FiEE Inc (FIEE) 2018 Q1 法說會逐字稿

Good afternoon. My name is Jason and I will be your conference operator today. At this time I would like to welcome everyone to the Zoom Q1 2018 shareholder conference call. (Operator Instructions). Thank you.

I would now like to turn the call over to our host, Mr. Frank Manning. Sir, you may begin your conference.

Okay. Thank you, Jason. Welcome to the Zoom Telephonics conference call for Q1 2018. My comments refer to those slides available on our website at www.zoomtel.com/sq118. Let's start with slide 3, which provides income statement highlights from the quarter. This was a strong quarter, and we show comparisons to Q1 2017.

Revenues and gross margins were up, operating expenses were down as a percentage of sales, and we achieved net income of $359,000. You can see on the slide that revenues were up 62% to $8.3 million. Gross margins improved from 33.7% to 39.4%. And operating expenses as a percentage of sales improved from 54.1% to 34.9%.

Now let's turn to slide 4, which shows our dramatic revenue growth. We grew 65% in both 2016 and 2017. And Q1 2018 continued our strong organic revenue growth, up 62% from Q1 2017 to $8.3 million. 96% of our revenues in Q1 2018 were from the Motorola brand.

Looking at product categories, 94% of our net revenues were from cable modems and gateways; and $266,000, or 3.2% of revenues, came from routers, range extenders, and MoCA adapters.

Looking at sales by country, 98% of our net revenues were from the United States, mostly through Amazon, Best Buy, Micro Center, Target, Walmart, and a select few other retailers. We also have sales initiatives outside the USA. And these will gain momentum as we broaden our product line of routers, DSL products, MoCA adapters, and cellular products. This will help us achieve a big enough product offering to get to the critical mass needed to fuel our international sales. The quarter had some boost from products that began shipping around the first of the year, including a 24 by 8 cable modem and a MoCA adapter.

Slide 5 shows how our gross margin has expanded over the past several quarters, which is due primarily to two things. The first is Amazon's share of our business increasing, and the second is higher overall sales. Gross margin for the first quarter 2018 improved to 39.4% from 33.7%. The main reason is that we get higher margin from Amazon where we sell direct, and Amazon has an increasing share of our business. Amazon stores our inventory in their warehouses and charges us a fee to cover storage, credit card billing, shipping, returns handling, and other services.

Note that when we report Amazon sales, we report them net of the Amazon fees mentioned above. However, we report Amazon advertising expenses as a selling expense.

Getting back to the question of our improved gross margin, another reason for improved gross margin in Q1 2018 is that our production, labor, and rent expenses haven't risen as fast as our sales. Operating expenses dropped from 54.1% of sales in Q1 2017 to 34.9% of sales in Q1 2018 as sales grew much faster than expenses. In dollar terms, operating expenses rose $127,000 to $2.9 million. The increase is mainly due to minimum quarterly Motorola royalty costs rising $125,000, and that will be -- that new rate will be the one we will have throughout 2018. And also sales tax related expenses rising $92,000 and advertising expenses rising $85,000; and these increases were partially offset by lower R&D costs.

We have now registered for sales tax in a large number of states. So Q2 2018 sales tax expenses should be minimal as Amazon collects sales taxes for those states, sends the money to us, and we pay the states.

Our net income for Q1 2018 was $359,000, a big improvement over the $1.1 million loss in Q1 2017. Our revenue growth is primarily due to strong execution with the Motorola brand. And as you can see on slide 6, the next slide, that that speaks to our success at Amazon, where we have grown our share significantly, primarily at the expense of ARRIS.

Our excellent products have earned high customer ratings, particularly for high performance cable gateways. We have achieved this success even in the recent difficult operating environment with unusually high out-of-stock products at Amazon due to our exceeding forecast, long supply lead times, and other issues. We are working hard to minimize out-of-stock issues and believe we are on the right path.

The next slide, slide 7, is a slide that many of you have seen before. The main point is that since our original Motorola brand agreement signed in 2015, we have expanded our brand rights to a worldwide license for many Internet and local area network products. Those products include cable modems and gateways, DSL modems and gateways, cellular modems and gateways, routers, range extenders, powerline network products, and cellular sensors. We have a great relationship with the people in charge of Motorola brand licensing, and they appreciate how we've respected the brand and earned strong customer reviews.

The next slide, slide 8, gives you a perspective on three important electronics categories at Amazon: printers and scanners, routers and rage extenders, and cable modems and gateways. We have Motorola brand rights for two of those categories, the two shown on the right in the slide. And we also have rights to some other product areas.

You can see that the most important category for us, and cable modems and gateways, had $27.5 million in gross sales at Amazon in Q1 2018. Growth was dramatic at a 16.7% increase over Q1 2017, much higher growth for Amazon than in the other two categories. We all know that Amazon has been growing, but you can see the cable modem growth is particularly strong.

The router category, on the other hand, is much bigger than the cable modem category with $147.5 million router sales in the quarter at Amazon. Router growth was a respectable 5.7%, but well below the 16.7% growth for cable modems. We believe that there are a number of things driving cable modem growth, particularly the growth of DOCSIS 3.1.

The next slide, slide 9, provides more information about our cable modem plans. Our goal is to grow our cable modem sales by adding products, increasing ad space and shelf space, and increasing sell-through in stores and online. We added a 24 by 8 cable modem to our line at the start of 2018, and we plan to introduce high performance 24 by 8 and DOCSIS 3.1 cable gateways in 2018.

The next slide, slide 10, shows our product rollout plans. We now have in some units of our DSL gateway at Amazon, and we'll be doing a release about that once we have more units in stock. We're also very close to announcing our new AC2600 router, a high performance product at an attractive price. We have working cellular sensors but we are still refining those, and we expect to be shipping those in Q3 of this year. We've talked about the cable gateways already. You can see that we still plan to ship a cellular modem and cellular router this year.

Looking into 2019 beyond, we plan to extend all our major product lines. DOCSIS 3.1, mesh routers, and cellular sensors are expected to be especially important.

The next slide, slide 11, provides detail around our sensor plan. As some of you know, our focus is on sensors that communicate through the cell network to smartphones in browser-enabled devices. Our first sensor will sense temperature, humidity, wet floors, vibration/earthquake, light, and power loss, 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 Wi-Fi sensors since they don't need to reach the Internet through a router and a fixed broadband modem.

Another selling point for consumers -- at the service plan costs for a sensor can be low because the sensor doesn't use much data. We will provide this service to our sensor customers, reselling the cellular machine-to-machine service at a leading cellular service provider. This will provide recurring revenue at good margin for us. We now expect to be shipping the cellular sensor in mid to late Q3 of this year.

The next slide, slide 12, shows a strong balance sheet on March 31, 2018. We had $423,000 in cash, $51,000 drawn on our $3 million line of credit, working capital of $3.2 million, a current ratio of 1.5, and stockholders' equity of $3.7 million.

Now let's turn to questions, Jason.

(Operator Instructions). William Velmer.

Very good report, very good. Editor of SA Advisory; we follow your stock and have recommended it recently. And I'm curious, looking at the run rate, is there a target of revs of around $40 million for the year? And is profitability going to start to increase? I mean, $0.02 for the quarter is great turnaround. But can the Company do $40 million and have a nice earnings jump in this coming -- this present year that we're in, 2018?

Well, we don't forecast revenues, but I certainly think it's a reasonable goal to exceed $40 million. That doesn't mean (technical difficulty) that there is a guarantee, but I think it's a reasonable goal. And definitely our profits are leveraged on sales. As we get above about $8 million revenue in a quarter, we think that that is about where we are profitable this year, now that our Motorola royalty has gone up. And we think that profits come pretty fast once you are over those revenues, so it's definitely a goal of the Company to try to significantly beat that $8 million quarterly revenue. And I think if we do that, we're going to see some nice profits.

So, is there any specific quarter that's weaker in your calendar year? First quarter, second -- is there any -- is the fourth quarter usually the strongest because of the holidays? Or at this point, it doesn't matter?

Yes. It's interesting that the answer has sort of evolved as our business has evolved. But one thing we look at very carefully is Amazon, because we get weekly detailed sales data for Amazon. And we just analyzed 2017. And what we found is that the first half of 2017, if you looked at all cable modem sales on Amazon, the first half was about 45%, and the second half was 55%. Here I'm not talking about Zoom; I'm talking about all cable modems and gateways.

So I think the answer to your question is that normally the Q3 and Q4 are the strongest quarters. And it's not just because of Amazon. There's things like back-to-school and Christmas. And normally the first two quarters are the weaker quarters.

Are you seeing any -- because of the economic cycle that we seem to be in, a Goldilocks environment with greater economic growth in the United States, do you foresee that to affect you as well? The consumer spending more money upgrading his equipment, and that leads to even greater sales for you?

Yes, that definitely helps. We like to see people using a lot of cable TV -- cable Internet services and needing a lot of bandwidth. And also spending money that makes them money by eliminating, in the case of Comcast, $11 a month equipment rental, which works out to $132 a year. So yes, I think (multiple speakers) economy helps.

One more question. International sales -- how much of a boost can international sales start for you to reach [grade 18]? Where's it going to become more meaningful, 2018 or 2019?

I think it's really going to be more 2019. Certainly we're doing things that are going to help international sales, including broadening our product line, as I mentioned, trying to get to critical mass; and also talking to and trying to close some distributors and sales agents. That's all happening, but I don't think that will be a big part of our growth story in 2018. I think it should be in 2019.

Another thing is that I doubt that the cellular sensors will go beyond the United States in 2018. But I think in 2019, there's a chance to start selling those in other markets also. So I think there's -- we very much want to grow our international sales. But it's a lot of -- a lot of things have to happen to make that happen, and it takes some time.

How about -- not to take up your time, but you're still bulletin board or pink sheets. Do you have any uplifting on a better exchange, OTC or NASDAQ, to get greater brokerage exposure and to possibly raise money for faster growth?

We definitely want to do that, and we looked at that recently. And basically what we typically need, depending on whether you are talking NASDAQ or New York Stock Exchange, is at least $4 million in equity, and we're close to that; and a stock price of $3. In the case of NASDAQ, they want to see that for 90 days, so -- (multiple speakers)

I see. Well, you've been there. You've pretty much been there for --. Any interest, any need for -- I know you have a line of credit. Are you looking for any additional equity in the form of raising some cash at this price for your balance sheet for faster growth?

No, we haven't been. I don't rule it out, but we don't have any plans to raise equity.

Okay, great. Very impressive report. It's nice to see a microcap that has a presentation that looks like a Harvard School of Business student would like to look at to see how a company's balance sheet and income statement should look. Thank you very much.

(Operator Instructions). [Jim Kennedy].

Congratulations on another good quarter.

Thank you.

Frank, a couple of questions. Number one: as I look at your product rollout for the balance of 2018 and going into 2019, are any of those -- or do you anticipate any of those being higher-margin products going forward, just because of the nature of the product? Or will they be demonstrating similar margins to what you have in the market today?

I think they will tend to be similar margins with -- and the one wildcard, which of course is going to take some time to develop, is the sensor service revenue. And honestly, we've been uncertain about exactly where to price that, and we -- so -- but I know that our costs will be low. So I think that there's some nice margin improvement that can happen from that. But, of course, it's going to take time for that service to (multiple speakers)

And that product, or that offering, would be a branded product or offering? It would not be a (multiple speakers)

Right, that'll be --

Okay.

The sensor will be a Motorola brand sensor. And the service will be something you can sign up for using the app that we'll provide with the product. And you'll get like a free month of service so that you can make sure you like the product. And then you'll pay the small -- fairly small monthly charge.

And are you anticipating that that app will work with virtually any carrier, whatever plan I might have? Or are you going to provide a specific plan?

We are going to provide a plan with one of the largest carriers. I'm not going to name them yet, but it's a very good one. Because we have to make sure service is good, even in areas where you would have a second home, which sometimes is pretty far out there. So we'll have a very good carrier, but what we are not doing is trying to tie it to your existing carrier. In other words, this is an independent thing that you just sign up through your app. And it doesn't -- if you -- if we provide carrier X, it's fine if you have a different carrier. It will still work (multiple speakers)

Okay. So in other words, if -- and these will be my carrier words, not yours -- but if I'm with Verizon and you are using a different carrier, how would I see the bill for that other carrier if I chose your service?

You'd see it on your credit card, and we'll just bill you. We will give you an option of either a monthly billing, or savings if you order like a year's worth of service, because that's still going to be fairly low cost. But it will just be on your credit card. It won't touch your normal Verizon bill.

Okay. So in other words, I'd go on, sign up, enter my credit card, and it's fairly seamless from there?

Exactly, exactly.

Okay. And then the last question, Frank, really revolves around the relationship with Motorola. I think the original was five years exclusivity, et cetera. How does that look going forward? Is that something that you continually talk to them about? How should we view that? Is there a definitive deadline? Or long before then, we'll hopefully get an extension? Obviously you are broadening the relationship each quarter.

Right. So, that group in Motorola is a small group, and we know all the key players. And they are very capable and very positive in terms of suggesting the partnering relationships. Just in the last week, a couple significant connections were made through them. So, it's a great relationship, and it is helped by the fact that we get such good customer reviews. Because as much that group does care about money -- and certainly they do, like I guess we all do -- but they care even more about the Motorola brand image. So they very much want us to protect that, which we absolutely do.

To get more specific, though, to your question, the official end of our existing agreement is the end of 2020. And we have had a discussion with Motorola in terms of extending that. And the advice that we got was that the right time to start talking about that is probably early in 2019. And certainly it's not true that it's just an automatic rollover or something like that, and certainly we're going to have to negotiate what the cost will be. So I can't tell you that it's an automatic thing. But on the other hand, I don't know that it could be any better in positioning than we have now because it's a very good relationship.

Got you. And then just one final one on the sensor side. When that comes to market, which hopefully will be later this year, are you seeing anything else out there that has the capability that you are anticipating this product having?

No. What you will find, if you go into Best Buy or go into Amazon, is that there are Wi-Fi sensors from several different companies. And those typically work through your router and your broadband modem. SimpliSafe has a nice offering of a whole security system where they work through their own cellular gateway, so that's a more expensive, nice system.

We're really not trying to compete with those entities. Our idea is that we want something that doesn't need to work with any other equipment in your home. You don't even have to have a broadband modem; a second home may not have one. And so the installation is easier, the equipment requirement is not there except for the sensor itself.

And so the setup is easier, and also it works even if you lose power. A very common thing to happen is that you lose power and then your house gets cold and then your pipes break, for instance, especially in cold climates. And we think we have a great solution for that. It's not trying to replace a big security system in a suburban home, for instance. But even in that home, we think it's good to have a nice, simple product that makes sure that -- if for instance, when you're away, if your whole security system goes down due to power issues, you've still got some monitoring of your home.

Right, okay. Well, thank you very much (multiple speakers)

In terms of cellular competitors, we haven't -- there is a cellular competitor that senses a couple of the things we sense. And I believe they are about $180 retail, and something like -- I believe it's at least $10 a month. (multiple speakers) So I think we have -- I'm very anxious to get this product shipping.

Any chance we see you on Shark Tank later this fall?

(laughter) No, I don't think so.

Okay. Congratulations again, Frank. Take care.

(Operator Instructions). [Matt Campbell].

Nice quarter. I was interested in learning a little bit more about the cellular opportunity with the cellular sensor. Like, who is going to be doing the advertising and the marketing of it? Will it be the carrier that will be supporting that, or are you going to have to spend the money on that?

Okay, well, the easy part of the answer is that at least a portion of the advertising will be the way we always do it. In other words, we'll try to place it with major retailers like Best Buy. We have a huge respect for Walmart. We will advertise it in Amazon. We will advertise it through Google AdWords. We'll sell it like our other retail products that we know a lot about.

We certainly hope to sell it to some carriers, but we're not experienced at doing that. I think that the Motorola brand certainly has traction with those carriers. And this is a unique product, so I think it has a chance, but I don't want to promise that we're going to deliver that. I think we'd love to succeed with that, but I can't guarantee you we will.

We are also looking at installers. We think that -- that's not really -- in that case, it's basically a personal word-of-mouth type of advertising. But we know that when somebody goes into a home to install electronic equipment or fix the plumbing or do some other task inside the home, that's a great opportunity to raise the issue of security and sell our products. So we definitely want to do that and want to go after that channel.

So the answer is, it's -- there will definitely be advertising like we've done before, and we hope to expand that advertising to some other areas.

Great. Thank you for that. And just regarding -- how many employees do you have now? And are you going to be able to handle the outlook, the growth that you're looking for this year with those employees? Or will you have to ramp up on the employee side?

We have 32 employees in Boston, and certainly we work through sales agents to help expand our effective size. And we also have a commitment to, but not an official -- they are not officially on our payroll -- about 32 people in Tijuana that they basically operate our distribution center where we bring in product; QC it; in some cases, modify firmware; store it and ship it.

To answer your question about expanding the number of people, I think we can do significant growth with about the same number of people. Certainly we want to expand the staff some, because there are things that we'd like to be doing that we just can't do with this size staff. But there's nothing planned that's a dramatic event as far as staff increases. But I think there will be some growth in staff over time as we grow.

Well, that's great. And my last question -- and I apologize; I'm new to this company -- but why can't -- and I'm not trying to -- I'm just curious. Amazon's selling your product and doing a hell of a job here in the United States. What's keeping Amazon from selling it internationally at this point?

It's a great question. And it's actually very -- we've actually pointed to that idea in some prior calls. We are selling some product in the UK. And the one difficult thing in the UK is that routers are not -- first of all, they don't have a retail cable modem market. So, by far, our biggest product category is a non-event there at retail, i.e., Amazon. And so then -- so now you have to look at what is only a small part of our Company's products. And unfortunately, routers are not real strong in the UK. Because, for instance, British Telecom ships to their customers a DSL gateway that has very strong Wi-Fi router capability. So we are selling product there; but, frankly, it's somewhat disappointing.

And if you then look to other Amazon channels, which definitely exist, in some cases -- again, you can go there, but you have the additional efforts of -- for instance, if you are going to go to Spain, you probably ought to have Spanish support in the product. We actually have Spanish-speaking support people as our second language. But you also want Spanish packaging and --. So it can all be done, but it all takes time. And it's happening, but it's going to take some time.

Great. Well, thank you very much for taking my questions. Congratulations (multiple speakers)

Okay, thank you.

William Velmer.

Yes, Frank, one more follow-up. I'm assuming most of the product is manufactured in China. And then as you mentioned, your distribution comes through Mexico. So we know that the current administration has interest in tariffs to make more fair trade. How will your products, the electronics products -- have you interpreted how you might be affected? Because obviously if your terrorist go up, sales might drop, or cost increases and profitability drops. Is that a potential pitfall here?

Certainly it is a potential, but I think it's unlikely. And let me tell you why. What I've seen is -- has been, in the electronics area, more discussion of not consumer products but other products that are sort of higher-end, non-consumer products. I think, for instance, when you talk consumer products, you start talking things like iPhones, and I think that's like politically poison to try to attack that area. So I can't to rule out a tariff on our products. I think it's unlikely.

The other thing is that our competitors build in China also, so they would have the same affect. But certainly it would increase costs. And certainly there'd be a short-term -- at least a short-term negative. I just think it's unlikely, but I wish I could tell you it's impossible.

In terms of Mexico, I think that, again, we don't really know. One thing to be aware of, though, is that most of the value add is not in Mexico. So I would certainly hope that if they put some duty relative to Mexico, it will be on the value add part, not the total. But I can't -- I'd be -- I'm absolutely not the expert on NAFTA negotiations and where those are going to end up. There certainly is a potential negative, but I think it's unlikely.

No, I think you're right where you talk about higher-priced products. They can't just start taxing and increasing tariffs on things that are $100 or $200. It's just -- defeats the whole purpose, too much paperwork. It's too much paperwork. Okay. Well, thank you very much, Frank.

And we have no further questions in queue at this time.

Well, thanks for the all the good questions. I really enjoyed those. And I appreciate everybody's attendance for the call, and I look forward to speaking with you in the future. Thanks a lot.

Ladies and gentlemen, this does conclude today's conference call. You may now disconnect.