Frank Manning - CEO Joseph Wytanis - President and COO.

Analysts:.

Good afternoon and thank you for joining us for Zoom Telephonics Q3 2018 Shareholder Call. All lines have been placed on mute to prevent any background noise. After the speakers' remark, there will be a question-and-answer session [Operator Instructions].

It is now my pleasure to hand the conference over to Frank Manning, CEO and Joe Wytanis, President and COO..

Thanks for listening to the call. That's Joe Wytanis. Thank you and welcome to the Zoom Telephonics conference call for the 2018 third quarter. Today we'll discuss our profitable quarter, recent product introductions, and an exciting pipeline of new products. First, I will make the prepared comments and then Joe and I will take questions.

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/SQ318. Looking at slide 2, please review this information about forward looking statements 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 shows some basic facts about Zoom. Our main brand is Motorola, and we also sell some products under our Zoom brand. Our focus is network products, with both Internet access and local area network products.

The vast majority of our revenues come from the Motorola brand. Now please turn to slide 4. Earlier this month, we announced the hiring of our new President and COO, Joe Wytanis, and his background information is shown on slide 4. Joe started his first week at Zoom this past Monday, and we're very excited that he's joined the company.

He has a lot of relevant knowledge, experience, and contacts; and we think he's very capable of driving significant growth. We're all very happy to have him here at Zoom. Slide 5 provides some financial highlights, comparing Q3 '18 to Q3 '17, and comparing the first nine months of 2018 to the first nine months of 2017.

Q3'18 revenues were up 4.9% to $9 million. Q3'18 gross margins improved from 35.7% to 36.4%, primarily due to higher sales. Q3 operating expenses increased from $2.7 million in Q3'17 to $2.9 million, which is an increase from 30.9% of sales to 32.1%. This increase was primarily due to increases in Motorola trademark licensing costs and advertising.

We reported net income of $346,000 for Q3 '18, slightly down from $377,000 in Q3'17. Nine month results for 2018 showed a dramatic improvement over 2017, with revenues up 20.9% to $24.9 million and net income of $750,000 versus a loss of $980,000. The main reason for the improvement was higher sales for the first nine months of 2018.

Moving to the next, slide 6, we show what our quarterly margins and profits have been over the past few quarters. Over the past five quarters Zoom has maintained gross margins over 35%, largely due to increased sales. Now let's go to slide 7.

We made significant product development progress in the quarter as we'll discuss, with year over year sales growth at 4.9% for the quarter. The main reason for this slower growth rate was Wal-Mart, where we've transitioned this year from two SKUs on the shelf, one high-priced and one low-priced, to one low-priced SKU.

We do continue to have a good relationship with Wal-Mart and we continue to work to grow the business. I'm pleased to report that in Q3 '18 we significantly expanded our sales and shelf space at Fry's Electronics, a significant retailer with 34 high-volume stores.

Looking at revenues by customer, every significant account except Wal-Mart was up from Q3 '17 to Q3 '18. For those non-Wal-Mart accounts, Q3 '18 was up $2 million or 31% to $8.6 million when compared to Q3'17. Over 98% of Q3'18 revenues were from the U.S. due to our focus on cable modem retailers.

We continue to work on growing sales outside the US, but progress has been slow. Looking at revenues by product category, cable modems dominated with Q3 '18 revenues of $8.16 million.

DSL, routers, Moca adapters, and range extenders generated $252,000 in revenues for the quarter, up dramatically from $28,000 in Q3 '17 due to new product introductions as we entered 2018. Now looking at slide 8, we just commented Amazon remains a great sales channel.

As you can see on that slide 8, 13 of our 15 products as of the end of Q3'18 were rated 4 stars or higher, strong ratings. The two products that are rated below 4 have low sales, and we are phasing them out of our line. For the first 10 months of 2018 we had the three top-selling cable modem/routers in the modem/router category on Amazon.

Slide 9 shows our average Amazon buy box percentage by month. When we have the buy box for a product, we are Amazon's default seller for that product. This affects sales and our ability to run an ad for the product. Zoom and our ad agency monitor the buy box very closely, and we're constantly working to increase our buy box percentage.

You can see that our Buy Box percentage was very strong through April, then a problem occurred May through August, and now it's generally running well. We do a great job of working to have a high buy box percentage, but even with that we are constantly working issues that come up.

Slide 10 shows the market share of Amazon's cable modem sales for the three big players; Netgear, Arris, and Motorola by Zoom. This data is from Stackline, which tracks Amazon sales in detail every week. We use Stackline's data to track our Amazon share of cable modem sales, and you can see that recently it's been very strong.

Over the past two years for the weeks we compared, Arris share dropped from 53% to 21.3%. Netgear's share grew from 29% to 42.1%. Our share grew from 8% to 31%. The share of all other brands selling on Amazon dropped from 8% to 5.6%. Share percentages vary some, week to week, but it's clear that we have been very successful at growing our Amazon share.

On slide 11 we turn from the quarter's results to discussion of our license and products.

You can see on slide 11 the state of our Motorola exclusive worldwide licensing agreements, which generally covers the consumer networking area including Internet access products, routers and other local area network products, and also cellular sensors on a non-exclusive basis.

Motorola is a powerful brand, and it's especially powerful when you marry it to great execution and product development, operations, sales, marketing, support, and finance. We've done that.

Slide 12 summarizes some of the products we've introduced from the start of our Motorola license January 2016, the first month we shipped the Motorola product through June of 2018. Our initial license was for cable modems, and you can see that most of the products initially introduced were cable modems, six DOCSIS 3.0 and one DOCSIS 3.1.

For December 2017 through June 18, we introduced two 24x8 cable modem products, a DSL product, two new routers, and one MoCA Adapter. In August TopTenReviews named one of the 24x8 cable modems as Best Overall Cable Modem.

All of the products we've recently introduced are highly rated on Amazon, and generally we're seeing reasonable to good sales for each product. Slide 13 summarizes more recent products shipped or planned.

We're very excited about our first cable gateway with phone ports, which addresses the 43% of Comcast's customers who have telephone service from Comcast. This just got Comcast certification a couple weeks ago after an extreme amount of engineering work and test, and we're excited about the prospects for this product.

We plan to begin building the first Cellular MultiSensor units in November, and December - I shouldn't say [ph] December, sorry, and we believe we're on track for first sales in December 2018. This is a very sophisticated product, and we'll discuss it in more detail in a minute.

You can see that we have a line of DOCSIS 3.1 gateways planned for 2019, and we hope to be shipping in the first half of 2019. We're very excited about the prospects for these products.

We are also fairly far along with a second cellular sensor, a low-cost model focused on flood and temperature sensing, using the exciting new LTE Cat M1 standard for cellular connection. On the Zoom brand side, we're very pleased that we got Verizon certification for an LTE Cat1 USB cell modem.

We also got AT&T certification for an LTE Cat M1 USB cell modem. We're getting good leads from both Verizon and ATT. This month we plan to submit the Cat M1 USB modem to Verizon, and we know that Verizon is excited about products with Cat M1 capability.

Slide 14 provides more details for our Cellular MultiSensor, the product we hope to ship in December of this year. This product senses a number of things that directly affect protection of someone's home. It's great for apartments and other small homes, second homes, boats, and many other locations.

We're excited about the cellular sensor category, and we will have a line of sensor and home automation products. We've provided a lot of information about product plans, and slide 15 addresses other ways to grow our company. We plan to remain very strong at selling through US retailers.

We can also be successful at expanding to the service provider and installer markets, and expanding internationally. Our new President and COO, Joe Wytanis, has what it takes to dramatically impact our ability to enter these new markets. On slide 16 we address the tariff issue.

We started our current quarter with a good amount of inventory in the USA, shipping it into the US before the duties began. All new shipments into the USA this quarter are generating a 10% tariff, and it's very possible that the duty will rise to 25% January 1.

We are actively looking at moving some or all of our production out of China, but that's a huge project and at best it will take many months. We are raising prices for almost all of our products based on our increased cost, and we are carefully reviewing the best time for an increase on a product by product basis.

Generally we expect all those price increases to take effect in November and December of this year, with additional increases early next year if tariffs rise to 25%.

Factors that influence the size and timing of the price increases include competitors' behavior, written terms and negotiations with retailers, the expected impact of price increases on unit sales and revenue, and other factors.

Slide 17 shows how our balance sheet has strengthened this year, primarily due to $750,000 net income and $375,000 in cash from the exercise of employee stock options. We continue to want an uplisting of our stock onto a major exchange, and were pleased to have grown shareholders' equity to over $4 million.

We meet the equity requirement for an uplisting to NASDAQ, and now we need a share price of $3 or a little more, depending on which column of NASDAQ requirements we use. Here at Zoom, we remain focused on those elements we can control. We expect to be active in speaking with the investment community and getting our story greater exposure.

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 excited about the products that we will be shipping soon. We appreciate your interest and support. Nicole, now let's turn to questions..

Hello Frank..

Hi, Spencer, nice to hear from you..

Great, there's a big thanks and our appreciation for what you've accomplished with Zoom over the years and I've been with you for a long time and we really, really hope you'll continue and we know you are going to be a major influence in the future with the company, but I think strategically you did a smart think bringing Joe in, and if I could have a quick question with him..

Sure..

Hey, Spencer, it's nice to meet you on this call..

Well, look forward to working with you and hope that we have a new era developing here and thanks to Frank, I think we are on the cusp here of some really great future. I think Frank it was mainly concerned with nurturing and growing the company and I think had to be done and we have been sort of under the radar.

I think with your background experience you might have some more ideas as far as getting out to the exposure to the financial community. I wondered if you could just maybe address that idea..

Yes, I - right now I'm very focused with the leadership team in terms of our initiatives moving forward, and I really want to get us all on the on the same page on those initiatives. And then as Frank mentioned my intent is to go out to the community and ensure that messaging with Frank and everyone else..

Well, that sounds great and we are looking forward to it. Thank you..

Thank you..

Your next question comes from the line of Walter Young [ph]..

Hi, my questions about slide 10, do you think the strategy is to take market share away from Netgear now that you have increased your market penetration so much and how do you look at that over the coming year?.

I'll start. This is Frank. We'd love you to take share from Netgear. That's a tough target. They are very successful company and they have the benefit of very strong router sales, which gives them various strength with the retailers and lot of shelf space. So they are very tough competitor.

On the other hand we have more focus on cable modems, I think we actually design better cable modems, and I think that you we can compete very successfully with them.

I also think that some of the new channels we will be able to attack with Joe will be very beneficial, not so much as taking share at Amazon for instance or Best Buy, but taking overall cable modem share..

Yeah, I'd like to add to that. I agree completely Frank. With - slide 10 really focuses on Amazon channel and I agree that Netgear is a strong competitor, certainly would like to gain share in there but I do believe that we will be able to grow our business in other channels and in particularly the service provider channel.

So that will be a key focus for us..

Thank you..

Thank you.

(Operator Instructions) We are showing no further audio questions at this time..

Okay, well, thanks everybody for joining. It's always nice to get our message out to you and we look forward to future conversations..

Thank you everyone..

This does conclude today's conference call. We thank you for your participation, and ask that you please disconnect your line..