FiEE, Inc. (FIEE) Q4 2018 Earnings Report, Transcript and Summary

Good afternoon. At this time, I would like to welcome everyone to the Zoom Telephonics Q4 2018 Shareholder 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] I would now like to turn the call over to Zoom CEO, Frank Manning. Please go ahead, sir.

Thank you. Welcome to the Zoom Telephonics conference call for Q4 2018. I’m Frank Manning, Zoom’s CEO. Our President, Joe Wytanis, will also be speaking and answering questions during this call. When you have time, please read Slide 2. Note that, we cannot predict the future, and our comments and forward-looking statements are subject to risks. Slide 3 provides a brief overview of Zoom Telephonics, and I think most of you’re familiar with that. On Slide 4, you can see that we had 10 straight quarters of increased year-over-year sales, but Q4 2018 broke that streak. Q4 2018 was a difficult quarter, primarily due to the 10% China tariff and its impact on revenues, gross profit, expenses and profitability. Looking at revenues, sales of Motorola brand products through U.S. retailers continued to dominate. Sales declined 15.8% from Q4 2017 to 2. – to, excuse me, to $7.5 million. The main reason was China tariffs on almost 100% of our products starting September 24. Unfortunately, our largest competitor at retail locked in low selling prices for the quarter before the tariffs set. That reduced our sales as we resisted dropping price and attempted to minimize margin impact of the tariffs. Excuse me, starting in January, cable modem prices imprinted [ph] higher, though there’s still aggressive competition. Now, let’s look at Slide 5. You can see that gross profit was hurt significantly by the 10% tariff, as it increased our cost of goods and reduced sales. Note that the impact would have been worse if we hadn’t shipped a significant quantity of fast-moving inventory to Amazon right before the tariffs started in September. In 2019, we are having success in driving down our cost of goods and we continue to work hard to offset the impact of the tariffs. Operating expenses for Q4 2018 were $3.1 million. This would have been up $364,000 from Q4 2017, except for the $831,000 one-time sales tax expense in Q4 2017. The primary contributors too would have been an increase were $125,000 increase in Motorola licensing costs, an increase of $163,000 in salary and benefits expenses, an increase of $143,000 in option expenses and a $39,000 increase in legal costs, primarily due to the tariffs. Slide 6 shows sales margin and profitability. Our net loss for the quarter of $826,000 was disappointing. The profits in Q1 through Q3 were wiped out in Q4, resulting in a loss for the year of $74,000. However, year-over-year, our loss greatly improved and we would have been net positive, if not for the tariff. Slide 7 comments on tariffs in more detail. We’ve discussed a number of these points already in prior calls. Please note that we’re making progress on moving a significant part of our production outside China, if necessary, but the soonest that will occur is Q3 of this year. We’re also making progress in driving down our costs and this will help to partially offset the impact of the tariffs. Also note that, the budget bill signed a couple of weeks ago has a provision for tariff elimination if a company can show severe financial harm from the tariff. This relief is an exciting possibility, but not a certainty. We probably won’t know whether we’ll get relief until June or July this year. If we do get relief, it is likely to be retroactive to mid-March. Slide 8 provides some information from our balance sheet. You can see that our balance sheet is sound with a good current ratio. Our inventory is higher than normal, as reduced Q4 sales and a threat of 25% duties caused our inventory to grow. Now I’ll turn to plans for 2019 starting with a summary of sales goals and our situation with retailers, then we’ll talk about product plans. Slide 9 summarizes our sales goals. One important goal is to increase sales in brick and mortar retailers, and we believe that will start to occur in Q2 due to increased – significantly increased shelf space. I wish we could comment in detail, but right now we can only say that we’re very excited about this. We also expect sales growth in the service provider channel in Q3. We’re making good progress towards this goal, but it takes time. We intend to significantly expand sensor in some modem sales and that should happen soon. Our Cellular MultiSensor will finally ship in March and this is exciting. We’re starting to see some momentum with our cell modem sales, especially now that one of our cell modems is certified by Verizon. We believe we will benefit from recurring revenues that will start with a MultiSensor, which has a $5 per month cell service plan. Over time, that will also come from cable modem/routers and IoT products as we’ll discuss later. We want to expand our international sales starting in Canada and Mexico and we’re making some progress with that. Slide 10 shows how our share of Amazon’s cable modem sales has grown significantly over time. Please keep in mind that this varies by week. We put a lot of focus on Amazon and will continue to drive for a higher share. Slide 11 shows some of our retailer and distributor customers. Our main focus in 2019 is not necessarily expanding the number of retailers, but rather expanding the amount and quality of shelf space with our current retailer customers. We expect to make good progress starting Q2 2019. Now Joe Wytanis, our President, will continue the presentation.

Thank you, Frank. As we turn to a product discussion, Slide 12 summarizes our Motorola brand worldwide exclusive licensing agreement. The focus is on Internet access and local area networking, with coverage of cable modem, DSL and cellular Internet access technologies. I do want to mention that we are seeing significant growth from modem – Motorola routers, MoCA adapters, DSL products and other non-cable products. Total revenues more than quadrupled from 2017 to 2018, with 2018 revenues about $2.6 million. Our Motorola cable modem revenues also grew from 2017 to 2018. Slide 13 summarizes some of the technology trends that will help to drive our sales growth later in 2019 and beyond. For cable modems, DOCSIS 3.1 is an important – because it significantly increases cable modem speeds. We carefully track weekly Amazon sales and DOCSIS 3.1 products on Amazon were up about 22% from Q4 2017 to Q4 2018. Mesh is a very exciting router technology that expands Wi-Fi coverage and helps you roam through your home without losing your Wi-Fi by connection. 2019 will be the first year with a mesh standard EasyMesh. Wi-Fi AX also called Wi-Fi 6 is a way to get higher Wi-Fi speed and more range, and the first shipments will occur in 2019. We already shipped cellular modems for use with cellular data providers that include Verizon and AT&T, and our experience with these products will help us as the 5G standard takes off. The IoT space is growing fast and it’s a natural fit with our routers, cable modem routers and future cellular router products. We plan to have a security and energy management products in this exciting new growth space. Finally, our Cellular MultiSensor will be our first product with downstream revenues. We have exciting plans for downstream revenues from other IoT products and from routers. We feel that Zoom is well-positioned to take advantage of these technology trends, as well show in our next – as we’ll show in our next slides. Now, let’s show some specific plans for various important product categories. Slide 14 shows the Motorola cable modems we’ve developed, and it shows that we have a plan to have DOCSIS 3.1 cable modem with 2.5 gig LAN port. DOCSIS 3.1 allows Internet speeds over 1 gigabit per second, and we want to eliminate the LAN port bottleneck that will occur as service providers offer speeds over 1 gigabit per second. You can see that we show some demand drivers and we’re very aware of these drivers as we execute our product plans. Slide 15 shows our Motorola cable modem router history and plans. We’re very excited about our success and plans in this category. In Q4 2018, we shipped a high-performance cable modem – cable gateway and with phone capability, and that product’s performance, along with strong customer reviews are generating significant sales. Later this year, we’ll have our first DOCSIS 3.1 cable gateway and that will feature AX wireless technology and potential downstream revenue from a service that will give parents good, easy control of their network, so they can thrill their children’s access to the network and the guard – and guard against harmful websites. Our cable gateway plan also includes supporting IoT in 2020. Slide 16 shows that we’ve introduced a number of local area network products. We’re excited about building a new mesh standard into some of our products and offering parental controls that will generate downstream revenues. Here again, we plan to support IoT devices in 2020. Slide 17 shows that we’ve already designed a number of cell modems, with some certified by Verizon and AT&T. We are starting to see some momentum with these products. We’re excited about our product plans, included – including Ethernet cell modems and cell routers and building in support for IoT products, including security cameras and sensors. We are well-positioned for 5G, a huge opportunity for us in 2020 and beyond. Slide 18 gives an outline of our cell sensor and IoT plan. The hardware and firmware for the first two products will be 100% designed by our engineers here in Boston. For the later products, we will be 100% designing some of those products and working with experienced ODMs for others. Security and Energy Management will be a major focus. Slide 19 talks about our Cellular MultiSensor. This will ship in Q1 and we’re excited about the prospects for this product. Both Frank and I have been using an early release of this product and we like it a lot. In summary, we’re very excited about 2019. Tariffs have been painful, but we’re doing the right things to deal with the tariffs. We’re excited about our expected expansion with U.S. retailers and service providers later this year and we appreciate your support. Now, let’s turn to questions.

[Operator Instructions] At this time, there are no questions.

Okay. Why don’t we wait a few seconds and see if anybody wants to offer a question. Okay. I guess, we’re all set. Thanks for joining, everybody…

Thank you.

…and look forward to speaking with you in the future.

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