferences and getting the story out. I think you mentioned at the beginning of your questions that we’ve had a bit of the core of getting our hands around the business, especially with the pandemic and we feel good that we’re starting to put the pieces together, and we’ll also — we also want to be in a position where we are able to bring our results with us.

And so I think there’s a number of trends that you heard in both my remarks and in Jackie’s remarks that point to what we think as the last couple of pieces of having that story put together, and we’ll probably be a lot more active meeting with respective stockholders and getting our story out.

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Spencer Lehman, [6]

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Is your IR company doing what they need to be doing and maybe as far as some research reports and a little more communication?

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Jeremy P. Hitchcock, Zoom Telephonics, Inc. – Executive Chairman & Interim Principal Executive Officer [7]

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We’ve taken IR in-house. And I think it’s part of this transformation where we really need to build and learn to walk again before we can start to run.

So we’re — it’s something that both Jackie and I are personally committed to, and it’s something that you’ll be seeing us have some actual things that we can point to over the next quarter or 2 that we’re actually active and out meeting people.

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Operator [8]

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Next question comes from the line of from (inaudible) also a Private Investor.

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Unidentified Participant, [9]

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So my question is, do you have any update on the listing of the NASDAQ that I think I read on the Q1 report?

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Jeremy P. Hitchcock, Zoom Telephonics, Inc. – Executive Chairman & Interim Principal Executive Officer [10]

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Yes. Very similar response to what I gave before. We wanted to — we have no specific plans on — capital plans, including NASDAQ uplisting. We as a management team, have wanted to have a bit more of the results that we can point to, to show that we can generate profitability that we have a firm understanding of where we are as a business, and we’ll have more to report on that in the next coming quarters.

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Operator [11]

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Our question comes from the line of [David Tokos], who is also a private investor.

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Unidentified Participant, [12]

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So I wanted to ask a couple of questions. A number of them have been answered, so I appreciate it. One was the NASDAQ question because I do believe at some point, that will be very helpful for the company. I don’t really understand or know what that endeavor means. I’ve talked to some folks who say it’s not the easiest thing to do. But it will be good to see the company get to profitability, and it seems like — I don’t know if you project it out. I know you want to be careful about forward-looking statements, but it sounds like if the tariffs go away in the next couple of quarters, and you can get back to sea freight, that you could be profitable by year-end, and that would probably be helpful.

But a couple of questions. Where are you all — where are you based? And is all the team — is the team of the top 4 or 5 that are together now, are you all together in the same city?

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Jeremy P. Hitchcock, Zoom Telephonics, Inc. – Executive Chairman & Interim Principal Executive Officer [13]

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Yes. A bunch of questions in there. I mean, the first is — yes, yes. No, it’s all good. The first is, as you heard from Jackie and my remarks, the diversification that we’ve made in our supply chain has allowed us to effectively be in a position where we’re able to source products, which are not currently imposed tariffs and that as we were able to ramp up our manufacturing, we’re able to build the inventory and so we can have a product that’s being delivered both by air and then also starting to rebuild that supply chain that also is being delivered by sea. So I think that’s where you hear the comments around some optimism in our margin structure in the coming quarters. We don’t issue guidance, but we’re — I think this is the first time that we’re able to point to what drivers and levers we can look at in the business.

And then the second part of your question regarding the geography of the team. This COVID has forced and his required companies to perform much differently. We are no different where we are essentially a remote company at this time. One member of management is in a different — completely different state. And I’m seated here physically with Jackie, which is the first time I’ve seen here in about a month. But we’re able to use video teleconferencing and a lot of other technologies. And so the team who has traditionally been together in the office every day up until essentially February has gone through very herculean efforts to change and reconfigure itself and it’s very cool to see it because it’s — we were not an organization that had that before, but we have certainly been able to figure it out in short quarter.

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Unidentified Participant, [14]

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Right. Well, it’s an interesting time, and I’m with a sizable private firm and all of us went remote too. And the great news was I have a direct report, he hates remote working. He has 2 teams, and I’m on a team that I could be in Turks and Caicos, and nobody would know the difference unless he asked me to come down with all for face-to-face. And we’ve operated seamlessly, and I believe — I feel bad for people who own commercial office and real estate now going forward because I think all of that can take it on the change as we evolve, as we see the world evolve.

But if people can — they’re going to find out that we can find out ways for people to be productive. So the question I was really asking was what city is the main group in and then the follow-up question is you have about 50 employees and you’re going to grow. If you charted out how many folks are going to add in engineering and other areas?

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Jeremy P. Hitchcock, Zoom Telephonics, Inc. – Executive Chairman & Interim Principal Executive Officer [15]

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We’re primarily Boston-based company. I think as we think about hiring, we’re — we might be more flexible with what we think of as geography, but it’s exciting times. We’ll see how the market and job seekers are equally as interested in working for companies that are based in different locations.

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Unidentified Participant, [16]

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Do you feel like it’s interesting, you have the products, and I was really happy to see the license get renewed and all that. But it seems like now with the team, do you feel like, you still feel like a baby company because it’s a whole new team. And — but you have this great product to start with and you’re adding some stuff. I mean how do you — where do you think you are in the life cycle? Is it like — my view is I feel like you’re starting over in some ways, but not in others because of the product?

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Jeremy P. Hitchcock, Zoom Telephonics, Inc. – Executive Chairman & Interim Principal Executive Officer [17]

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Yes. We have a great foundation to build on. And a lot of the magic of what the team has been able to learn and build on is very nuanced, and it’s something that plays well to us in terms of a strength. And we also have a brand-new team that’s coming in with lots of new ideas. And we’re excited about what the future holds for us and excited about sharing that with us all as those results become more clear.

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Unidentified Participant, [18]

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Okay, great. Well, thanks for your time. I wish you all the best in the coming quarters. I know it’s been a crazy first half in so many ways, and you’ve had a lot of headwinds just with the move and with China and then with COVID. So that has been helpful. So hopefully, I’ll pray for a little peace in home, while you guys accelerate your programs in the next few quarters.

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Jeremy P. Hitchcock, Zoom Telephonics, Inc. – Executive Chairman & Interim Principal Executive Officer [19]

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Thanks so much.

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Operator [20]

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(Operator Instructions) And there are no further questions at this time. I do apologize. We do have a question from the line of [Paul Luca].

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Unidentified Participant, [21]

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Jeremy, this is Paul Luca. I was wondering if you could explain more about the MotoManage app and how that’s going to work. Remember previous presentation showed it being able to control all the IoT things in a person’s home from quick set locks to Lutron light switches. Is that still the vision for the MotoManage app?

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Jeremy P. Hitchcock, Zoom Telephonics, Inc. – Executive Chairman & Interim Principal Executive Officer [22]

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Paul, good to hear from you. We’ll be releasing it this quarter. So there’ll be a lot more information that will be available about the MotoManage platform.

The first launch with the Whole Home managed WiFi product, the MH7022 will be to manage the WiFi inside the home. There’ll also be the visibility of IoT devices that are inside the home. And as you know, we make products that are not just for home connectivity. We make a multi-sensor and it’s our vision that we’re going to be able to put all of our products into a single control panel, pane a glass app that homeowners and SMBs will be able to look at and be able to manage the things that are inside their home. So that is definitely the vision for where we’re going. And you will see a lot of incremental stuffs along the way as both the 7022 come out in out market and also as additional products come out that are part of this MotoManage platform.

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Unidentified Participant, [23]

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Great. I understand the — could you explain the ownership of MotoManage? I know the hardware is licensed from Motorola and the software is licensed from Minim. Looking at a worst-case scenario where Motorola might want to cancel the license or not renew the license, would Zoom Telephonics still own the service end of that. I just wonder how that works contractually.

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Jeremy P. Hitchcock, Zoom Telephonics, Inc. – Executive Chairman & Interim Principal Executive Officer [24]

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Yes, I can go into some details on this, but others won’t be able to give full transparency just because of the nature of some of the relationships. Probably the best way to describe this is it’s something that we as a Motorola licensee are very excited about being able to bring a management platform. And if you look under other licensees of Motorola, there’s also many other devices that are connected. Some of whom have interactive management control apps and many of those who don’t. And so it’s something that we have eyes wide open about making sure that our plans are very congruent with the ways in which we can operate. We would not undertake such a — such a product and endeavor unless we had a really good understanding of the level of excitement that this is an area that we can invest in and deliver on.

And we certainly see it as a platform that others can adopt and extend and it’s a platform that has our — that we operate. We might use service providers for parts of it, but it’s a platform that we operate. It’s our app, and we’re excited to see where it can go. As you hear more about our long-term plan. This is going to be one of the elements that will feature greatly in that because not only is the hardware that is part of the home connectivity experience important, but so is the way in which the human interacts with that hardware and that infrastructure.

So it’s something that at this point, we don’t want to go into too many details about what we’re thinking on that front, but it’s definitely an investment area for the company and one that we think of will drive significant value for all of us.

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Unidentified Participant, [25]

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Great. I’m excited to see how this evolves. You’ve certainly made clear that you’re invested with your recent increase in ownership. So I will hold tight and watch for changes and look forward to seeing you at the LD 500. Well, that — will you be presenting it for the LD Micro 500 or Jacquelyn?

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Jeremy P. Hitchcock, Zoom Telephonics, Inc. – Executive Chairman & Interim Principal Executive Officer [26]

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Both of us will be there. So in September, we will be — we didn’t want to necessarily refer to just that specific event, but we will be there. And there’s other events that we’re looking at participating and presenting that. So we’re excited to continue to share the story and look forward to meeting more of you all out in the — out at those conferences.

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Operator [27]

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And there are no further questions at this time.

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Jeremy P. Hitchcock, Zoom Telephonics, Inc. – Executive Chairman & Interim Principal Executive Officer [28]

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Great. Thanks, everyone, for joining and thanks for the interest, and we look forward to keeping you updated on our progress. Take care.

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Operator [29]

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This concludes today’s conference. You may now disconnect.