FiEE Inc (FIEE) 2017 Q4 法說會逐字稿

Good afternoon. My name is Chantelle and I will be your conference operator today. At this time, I would like to welcome everyone to the Zoom Telephonics conference call for Q4 2017. (Operator Instructions). Frank Manning, Zoom's President and CEO, you may begin your conference.

Okay, thank you, Chantelle. Welcome to the Zoom Telephonics conference call for Q4 2017. My comments refer to the slides available on our website at www.zoomtel.com/sq417.

Let's start with slide 3, which provides several quick highlights from the quarter. This was a strong quarter with significant revenue growth. We achieved the second straight quarter of profitability, excluding a one-time charge related to Amazon sales tax that we will discuss in detail. We had strong organic revenue growth to $8.9 million for Q4 2017 and gross margin improved to 36.6% largely due to increased US retail sales of Motorola brand cable modems and gateways.

With the higher sales and gross profit, we achieved net profitability of $444,000, or $0.03 per diluted share for Q4 2017 on a non-GAAP adjusted basis. This excludes the impact of an $831,000 expense relating to state sales tax liability due to Amazon's storing our inventory in warehouses in a large number of states.

During the quarter, we successfully introduced three new Motorola products, including our first 24x8 cable modem, our first MoCA adapter and our second WiFi router. In 2018, we plan to continue to expand our cable modem productline and to introduce other products as we will discuss later in this call.

Now let's look at slide 4. Slide 4 demonstrates the considerable growth that we have seen since we launched our first Motorola-branded product. Fiscal 2017 revenues of $29.4 million are up 65% from 2016 and almost triple the revenues for 2015. Note also that Q4 2017 revenues were higher than Q3 2017 revenues.

Slide 5 shows the sequential growth that we have delivered and how positive net income as a result of increasing revenues, particularly when our quarterly revenue is over $8 million. You can see that the Q4 EPS on this slide excludes the Amazon sales tax expense.

Slide 6 provides some of our financial highlights from the quarter. Q4 2017 revenues of [$8.86 million] were 72% above Q4 2016 revenues, marking the seventh straight quarter of year-over-year revenue growth. This growth was driven by sell-through, not sell-in and we saw substantial growth in sales of Motorola cable modems and gateways to our major US retailers.

Sales through Amazon were especially strong. 98.7% of our sales during the quarter came from the US, by far the largest market for cable modems supplied through retailers. Our new router, MoCA DSL and cellular products should provide significant opportunities for international growth moving forward.

The Q4 2017 gross profit benefited from increased sales, particularly sales through Amazon Seller Central, which have high gross margins. We sell directly through Amazon which helped Q4 2017 gross margin rise to 36.6% from 27.3% in Q4 2016. Similarly, gross margin for year 2017 increased to 34.8% compared to 30.1% for year 2016.

Excluding the sales tax expense, operating expenses grew to $2.76 million for Q4 2017, a $410,000 increase, mainly due to increased expenses for the Motorola royalty, advertising and product certifications; however, total operating expenses as a percentage of sales significantly improved to 31.1% in Q4 2017 from 45.5% in Q4 2016. For full-year 2017, total operating expenses as a percentage of sales decreased to 36.1% from 46.3% for 2016.

We were pleased with our second straight quarter of profitability, excluding the Amazon issue. This flows from higher revenues, higher gross margins and lower operating expenses as a percentage of sales.

Now on slide 7, we will discuss the Amazon sales tax issue. This is an issue that many companies have been wrestling with. Almost all of Zoom's Amazon sales go through Amazon Seller Central, where we sell our products direct and Amazon charges us for a number of services. Most states are saying that when a company has inventory in an Amazon warehouse that creates what is referred to as nexus and the state has the right to require us to pay sales tax for shipments to the state's customers. There has been a lot of debate about this issue.

In January, the Supreme Court decided to deal with a case relating to nexus in late summer and it's possible that the Supreme Court will make the nexus issue much clearer. It's also possible, but unlikely, that Congress will pass a law in this area. Nonetheless, we are taking a conservative view of the state sales tax issue and after careful analysis by Zoom and expert sales tax advisors, we booked in Q4 a significant sales tax relating to Amazon sales going back to our first Amazon sales in 2013.

We expect to be paying a significant portion of that accrual to states over the next few months. We also plan to promptly take steps to have Amazon collect sales tax for us in the states where that is appropriate. We believe the worst part of the expense is behind us, but we also see an impact of under $220,000 in Q1. Future quarters should have minimal, if any, expense impact.

On slide 8, we provide select balance sheet items. At December 31, 2017, we had approximately $90,000 drawn on our $3 million line of credit with $229,000 in cash. Working capital was $2.6 million with a current ratio of 1.5. We believe the balance sheet and available bank debt provide a good foundation for the continued growth of the business.

Slide 9 summarizes the evolution of our agreement with Motorola. Our license initially covered cable modems for North America. After two amendments, the license has added a number of broadband and local area network products worldwide, including exclusive rights for routers, range extenders, powerline adapters, consumer cell modems and gateways, DSL modems and gateways and MoCA adapters.

The license also includes cellular sensors, but on a nonexclusive basis. The combination of the Motorola brand and excellent execution with that brand have really been by far the primary reason we have been growing so rapidly.

On slide 10, we detail our Motorola cable modem productline and status. We continue to stay focused on expanding our productline, increasing our product placements in the leading stores and increasing sell-through in stores and online. We introduced our first 24x8 cable modem at the end of 2017. This is a good product, but it has been hurt by a few uninformed reviews. We're working to address the problem of these groundless reviews, but meanwhile they are hurting sales.

We have two 24x8 cable modem/router combo products in the works and both are on track to ship in Q2 or perhaps a little bit later in the case of our telephony cable modem. That product has telephone call capability, a very difficult area and one that has required a lot of investment and engineering effort. We think that there is very good potential for both these products and we are looking forward to shipping those in the near future.

Additionally, in 2018, we hope to introduce at least one DOCSIS 3.1 gateway product. DOCSIS 3.1 is a relatively new high-speed standard for cable modems. We are already shipping a strong selling DOCSIS 3.1 cable modem. We are looking forward to combining a DOCSIS 3.1 cable modem and a strong router into one product.

On slide 11, you can see that our shelf space changed very little from Q3 to Q4 2017 with a slight decline due to normal retailer tuning of which [stores] carry cable modems. We ended 2017 with Motorola brand cable modems in over 6,689 stores. We continue to push for more shelf space, but this is difficult for two reasons.

One, most retailers are not growing their cable modem shelf space and two, Netgear remains very strong at Best Buy due mainly to their strength in routers. In trying to get more shelf space, we make the point especially to Best Buy that Netgear continues to embarrass Best Buy on Amazon with Amazon often showing a lower price than Best Buy. Zoom, on the other hand, has been able to keep Best Buy competitive with Amazon for our Motorola and Zoom products.

On slide 12, you can see that Zoom continues to be very strong in the cable modem category at Amazon. We have the leading product in four product categories, especially in the faster growing high performance cable modem router combo products. We have grown our share of Amazon business dramatically taking share primarily from Arris and to a lesser extent Netgear.

Marketshare varies a little from week to week and some weeks we are outselling Netgear. We believe that our new cable modem products should allow us to continue to grow our cable modem share at Amazon.

Slide 13 compares the sales and growth for some Amazon electronics categories. We find it encouraging that cable modems grew 8.6% from Q4 2016 to Q4 2017, a significantly higher growth rate than the printers and scanners category and the routers and range extender category.

We believe the major reason for this growth is DOCSIS 3.1. Another reason is that Comcast now leases cable modems for $11 a month, a 10% increase.

On slide 14, we turn from cable modems to our Motorola brand MoCA, LAN and DSL products. We began shipping our first MoCA product in late December 2017. Customer reviews are good and sales are fairly encouraging. We expect 2018 revenues for this product to be above $1 million a year.

We also began shipping our MR17 router in late December 2017. Similarly, reviews are good and we expect 2018 revenues over $1 million a year for this product. This is our second router outside China. We plan to introduce another router, an AC2600 router, very soon and we also hope to ship mesh routers in 2018. Mesh is a very, very strong growing category of routers.

Our China partner is now shipping five routers and one range extender for China. We are not yet shipping our VDSL/ADSL combo AC1600 gateway product, but we expect to be shipping that product this month.

As we introduce more MoCA, DSL and LAN products, we are reaching a critical mass of products that can be sold outside the USA. Consistent with that, we are now in discussion with sales representatives and distributors for a number of countries.

Slide 15 discusses the status of our industrial and consumer cell modems. We remain focused on introducing our line of industrial-strength USB cell modems as an important part of our push for success in the Internet of Things and machine to machine markets. We have a good pipeline of customers evaluating this productline.

Most of these products include a Gemalto module and we'll continue to cultivate our Gemalto relationship with the hope of getting new leads and sales. In addition, we will continue to focus on reinforcing our relationships with carriers such as AT&T. We are part of the AT&T partners program and we are getting good leads from AT&T.

Because our new license amendment includes cellular modems and routers, we are also increasing our focus on bringing these Motorola brand LTE consumer cell modems to market. We expect to begin shipping Motorola brand consumer cell modems in Q3 of this year.

Slide 16 provides detail around our sensor plan. During Q3 2017, we were granted nonexclusive worldwide rights to use the Motorola brand for consumer grade cellular home sensors. As some of you know, our focus is on sensors that communicate through the cell network to smartphones and browser-enabled devices. Our first sensor will sense temperature, humidity, water on the floor, vibration/earthquake, light and power all in a small package with battery backup. These sensors are ideal for residences and second homes, garages, storage facilities and RVs.

Additionally, cellular sensors are easier to set up than WiFi sensors since they don't need to reach the Internet through a router and a fixed broadband modem. Another selling point for consumers is that the service plan costs for a sensor can be below $5 per month because the sensor doesn't use much data. We plan to offer a service plan with the cellular sensor.

This is a challenging product, but we are close to being done. We hope to ship by the end of June 2018. There is still some risk with that, but I think we have got an awful lot done, so we have got a very good chance.

Slide 17 summarizes our major Motorola product rollout timeline. This is an ambitious plan, but we have already made significant progress with many of these products. Now let's turn to questions, Chantelle.

(Operator Instructions). [Mike Huffy], Catamount.

Yes, thank you. I have just a question about the significant product rollout for the balance of 2018 and if you have the balance sheet to support all of these product introductions.

Yes, we do. We have a significant unused line of credit and with that and our expected operating performance, we have the balance sheet to support these product introductions. Another key point is that, in many cases, we have already incurred a significant portion of the total expense, so that also helps.

Thank you.

(Operator Instructions). [Phil Rosenthal], an investor.

Hello, I was wondering if you have any information on the breakdown between how much of the revenue is on the high-end DOCSIS 3.1 products versus the more entry-level DOCSIS products?

We don't provide that, but I will just say that it's significant revenue, but it's very much under half of our total revenue. As a reminder, we have -- shipping right now seven DOCSIS 3.0 cable modems and one DOCSIS 3.1 and the one is getting more than its share of revenues, but it's well under 50%.

(Operator Instructions). There are no further questions at this time. I will now turn the call back over to the presenter.

Okay, well, thanks, Chantelle. Thanks for all of you for calling in and we appreciate your support. We look forward to talking with you in the future. Thanks again. Bye.

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