FiEE, Inc. (FIEE) Q1 2019 Earnings Report, Transcript and Summary

Good morning and welcome to the Zoom Telephonics' Q1 2019 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] Thank you. I will now turn the call over to Frank Manning. Please go ahead, sir.

Welcome to the Zoom Telephonics conference call for Q1 2019. 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 which cautions you that any of our forward-looking statements is subject to uncertainty and risks. Slide 3 provides a brief overview of Zoom Telephonics. I think most of you are familiar with the facts on this slide. Please note the recent increase in share count in connection with the $5 million strategic investment that we announced on Monday. Slide 4 provides a brief financial summary for our first quarter of 2019, “Q1 2019.” This was a difficult quarter due primarily to tariffs and to reduced shelf space at one retail chain, which I’ll detail shortly. Compared to Q1 2018, our gross profit declined $863 thousand in the quarter to $2.4 million, and our operating expenses increased $585 thousand to $3.5 million. A significant operating expense increase was the quarterly Motorola trademark licensing expense, which went up $250K to $1.125 million. Ad expenses rose $163K. It’s impossible to discuss the quarter without highlighting the impact of the tariffs, which we note on Slide 5. Our approach is to continue to push for tariff relief either through moving some production outside of China or through tariff-related filings in the US. One very recent development is that the US Trade Representative has committed to begin considering tariff exemptions for the third wave of tariffs, the one we’re in, by the end of this month. We are hoping that this occurs and that we can get an exemption due to the severe economic harm the tariffs are causing us. In summary, there’s a wide range of possibilities, from the worst case of 25% tariffs with no exemption, the middle ground of no tariffs, and the best case of 25% tariffs with a near-term exemption. Another possibility is continuing 10% tariffs, or continuing tariffs with gradual reductions over time assuming China’s compliance with a possible trade agreement On slide 6 we highlight our sales breakout by year and by quarter. Sales declined 3.9% to $8.0 million from Q1 2018 to Q1 2019. The main reasons were the China tariffs on almost 100% of our products starting September 24, the pricing confusion this has caused in the market, and the reduction of shelf space we have experienced over the past year at one major retailer. We were able to experience growth at our etailers, but this was offset by declines at some of our brick-and-mortar retailers. We are in the process of introducing new retail packaging to try to improve brick and mortar sales. We will also see a very significant improvement in shelf space and shelf positioning later this quarter at a very large and important retail chain. Linksys is exiting the cable modem business, so brick and mortar sales through US retailers should come primarily from Netgear, Arris, and Zoom through our Motorola brand. Arris was just purchased by Commscope, and we feel that our competitive position in brick and mortar stores is improving. Comcast increased the monthly cable modem rental cost from $11 to $13 at the start of 2019. That’s good news for us, as it shortens the payback period for customer-owned cable modems. Now let’s look at slide 7. You can see that gross profit and gross margins were hurt significantly by the 10% tariff as it increased our cost of goods and reduced sales. From Q1 2018 to Q1 2019 gross profit declined by $863 thousand to $2.4 million, and gross margin declined from 39.4% to 30.2%. One effect of reduced sales was that fixed overhead costs were spread over lower sales, reducing gross margins beyond the direct impact of the tariff. We’ve had at best mixed success in passing our tariff costs on to our customers. We and our competitors are trying to navigate a confusing course, monitoring each other’s pricing, the prospects for tariff changes, and ways to reduce the impact of tariffs. We have been able to slightly reduce our pre-tariff cost of goods for some products, and we are continuing to try hard to reduce product costs. Moving to the next slide, 8, we are very pleased with the recent financing we closed this week. It provides working capital and helps us more aggressively develop new products. It also brings us closer to an important strategic partner, Minim, as we move to significantly increase the capabilities of some of our new products. With the financing we brought on new Board members Jeremy Hitchcock and Jonathan Seelig, who are both co-founders of very successful network communications companies. We think they will be very helpful as we set our course moving forward. You can also see that it’s a priority for us to trade on NASDAQ. Slide 9 shows the impact of the financing on our balance sheet items, including pro-forma figures that simply assume that the March 31, 2019 balance sheet was improved by $5 million in cash from the PIPE financing announced this week. That cash will be used primarily for working capital and for product-related expenses to grow the company. Now let’s look at some of the near- and long-term opportunities for Zoom. On slide 10 we summarize our Motorola exclusive license. This has evolved over time, and our license now extends through 2020 on a wide range of networking products. We believe that we’re far down the road to extending our license well past 2020, but we can’t guarantee that yet. Slide 11 updates our position at Amazon. Recently our share of cable modem sales has been around 25%. We’ve had an unusually high number of Amazon issues recently, typically due to some hiccup in the giant Amazon machine. The good news is that we keep improving our systems for dealing with Amazon issues, and that our Amazon sales and cash flow remain strong. Slide 12 reminds you of some of our important customers. These are the top US retailers of electronics, and we’re excited about the prospects of growing our shelf space and shelf position this quarter. With that, I’d like to turn it over to Joe for some discussion on our sales channels.

Thanks Frank. Slide 13 summarizes some of our near-term sales channel goals starting with increased Store Front Sales in Q2 2019. We’ve made excellent progress with a major retailer that will result in increased product placements this quarter. In the Service Provider channel, we are focusing our initial attention on Tier 2 and 3 cable operators in the USA, Canada, and Latin America. To reach these operators, we are forming relationships with key distribution partners and industry organizations. We’re excited about the Motorola Cellular MultiSensor we began shipping at the end of March and the downstream recurring revenue it will provide. It is our full intention to build added features and functionality into our future cable modem/router, WiFi mesh router/controllers/extenders, and other router products. This includes unique network, security, and cloud capabilities that will offer us differentiation in the marketplace. I will discuss this more on the next slide, but certainly a key point is the downstream recurring revenue this will create. As just mentioned, we fully intend to expand our sales presence into international markets, starting with the adjacent markets of Canada and Mexico. As I alluded to on the previous slide, Slide 14 speaks to the exciting prospect of Zoom teaming up with Minim, whose CEO Jeremy Hitchcock just invested $4.1 million in our company through his family fund. Having Jeremy on our Board, and his company Minim working with us in close partnership, will create tremendous possibilities for Zoom. At a very high level, it will allow users of our Motorola products to easily manage their wireless home network from a Motorola application they download. The application will give end users access to parental controls, manage WiFi settings, create usage limits, and much more. But that’s not all, it will allow our Motorola Customer Tech Support team to provide outstanding customer service support by providing remote network diagnostics and management of home network end point devices. Slide 15 summarizes some exciting technology trends that will help drive growth for Zoom. The rollout and adoption of DOCSIS 3.1 for higher downstream and upstream speeds continues. We are developing new DOCSIS 3.1 products with enhanced capabilities. Achieving better in-home WiFi coverage while making it simple to install, continues to grow in importance. We embrace open standards, including the support of EasyMesh, and are developing new Mesh products. With the blazing speeds DOCSIS 3.1 can provide, we don’t want users constrained by the WiFi throughput. So, we are developing products that include WiFi 802.11ax technology. As I mentioned before, we see the need for end users to have greater control of their home WiFi network with easy to use network management and security. We intend to include this capability in some of our new products moving forward. Of course, this will provide downstream recurring revenue for us through Subscription and Cloud services. Faster Internet speeds, coverage outside the home, and new applications are right around the corner. We continue to put attention on developing new Cellular product solutions with a keen eye on 5G. Finally, we view Home Security & Energy Management as a very interesting IoT market segment for our company to move to and we are developing products that include technologies that support this segment. In summary, we are going through some difficult tariff headwinds. However, we’re excited about our prospects and we appreciate your support. We’d now like to open it up for questions.

Thank you. [Operator Instructions] And your first question is from Spencer Lehman.

Good morning. Hey, congratulations, Frank and Joe, for exciting new partnership. I think the news is really exciting. And do you see your IR Company getting a story out now to the financial markets in the near future?

Thanks. Spencer. Yes. We've already started to do that. And I think we'll -- we're expecting to significantly increase our meetings with investors in our general investor outreach.

Okay. Thank you.

Your next question is from Walter Young.

Hi. My question is about the competitive products. In specific, Smith Micro has a product called SafePath. And I wondered if that and other products for this industry or this area that -- for WiFi parental controls and managing your home, do you have the pricing competition landscape? Any comments there would help me.

Hi, Walter. It's interesting to hear, you mentioned Smith Micro because we know there's nothing we can do. We have started doing business with Smith Micro in fact, probably back in 1980s. But to answer your question, I don't know the specific product you mentioned, but the key thing I would mention is that the router is so central and it's such a great advantage that we have that a regular software provider doesn't have. So, if you think about it, the data, all goes through that cable modem or other internet access device and the router and so it's central to the story. And we think that, that central spot gives us unique advantage over other approaches like in many cases software. So again, I can't really comment on Smith's product. They do good work. So it's probably a good product, but I really like the strategic position our router products have.

Okay. Thank you.

[Operator Instructions] And we have no further questions at this time.

Okay. Well, thanks for joining the call. It's always nice to get to communicate with you and I'll look forward to speaking with you in the future.

Thank you very much.

Thank you. This does conclude today's conference call. You may now disconnect.