Ladies and gentlemen, thank you for standing by and Welcome to the Zoom Telephonics Q4 and Fiscal Year 2019 Shareholder Conference Call. At this time all participants are in a listen-only mode. After the speakers' remarks, there will be a question-and-answer session.

[Operator Instructions] I would now like to hand the conference over to your speaker today, Joe Wytanis, CEO. Thank you. Please go ahead..

Thank you, Stephanie and Good morning. Welcome to the Zoom Telephonics conference call for Q4 and the full fiscal year 2019. I'm Joe Wytanis, Zoom's CEO and I will also be joined by CFO, Jacqueline Barry Hamilton and our Senior VP of Operations, John Lauten. When you have time please read Slide two.

We cannot predict the future and our comments, and forward looking statements are subject to uncertainty and risk. Before digging into our review, I want to pause and recognize our former CTO and Co-founder Frank Manning. Frank founded Zoom in 1977 and we would not be here today without his hard work, leadership and vision.

Although Frank has retired from day to day management of the company, he remains a key member of our Board of Directors. Thank you, Frank for creating an outstanding company. Now, turning to Slide 3, I want to start by highlighting a number of key personnel changes that we've made since our last call.

Upon Frank's retirement, I was promoted to CEO after serving as Zoom's President and COO. I won't go through my biography here, but do want to emphasize how excited I am about this opportunity. Zoom is well known for its best in class Motorola-branded products, and I intend to drive aggressive sales and marketing programs to capitalize on that.

In fact, we recently hired a new Director of Marketing who is an expert in digital marketing. Turning to Slide 4, we summarize a number of key changes to our executive leadership team that have taken place within the past year. Jackie is the most recent new addition to the team. And I'm thrilled she decided to join us permanently this week. Thank you.

Phil, John and Alla, all bring a wealth of industry experience and knowledge along with a strong drive to build something great here at Zoom. Each of them is playing an important role in accelerating our growth, while also bringing as the profitability. I'm really excited about our team and what we expect to accomplish.

Again, I won't spend time reading through their bio's here, but encourage everyone to read over those on their own. I'll now hand over the call to our new CFO, Jackie for the review of our financial results..

Thank you, Joe. Echoing Joe's comments, I'm thrilled to be a part of the team here at Zoom. I would be reviewing our financials for both the fourth quarter and full year 2019 starting with WiFi. Broadly, two main things apply to both the fourth quarter and full year results, growth in revenue and growth and tariff expense.

On the top line our revenues are accelerating. The Q4 revenues were 10.6 million, up 41.6% from the same quarter in the prior year. That compares with a 20.8% year-over-year growth rate in the third quarter and 8.5% year-over-year growth rate in the second quarter. For the full year 2019, our revenues were up 16.4% to 37.6 million.

Growth in our top line is being driven by strength in Etail companies such as Amazon and brick and mortar retailing such as Best Buy. Tariffs related to the company's imported products from our primary outsourced manufacturing prospects in China had a significant impact on the company's profitability during the fourth quarter and the full year.

Our Q4 2019 gross margin was 24.5%, which includes 1.3 million of tariffs. Without these tariffs our gross margin would have been 36.9%. For the full year, gross margin was 29%. Without these tariffs, gross margin would have been 37.6% and gross profits would have been 3.2 million higher.

Turning to Slide 6, Slide 6 shows the impact of tariffs in each quarter of 2019.

Both the third quarter and fourth quarter of 2019 would have been profitable at the net income line for Zoom, without the impact of tariffs, contributing just under 1 million before the impact of tariffs for the second half of 2019 and the full year ending it just under breakeven before the impact of tariffs.

The impact of tariffs goes through the income statement directly from gross profit to net income, resulting in a net loss in the fourth quarter of 2019 of 1.1 million.

Again, as mentioned during the discussion of gross profit tariff expense in the fourth quarter was 1.3 million, taking positive net income before tariffs for the quarter and turning it into a net loss after tariff. For the full year net loss was 3.3 million, including 3.2 million of tariff expense.

As you'll hear Joe address shortly, eliminating this tariff expense by moving our manufacturing to Vietnam is the highest priority for Zoom in 2020. Moving to Slide 7, on Slide 7 we show our revenue by quarter and by year going back to 2015.

As you can see, we continue to grow our top line with 16.4% year-over-year growth between 2018 and 2019 and 37% compound annual growth rate between 2015 and 2019.

During 2019, our company and products received positive reviews from the trade press, from Zoom being named to Deloitte's 2019 technology fast 500 ranked as one of the fastest growing companies in North America for the second year in a row, to our MB8600 cable modem being rated as the best cable modem in its category by Wirecutter, a respected technology industry product review website.

We are constantly working to develop and introduce the best in class products to the market. Moving to Slide 8, Slide 8 summarizes our gross profit and gross profit margin history going back to Q1 2016.

As can be seen in this chart, which prospers profit, reflected in the red and green bars, and diverse margin effective on the red line plotted over the bars on the chart, our business 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 and full year 2019 gross margins would have been in this range if not to the imposition of tariffs. Excluding the impact of tariffs our business is performing well at its core. With that, call back to Joe..

Thanks, Jackie. Moving to Slide 9, this is the slide everyone should be familiar with. For those new to Zoom this summarizes some of our key customers, ranging from retailers focused on consumer electronics to retail giant Amazon.

In our last earnings call, we discussed how we were growing our shelf space and adding new skews with key retailers like Best Buy and Target. At that time we discussed placement of focal displays for our MT7711 product at the Best Buy stores in Comcast regions. I'm pleased to report that our sales in Best Buys increased 64% from 2018 to 2019.

At Target we grew our share by 18% year-to-year and not to overlook Amazon, our sales increased 15% year-to-year. The key message here is that we're growing share and that doesn't include all the new products we're introducing this year, plus entrance into new accounts and channels.

Drilling down further on Amazon, turning to Slide 10, is our regular update on our Amazon sales of cable modems and our share. We continue to significantly expand our share with Amazon since we started selling Motorola branded modems in October 2016. Last month we announced a program with Amazon, where we added A+ Content to our product pages.

A+ Content enables richer product descriptions with enhanced images, comparison tables and expanded text and thus far is helping drive the continued sales growth. On Slide 11, we summarize our key objectives for 2020. As Jackie noted earlier, addressing the tariff issue is our number one priority.

We are working very aggressively on this front and are optimistic we will have this completed by the end of second quarter. In the following slide, John Lauten will share a little more insight into our Vietnam, China transition and the current impact of coronavirus.

Obviously, successfully navigating these issues has a significant impact on item number three, which is returning the company to growth and profitability. A second key priority for us is to launch a number of key products and services.

Our vision is to provide the best in class home networking solution from a trusted brand, making home users life easier, simpler and safer. Our industry is one of constant technological evolution, and we aim to remain at the forefront of that with a range of exciting new products and service introductions.

For items four through nine, I want to provide the following quick comments. This week we signed an agreement with a major Tier 1 manufacturer who will be supporting us with a number of new products slated for introduction this year.

As I mentioned earlier, the increased focus on our digital marketing efforts we fully expect incremental revenue in our existing channel and customer base. I expect to be reporting soon on our existing Motorola license extension and entering into new product and service categories.

As several of you may know, my background includes 20 plus years working with service providers. Growing sales in the service provider channel is an important objective for us. And we continue to work on this. Expanding sales outside of the US is also important for us and we are actively engaged with resellers.

Finally, for this slide, I believe it's important for us to cultivate and grow our Investor Relations activity, and you may find us in your city in the very near future. I'll now hand over the call to our new Senior VP of Operations, John Lauten for a quick review of our China to Vietnam transition and update on the coronavirus.

John?.

Thank you, Joe. As we communicated last quarter on Slide 12, I want to highlight that Zoom is very keen to move our production out of China to avoid the costly tariffs from the ongoing US-China trade war. I'm glad to report that we're on track with moving the majority of our products to Vietnam in the first half of this year.

Our Chinese cable modem supplier opened a new factory in Vietnam, which is now operational. We have added a second major Tier 1 supplier with an already established factory in Vietnam. In addition, we're closely monitoring the situation with the coronavirus, especially in China.

While our suppliers' factories are open and operational, we are aware of component supplier shutdowns across China that may impact our production. The coronavirus also impacts travel and logistics within China and between China and Vietnam, which could add to production delays.

So we're definitely concerned about the situation in controlling what we can control and of course, hope that the virus spread is halted soon. Back to you Joe..

Thanks, John, for that important update. Turning to Slide 13, we provide a generalized overview of product categories. And as you can see, we have new products targeted for each. Really excited about what we have planned not just for 2020, but the years to follow too.

In 2020, you will see new product designs and from the initial feedback we're receiving, we believe customer receptiveness will be tremendous. New products better than ever, and new direction for Zoom, which you may have heard us reference in the last couple of quarters is on the service side, which we show on Slide 14.

In 2020, we will be rolling out an app based platform that will allow users of our gateway products to remotely manage all aspects of their home network. That includes features such as parental control, usage analytics, security features just to name a few.

Consumers buying a Motorola gateway will be able to download our MotoManage app out of the box in order to access these services for a recurring monthly charge. I'll close with Slide 15. The broader technology trends are clearly in our favor.

Consumers continue to demand cutting edge gateway and networking products in order to make their lives easier, simpler and safer. Motorola is a trusted brand. And we will continue to innovate with quality technology coupled with value added service. In summary, sales are growing, but our bottom line is being impacted by external forces.

We're not sitting idle. Our laser focus is to transition our production from China to Vietnam as quickly as possible. We have a production transition plan in place, and we're executing on it. Now let's turn to questions..

[Operator Instructions] Your first question is from Spencer Lehman a private investor..

Hi, good morning, Joe and Frank. In regard to the Vietnam move, I was sort of hoping that was all sort of completed because I know you started last year. Did you run into any problems with that or is that on target? And if so, when you estimate you would be completely out of China..

So – hey Spencer, thank you. So this is Joe, great to hear from you..

Hi, Joe..

Yeah. So I want to take – just take a second here and talk about a little bit of the timeline. If you think back to this time last year, our major manufacturing partner had no manufacturing capability outside of China. And so what we did was we drove with something they called a CKD model or a complete knockdown model with another ODM.

It wasn't until basically late second quarter into the third quarter of last year that our key manufacturing partner said that they would establish a new factory in the Shenzhen-Hai Phong Trade Zone.

And so if you recall back at that time, we were also filing for economic harm with the Federal Trade, which of course in November we know that was denied. So we really made the decision to the full transition from China to Vietnam in the late Q3 and with pilot runs, just starting in Q1, January of this year.

So we are actually on track to what we expected. Our concern right now is again, looking at impact of coronavirus. And I'll let John add a little bit more insight into this. But right now, I would say we are on track to what we expected, even on the last earnings call.

And as I mentioned in this earnings call, it is our full intention to be out of China with the majority of our products into Vietnam by the end of second quarter.

But John, do you want to add any comments?.

Yeah. Thank you, Joe. As Joe explained, once we went ahead with the green light, we have a rapid transition program going here with our existing cable modem supplier. And the way we're executing rapidly is by replicating the lines and the setup, and the management of supervision in Vietnam, with the Chinese teams.

I do agree with Joe that we're cautiously watching the impact of the coronavirus on our component suppliers, but otherwise we're executing right on schedule..

And Spectrum one more point that I'd like to add is that as I mentioned, we brought on a major Tier 1 manufacturer, and we will be bringing those products out this year. I'm very excited about them. And that means your Tier 1 manufacturer has been operating, manufacturing in Vietnam for close to 10 years. So that's also a big sign..

Okay, thanks. Thanks, guys for all that again. Good luck..

Yes, thank you very much..

[Operator Instructions] Your next question is from Paul Lucat a private investor..

Good morning, Joe. I think I recall on the last earnings call, but could you – said gross margins would be slightly less with the new Vietnam manufacturers.

Could you again go over what you expect – what effect you expect gross margins to have when you shift manufacturing to the new manufacturers?.

Yeah. Hey, Paul, it's great to hear from you. Yeah. If I reflect back on our last call, I think you raised the question about what is the impact to margins when you move completely out of China into Vietnam.

And as I pointed out that – and I'll reemphasize it here, when you move from China to Vietnam, you're basically taking those components, the kits, you're bringing them over to Vietnam, you're also to make sure that there's no issues in our quality and service.

You bring resources over from China and elsewhere into Vietnam to make sure that we continue at the high quality level that our customers are used to. And what we believe is that from China to Vietnam, there's a about a six – 5% to 6% difference. And we believe that within short of two years that becomes part if not even better than where China is.

It all is a matter of how fast can we hire local, not only workers, but local management, get them trained. But as you can imagine, right now, we're picking up, we're fork lifting SMP lines, et cetera into Vietnam. We've already done that. And that's additional cost that of course, flows down to the margin. So that's what we're basically looking at..

Great, great, perhaps this situation is certainly better the tariffs..

Yeah, yeah..

And on the MotoManage app are we still – are you still envisioning an app that would allow control of all the IoT things and analysis all the disparate blind window of locks on different manufacturers bringing that all under one control panel? That's the future..

Yeah. Yeah, that's – yeah, we're very, very excited about MotoManage. And as said, Paul, it does provide a full fingerprint of all the devices in the home.

It not only goes down to the WiFi devices, but as you rightfully pointed out, as you look at those other devices, door, window sensors and glass break sensors and all these other trinket devices that are communicating, say ZigBee, Z-Wave and so forth through the gateways, our MotoManage app will have visibility down to all those devices.

And without giving too much away on this call, I'm super excited about our new gateways that are coming out because we are embedding that new IoT radio technology into the gateway that's going to allow users to bring on all of those devices that you just pointed to..

Great, great, I think that's – is that a unique thing. I haven't heard of anyone else offering that.

Is that going to be unique to you guys, are you leading the way with that?.

Well, let me just say this, we –Comcast has just released a new gateway, it's – I don't know – I know what the code name, I think it's the – they call it the XP7 and it supports say, ZigBee, technology, BLE and WiFi, which fits into their ecosystem of the ZigBee devices. We're adding additional capability into ours..

Great, great, I look forward to seeing that. I think the market will receive that well if it's marketed well and that's all for me. Thanks Joe..

Thank you. Thank you very much, Paul..

[Operator Instructions] There are no additional questions at this time..

Alright, I would like to just say on behalf of the entire team here at Zoom, thanks for joining us today. We're all very excited about what lies ahead for Zoom. And hope you join us on our journey. Thank you very much, everyone..

Thank you. This concludes today's conference. You may now disconnect..