Frank Manning - President and Chief Executive Officer.

Good afternoon. My name is Hani and I will be your conference operator today. At this time, I would like to welcome everyone to the Zoom Second Quarter 2018 Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remark, there will be a question and answer session [Operator Instructions] Thank you.

I would like to turn the call over to Mr. Frank Manning, President and CEO of Zoom Telephonics. Mr. Manning, you may begin your conference..

Thank you and welcome to the Zoom Telephonics conference call for the 2018 second quarter. Today we'll discuss our profitable quarter, recent product introductions, and an exciting pipeline of new products. I'll be referring to a slideshow presentation.

This presentation is available on our website’s Investor Relations section, with a specific address of www.zoomtel.com/SQ218. Please read slide 2 when you have time. Our slides and my comments are subject to errors, uncertainties, and risks as detailed in this slide and in our filings with the SEC.

Slide 3 provides some financial highlights, comparing Q2 '18 to Q2 '17. Revenues were up 10.2% to $7.5 million. Gross margins improved from 32.1% to 36.3%, primarily due to higher sales through Amazon, where we sell direct and enjoy a higher margin than we do in brick and mortar stores. Operating expenses as a percentage of sales were basically flat.

We reported net income of $47 thousand for Q2 '18, compared to a loss of $269 thousand in Q2'17. Now let's go to slide 4. We made a lot of product development progress in the quarter, but year over year sales growth slowed to 10%. The two main reasons for this slower growth rate were specific issues with Amazon and lower sales at Walmart.

Our Amazon sales in Q2 '18 were up 56% over Q2 '17, but growth was hurt by buy box issues. First let me explain what the buy-box is. When we have the buy box for a product, that means that Amazon pushes customers toward buying from us rather than from other retailers of the product.

Without the buy box for a product, Amazon ads for the product don't run. Our average buy box percentage in Q1 '18 was 94%, but in Q2 '18 it dropped to 84%. This impacted some of our top-selling products on Amazon, and the buy-box issue probably accounted for reduction in our Amazon sales during the period by between $700 thousand and $1 million.

We've also lost the buy box sometimes dues to Amazon errors, but we continue to get better at dealing with these. Overall we're pleased with the progress we're making at Amazon. Throughout the period there were a number of encouraging signs in our markets.

Sales for our new 24x8 cable modem and cable gateway were good in Q2 '18, and they are ramping nicely. We've also expanded our line of not-cable-modem Motorola products so that we are now selling 3 routers, a DSL gateway, a Moca adapter, and a range extender.

Revenues for these not-cable-modem Motorola products in Q2 '18 were $347K, up from about ZERO a year ago; and sales for these products continue to ramp sharply. We also see potential upside in our revenues outside of the US.

We reported $143K in the second quarter, but we expect to see significant growth from Canada and Latin America starting in Q4 of this year. We also see excellent sales growth potential from products that will be shipping by the end of the year, and I'll discuss those later in the call.

Slide 5 shows how quarterly gross profit and gross margin have changed over time, and you can see that Q2 margin was reasonable even with our Amazon issues. You can see our press release for discussion of gross profit and expenses. We normally think of our break-even as about $8 million in quarterly sales.

Q2 2018 showed net income of $47 thousand with $7.5 million in sales. We benefitted partly because of a $262K reduction in our sales tax reserve for some states. We have been intensely involved with sales tax payments since April, and we now have a much better ability to estimate sales tax liability than we did a few months ago.

Now let's go to slide 6. Motorola brand products continue to drive our growth. We've launched 5 Motorola products since December 2017 including two new 24x8 cable products, an AC1700 router, an AC2600 router, and a MoCA adapter. Every one of these products is well-reviewed and ramping nicely.

Now let's turn go to slide 7, which summarizes our current product line at Amazon. We now have 15 main Motorola products on Amazon. 7 are rated Amazon's choice, and 8 are among the 100 top-selling Amazon network products. 13 of the 15 products are rated 4 stars or better, and 7 out of the 15 are rated 4.3 stars are better.

We have achieved these ratings through high-performance products, reliability, excellent customer support, and overall customer satisfaction. Slide 8 shows the growth in Amazon's total sales in two key product categories, comparing Q2 '18 to Q2 '17. You can see that routers without built-in modems have grown 18.5% to $99.9 million per quarter.

Cable modems and gateways, a smaller category, has grown 26.1% to $28.9 million. Our growth in both categories has been significantly better than this. Slide 9 focuses on product plans for cable modems and gateways, by far our biggest product category. An important and challenging product is our first cable gateway with telephone ports.

We believe that we're very close to Comcast certification, and that this should occur this quarter. The prospects for this product are very good. We are also working on cable gateways that include mesh routers. Mesh is a big, fast-growing category for routers, but not yet for cable gateways.

Mesh routers automatically adjust so that you can walk through your home with a smartphone without changing the wireless network name, with the mesh network gracefully handing you off from one wireless access point to another with a stronger signal as you move through your home.

Zoom has a line of these products planned, but we don't expect these to be shipping until the first half of next year. We continue to work on increasing shelf space and sell-through. We have excellent shelf space and sell-through through our brick and mortar retailers including Best Buy, Micro Center, Target, Walmart.

We also have some key service provider certifications progressing, and we hope to significantly increase our sales to service providers starting in Q4 '18. Slide 10 summarizes our product rollout status and expected timeline. We've already talked about the recently completed products, so I'll focus on upcoming products.

We're very pleased to announce that we've achieved Verizon certification for one of our USB LTE Cat1 modems. Verizon's tests are very difficult, and this was a major accomplishment. Our timing is great. Verizon is in the process of transitioning 100% away from CDMA, and our USB modem is a good way to do that for some Verizon customers.

Verizon has been very supportive, and they've started to send good sales leads. We'll discuss our Cellular MultiSensor in a moment. Our cellular Ethernet modem is progressing, and we hope it will ship in Q4 of this year. We know there's a good market for this type of product.

We have an LTE Cat M1 USB cell modem working in our lab, and we have begun certifications for this product. Cat M1 is a new technology for low datarate machine to machine communications. Verizon and ATT are pushing Cat M1 hard, and we are excited about our Cat M1 product, which works for both ATT and Verizon.

Slide 11 addresses our Motorola Cellular MultiSensor, which senses a number of important things so you can monitor and protect a home, garage, or other facility or vehicle. We have working units, but we are continuing to fine-tune the firmware and app. We expect to be shipping in volume in October.

This is an exciting and challenging product, and we're working hard to make sure that it works well. We've made huge progress in building a significant base of proprietary technology, and we have high hopes for this product and for follow-on cellular sensor products. Slide 12 shows that our balance sheet remains strong with no long term debt.

Our equity was just under $4 million on June 30. While we are focused on our operations, we do get questions from time to time about our expectations for up-listing to a National Exchange.

You'll recall that one way to get onto NASDAQ is to have $4 million in equity and 90 straight trading days with a market cap of at least $50 million, which currently amounts to about $3.14 per share. Overall, we feel good about our business. We have a solid base of customers and sales, and an expanding line of Motorola products.

We're excited about the products we've recently introduced, and even more excited about the products that will be shipping soon. We appreciate your interest and support. Hani, now let’s turn to questions..

[Operator Instructions] Your question comes from the line of Matt Camdo. Mr. Matt Camdo, your line is now open..

I was wondering if you could just expand upon the Amazon issue. You said you are talking about the buybacks situation going from 94% to 84% Q2 and that impacted you $700,000 to $1 million.

Is that correct?.

Yes..

And so could you just expand upon your next comment because you said you were pleased with the progress at Amazon.

Have you figured out, rectified that situation or could you just expand upon that?.

Well there are always Amazon issues and I can talk about some of the kinds of issues but we actually have a team of people who watch for those and try to fix them.

But Q2 was unusually tough in that regard and I think the number one biggest problem was that we found that there were some very little retailers that we buy product and just undercut our normal price and then Amazon will give them the buybacks even if they OEM three units in stock or whatever.

So we had depending on the day of the quarter, we typically had two or three of our top products savaged by that kind of really disappointing stuff which is first Amazon and us but that’s the way their mechanism works.

We’ve also had specific mistakes where they have a concept called the hand eye cohort [ph] or anyone of the large group of people at Amazon can basically stop the shipment if they think there is an issue and in one case, we had a very significant product with [indiscernible] pulled by somebody that he completely did it erroneously.

So it actually takes a fair amount of time to get that solved and we learnt some things through that experience and I think next time we will be able to be fix it faster but there is no way I could – anybody could ever say, there won’t be any more issues. That would be an impossible statement.

But normally we are very good at dealing with the issues that we think we understand the ones we had and we think we are reducing the chance of those happening again. So I think, it’s unlikely that it will be as bad as it was in Q2 going forward.

Why are we still optimistic about Amazon? Because we still grew our sales dramatically in the last year and there is still wonderful way to sell product and we are – the people that go to Amazon see that we have a great products, well priced and very well reviewed.

So I think the general picture at Amazon is good but this is very encouraging when you lose significant sales really for fairly crazy reasons but that’s the way it is..

Well, I appreciate the explanation there. Thank you. And then if you could just comment upon the lower sales at Walmart as well.

Were you seeing some rationality from competition? Can you explain upon that too?.

Well, basically Wal-mart is in the process of transitioning to a – one of our products to a faster version and best disruptive and so I think that was the main thing, but if I look at the – my account by account that was our worst comparable in terms of reduction of sales.

And you know that can also depend on things like whether you are selling in new product or taking back a product that you are phasing out or whatever. So I don’t want to get into all that detail but I – but the basic picture is that, that was our – that’s why our second biggest issue in the quarter from a sales point of view..

Well it sounds like some of these issues are now behind you and you’ve learnt things from it and like you pointed out, you got a lot of new products that are coming online, so you are not relying on one or two products now.

So that’s a big positive and with regard to the cellular sensor opportunity, I think you said in your remarks that you are going to be rolling this out in October.

Is that correct?.

I think so and people that follow the company closely know that it has slipped over time and but I can tell you that a number of us have been using their own sensor, their own multi-sensor for some months and it works well.

There definitely are some fairly easy firmware improvements we are putting in and also some smartphone app improvements we are putting in and I think – if feel fairly certain that we will be shipping in October. I wouldn’t want to term down a 100% but I think it’s probably over 80%.

It’s a – we feel so good about it, we actually have brought the parts to for their first run and actually can do the run at the end of this month but we probably won’t do it till we absolutely finalize the firmware. We’ve done lot of testing of it. Generally it’s very good.

But we fell like this product has really got to be very good when it comes out and we are doing everything in our power to make sure that that’s what the case..

Yes, it sounds very exciting and I guess just to expand upon that. Last call from my recollection, you talked about not knowing really what you would be selling the product for but in the deck here you are talking about targeting $100 price point with $10 per month service fees. So is there –.

That’s correct. Can I just interrupt one second? Actually what we say is $100 with service under $10 per month and so I – the word under is important in that case. So I will just say that it will be between $5 and $10 a month with a – like a 99% certainty..

That’s fantastic. Thank you for the clarity.

Is there – are there partners that you are currently working with or you’re still trying to develop the right line of partners?.

When you say partners, what type of partner?.

Go to market.

How are you going to go to market on this product?.

Sure that’s a good question. Well and not surprisingly one of the key channels will be retail which is our strength and so there is more and more sales activity and interest in sensors and related products and so definitely retail is the focus.

We are not as good at some of the other markets we like to reach like an example would be people that, one example would be plumbers, another example would be contractors who do home improvements. Those are – we know those are good ways to solve those kind of product. On the other hand, we are less good at making that kind of sales.

So we are starting to reach out in those directions and we will be at a show in Los Angeles in Mobile World Congress. It’s a mouthful, Mobile World Congress in September and we have some good context that we will see there but we also hope to meet some new people and think of course some new markets..

Thank you very much. It sounds like things are starting to really – go in the right direction and it’s certainly nice to see you profitable at this level..

Okay, thank you very much. Nice talking to you..

[Operator Instructions] There are no further questions at this time. Mr. Manning, you may continue..

Okay, thank you. Thanks to all of you for your interest. We look forward to speaking again with you following the issuance of our third quarter results. Thanks again. Bye..

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