Frank Manning - President and Chief Executive Officer

Good afternoon. My name is Hani and I will be your conference operator today. At this time, I would like to welcome everyone to the Zoom Second Quarter 2018 Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remark, there will be a question and answer session [Operator Instructions] Thank you. I would like to turn the call over to Mr. Frank Manning, President and CEO of Zoom Telephonics. Mr. Manning, you may begin your conference.

Thank you and welcome to the Zoom Telephonics conference call for the 2018 second quarter. Today we'll discuss our profitable quarter, recent product introductions, and an exciting pipeline of new products. I'll be referring to a slideshow presentation. This presentation is available on our website’s Investor Relations section, with a specific address of www.zoomtel.com/SQ218. Please read slide 2 when you have time. Our slides and my comments are subject to errors, uncertainties, and risks as detailed in this slide and in our filings with the SEC. Slide 3 provides some financial highlights, comparing Q2 '18 to Q2 '17. Revenues were up 10.2% to $7.5 million. Gross margins improved from 32.1% to 36.3%, primarily due to higher sales through Amazon, where we sell direct and enjoy a higher margin than we do in brick and mortar stores. Operating expenses as a percentage of sales were basically flat. We reported net income of $47 thousand for Q2 '18, compared to a loss of $269 thousand in Q2'17. Now let's go to slide 4. We made a lot of product development progress in the quarter, but year over year sales growth slowed to 10%. The two main reasons for this slower growth rate were specific issues with Amazon and lower sales at Walmart. Our Amazon sales in Q2 '18 were up 56% over Q2 '17, but growth was hurt by buy box issues. First let me explain what the buy-box is. When we have the buy box for a product, that means that Amazon pushes customers toward buying from us rather than from other retailers of the product. Without the buy box for a product, Amazon ads for the product don't run. Our average buy box percentage in Q1 '18 was 94%, but in Q2 '18 it dropped to 84%. This impacted some…

[Operator Instructions] Your question comes from the line of Matt Camdo. Mr. Matt Camdo, your line is now open.

I was wondering if you could just expand upon the Amazon issue. You said you are talking about the buybacks situation going from 94% to 84% Q2 and that impacted you $700,000 to $1 million. Is that correct?

Yes.

And so could you just expand upon your next comment because you said you were pleased with the progress at Amazon. Have you figured out, rectified that situation or could you just expand upon that?

Well there are always Amazon issues and I can talk about some of the kinds of issues but we actually have a team of people who watch for those and try to fix them. But Q2 was unusually tough in that regard and I think the number one biggest problem was that we found that there were some very little retailers that we buy product and just undercut our normal price and then Amazon will give them the buybacks even if they OEM three units in stock or whatever. So we had depending on the day of the quarter, we typically had two or three of our top products savaged by that kind of really disappointing stuff which is first Amazon and us but that’s the way their mechanism works. We’ve also had specific mistakes where they have a concept called the hand eye cohort [ph] or anyone of the large group of people at Amazon can basically stop the shipment if they think there is an issue and in one case, we had a very significant product with [indiscernible] pulled by somebody that he completely did it erroneously. So it actually takes a fair amount of time to get that solved and we learnt some things through that experience and I think next time we will be able to be fix it faster but there is no way I could – anybody could ever say, there won’t be any more issues. That would be an impossible statement. But normally we are very good at dealing with the issues that we think we understand the ones we had and we think we are reducing the chance of those happening again. So I think, it’s unlikely that it will be as bad as it was in Q2 going forward. Why are we still optimistic about Amazon? Because we still grew our sales dramatically in the last year and there is still wonderful way to sell product and we are – the people that go to Amazon see that we have a great products, well priced and very well reviewed. So I think the general picture at Amazon is good but this is very encouraging when you lose significant sales really for fairly crazy reasons but that’s the way it is.

Well, I appreciate the explanation there. Thank you. And then if you could just comment upon the lower sales at Walmart as well. Were you seeing some rationality from competition? Can you explain upon that too?

Well, basically Wal-mart is in the process of transitioning to a – one of our products to a faster version and best disruptive and so I think that was the main thing, but if I look at the – my account by account that was our worst comparable in terms of reduction of sales. And you know that can also depend on things like whether you are selling in new product or taking back a product that you are phasing out or whatever. So I don’t want to get into all that detail but I – but the basic picture is that, that was our – that’s why our second biggest issue in the quarter from a sales point of view.

Well it sounds like some of these issues are now behind you and you’ve learnt things from it and like you pointed out, you got a lot of new products that are coming online, so you are not relying on one or two products now. So that’s a big positive and with regard to the cellular sensor opportunity, I think you said in your remarks that you are going to be rolling this out in October. Is that correct?

I think so and people that follow the company closely know that it has slipped over time and but I can tell you that a number of us have been using their own sensor, their own multi-sensor for some months and it works well. There definitely are some fairly easy firmware improvements we are putting in and also some smartphone app improvements we are putting in and I think – if feel fairly certain that we will be shipping in October. I wouldn’t want to term down a 100% but I think it’s probably over 80%. It’s a – we feel so good about it, we actually have brought the parts to for their first run and actually can do the run at the end of this month but we probably won’t do it till we absolutely finalize the firmware. We’ve done lot of testing of it. Generally it’s very good. But we fell like this product has really got to be very good when it comes out and we are doing everything in our power to make sure that that’s what the case.

Yes, it sounds very exciting and I guess just to expand upon that. Last call from my recollection, you talked about not knowing really what you would be selling the product for but in the deck here you are talking about targeting $100 price point with $10 per month service fees. So is there –

That’s correct. Can I just interrupt one second? Actually what we say is $100 with service under $10 per month and so I – the word under is important in that case. So I will just say that it will be between $5 and $10 a month with a – like a 99% certainty.

That’s fantastic. Thank you for the clarity. Is there – are there partners that you are currently working with or you’re still trying to develop the right line of partners?

When you say partners, what type of partner?

Go to market. How are you going to go to market on this product?

Sure that’s a good question. Well and not surprisingly one of the key channels will be retail which is our strength and so there is more and more sales activity and interest in sensors and related products and so definitely retail is the focus. We are not as good at some of the other markets we like to reach like an example would be people that, one example would be plumbers, another example would be contractors who do home improvements. Those are – we know those are good ways to solve those kind of product. On the other hand, we are less good at making that kind of sales. So we are starting to reach out in those directions and we will be at a show in Los Angeles in Mobile World Congress. It’s a mouthful, Mobile World Congress in September and we have some good context that we will see there but we also hope to meet some new people and think of course some new markets.

Thank you very much. It sounds like things are starting to really – go in the right direction and it’s certainly nice to see you profitable at this level.

Okay, thank you very much. Nice talking to you.

[Operator Instructions] There are no further questions at this time. Mr. Manning, you may continue.

Okay, thank you. Thanks to all of you for your interest. We look forward to speaking again with you following the issuance of our third quarter results. Thanks again. Bye.

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