Good morning. My name is Lisa, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Quarter Two Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you.

I would now like to turn the call over to Mr. Jeremy Hitchcock..

Good morning. Before we begin the formal remarks, we advise you that today's conference call contains forward-looking statements. Forward-looking statements include statements regarding expected revenue, operating margin, expenses, and future business outlook.

Actual results or trends could differ materially from those contemplated by these forward-looking statements. For more information, please refer to our Investor Relations page for additional risk factors discussed in Zoom Telephonics' periodic filings with the SEC, including the most recent Form 10-Q. Thank you.

I'd now like to turn the call over to Jeremy Hitchcock, Executive Chairperson and Principal Executive Officer of Zoom Telephonics..

Good morning, and welcome to Zoom Telephonics' Q2 conference call. Zoom is at an exciting inflection point in its lifecycle of the Company. I'm Jeremy Hitchcock, Executive Chairperson for Zoom Telephonics, and I'm joined here with Jacquelyn Barry Hamilton, CFO. We are pleased to release our Q2 2020 earnings, as was posted yesterday evening.

We've also posted slides that accompany our results to the Investor Relations page on our website. You can find both the earnings release and the slides at investor.zoom.net. I'd like to start off this call with a bit of an introduction. I've been serving as the Company's acting Principal Executive Officer for just inside 100 days.

I've come from 15 years at Dyn, a company I co-founded and led, which was a software as a service internet infrastructure company that powered a great portion of the internet's traffic in real time for many top web enterprise and Fortune 1000 companies. Dyn was acquired by Oracle in 2017, and is now part of Oracle's cloud infrastructure.

I became involved in Zoom Telephonics after meeting Frank Manning in 2018, and seeing the potential it had in software capabilities to develop Zoom Telephonics' product line. Zoom is uniquely positioned to expand its product line and capture more of the home connectivity spend that consumers demand.

There were many times in my previous life at Dyn where we complained about the last mile connectivity, and I'm excited to bring in engineering and product mindset to a company whose business is leading the way in home connectivity through innovation and consumer focused design.

We are working to deliver growth and capture the growing market with home-connected Wi-Fi, cybersecurity, and IoT products. I'm a firm believer that we will be able to add significant amounts of recurring revenue to our mix and balance the capture of market share, responsible growth, investments in our long-term, and profitability.

Over the next few quarters, we'll be discussing our long-term plan. Today, you'll get to hear a couple elements of that plan. The leadership team here at Zoom is great. I'd like to mention them and thank them, our CFO, Jacquelyn 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, a 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 four 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 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 to 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 positioned to double manufacturing capacity from the beginning of the year.

At this time, we're manufacturing products in 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 two 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 airfreight and get more product in market faster. This added a significant additional cost for the 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 two, 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 Wi-Fi management product, the MH7022, a reliable and value-oriented product in the Wi-Fi category. The segment is highly competitive, but also five times the size of cable modems.

Consumers are looking to blanket their home in Wi-Fi, and this product is a great answer. Fourth is the other major product launch, our software platform Modem Manage.

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.

Modem Manage will debut on the whole home mesh Wi-Fi product sold in single, double, and triple packs in this quarter. Software is an area that this company is heavily invested 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..

Thank you, Jeremy. I'm going to 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, we'll be starting on Slide 6.

Broadly speaking, three main things according to our second quarter results; growth and 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 side, our revenues remains strong, with Q2 revenues of $10.3 million of 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 the top line continues to get driven by strength of 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 up-switched manufacturing partner based in China continued 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 tariffs 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 airfreight, 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 revenue for the quarter and by year, going back to 2016. As you can see, we continued 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 products 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, as the net income lines resume 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 a $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 Q4 2020, as we sell through the inventory manufactured in China and limit our manufacturing in China to only the initial product production runs of new products.

The impact of tariffs closed through the income statement directly from gross profit to net income, resulting in a net loss in the second quarter of 2020 of $1.5 million. Again, as mentioned during the discussion of first 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 products 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 two 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, reflected 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 [ph] 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 the 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..

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..

[Operator Instructions] Your first question comes from the line of Spencer Lehman..

Oh, hi, guys. 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 on the Wall Street radar because it would be sort of a shame to miss out on all the action with what's going on with the home electronics. .

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 a trend that is probably accelerating. I think we're in the midst of seen probably what you would consider a spike, but an increased plateau after that.

A company has to be in a position where it has products and 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 while 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..

Yes, but I'm thinking more about the stock itself and the -- it's a very thin market, and obviously there's always sellers. But the buyers are sparse, and from time to time, sometimes it just doesn't trade for quite a long time. And just wondering what your plans are as far as getting -- you've got a great story now. I mean, it's a super story.

It fits so well into what's going on.

What are your plans for maybe getting that story out a little more?.

I think you'll see us at a few conferences coming up for shareholder conferences and getting the story out. I think you mentioned in 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 so, we feel good that we're starting to put the pieces together.

And 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 pieces of having that story put together, and we'll probably be a lot more active, with respect to stockholders and getting our story out..

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

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.

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 two that we're actually active and out meeting people..

Okay, thank you, and good luck..

Next question comes from line of Jimmy [ph] who is also a Private Investor..

Hey, Jeremy, how are you doing? My question is do you have any update on the lifting of the NASDAQ that I think I read on the Q1 report?.

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 the management team have wanted to have a bit more of the results that we can point 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 reporting on that in the next coming quarters..

Okay, thank you so much..

Your next question comes from a line of David Tocos [ph], who is also a Private Investor..

Good morning, Jeremy.

How's everybody doing?.

Good..

So I wanted to ask a couple of questions, a number of them have been answered so I appreciate it. On more on NASDAQ question because I do believe at some point that'll 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'll be good to see the company get to profitability. It seems like I don't know if you projected 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 C3.

It could be profitable by year end and that would probably be helpful. But a couple of questions.

Where are you based in? Is the team of the top four or five that are together now? Are you all together in the same city?.

A bunch of questions in there. It's all good.

The first 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're able to ramp up our manufacturing, we're able to build the inventory and so we can have 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 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. Then the second part of your question regarding the geography of the team.

COVID has forced and has required companies to perform much differently. We are no different. We are essentially a remote company at this time. One member of management is in a completely different state.

And I'm seated here physically with Jackie, which is the first time I've seen her in about a month but we're able to use video teleconferencing and a lot of other technologies. 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.

It's very cool to see because it's -- we were not an organization that had that before but we have certainly been able to figure it out in the third quarter..

Right. Well, it's an interesting time and I'm with a sizable private firm and all of us went remote to and the great news was I have a directly 40 [indiscernible] remote working. He has two teams and I'm on a team that I could be in Turks and Caicos and nobody would know the difference unless they asked me to come down to the hall for face to face.

We've operated seamlessly and I believe so. I feel bad for people who own commercial office real estate now going forward because I think all of us can take it on the chin as we evolve. As we see the world evolve, and if people can, they're going to find out that you can find out ways for people to be productive.

So the question I was really asking was what city is the main group in? Then the follow-up question is you have about 50 employees and you're going to grow.

If you chart it out how many folks you're going to add in engineering and other areas?.

We're primarily a Boston based company. I think as we think about hiring, we might be more flexible with what we think of as geography but they're not 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..

Do you feel like -- it's interesting you have these 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 still feel like a baby company? Because it's a whole new team but you have this great product to start with and you're adding some stuff? How do you -- where do you think you are in the life cycle? My view is I feel like you're starting over in some ways, but not in others because of the product..

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 is something that plays well to us in terms of the strength.

We also have a brand new team that is 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..

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 in that a lot of headwinds just with the move with China and then with COVID so that has been awful.

So hopefully, I'll pray for a little peace and calm while you guys accelerate your programs in the next few quarters. Thanks so much..

All right. Thank you, sir..

[Operator Instructions] There are no further questions at this time. I do apologize. We do have a question from the line of Paul Lucat..

Hi, Jeremy. This is Paul Lucat. 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?.

Hey, 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 manage Wi-Fi product, the NH7022 will be to manage the Wi-Fi inside the home. There'll also be the visibility of IoT devices that are inside the home.

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 of 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. You'll see a lot of incremental steps along the way as both the 7022 to come out in the market and also as additional products come out that are part of this Motomanage platform..

Okay, I understand. Could you explain the ownership of Motomanage? I know the hardware is licensed from Motorola and the software is licensed from Menon.

Looking at a worst-case scenario where Motorola might want to cancel the license or not renew the license would Zoom Telephonic still own the service under that? I was just wondering how does wonder how that works contractually..

I can go into some details on this but others I won't be won't be able to get 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're as a Motorola licensee are very excited about. Being able to bring a management platform.

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 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. 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 riders 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.

It's something that -- at this point, we don't like going 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..

Okay. I'm excited to see how this evolves. You've certainly made clear that you're invested with a recent increase in ownership so we'll hold tight and watch for changes and look forward to seeing you at the LG500.

Will you be presenting it for the LG micro 500 or check one?.

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 in presenting that. So we're excited to continue to share the story and I look forward to meeting more of you all out of these conferences..

Okay, thanks. Good luck..

Thanks, Paul..

There are no further questions at this time..

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

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