Zoom
Q2
| Zoom
Q2
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| (FOOL
CONFERENCE
CALL SYNOPSIS)* By Dale Wettlaufer (MF Raleigh) Zoom Telephonics, Inc. Buffalo, N.Y., July 25, 1996 /FOOLWIRE/--- Zoom Telephonics, Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:ZOOM)") else Response.Write("(NASDAQ:ZOOM)") end if %> reported Q2 net income Wednesday of $0.04 per share on sales of $21.1 million. Year/year sales grew 23% for the quarter and 45% for the first six months of 1996. Sales for H1 1996 and 1996 were $54.4 million and $37.6 million, respectively. EPS for the quarter was down from $0.18 in Q2 1995. EPS for H1 1996 was down a penny to $0.36 from $0.37 for the first half of 1995.
The company is selling more products into the OEM channel, which represented 28% of sales in Q2, up from 11% in Q2 1995. International sales for the Zoom-brand grew to 22% of sales in Q2 1996, up from 11% in Q2 1995.
OEM sales grew to 28% of Zoom's sales in the second quarter of 1996, up from 11% in the second quarter of 1995. Zoom-brand sales outside North America grew to 22% of sales in the second quarter of 1996, up from 12% in the second quarter of 1995.
Gross margin declined to 17.7% in the second quarter of 1996 from 25.4% in the second quarter of 1995, reflecting an increase in lower-margin OEM sales and increased price competition. This also affected the first half of 1996, as gross margin dropped from 24.4% to 21.2%.
From the company's press release:
Operating expenses for the second quarter of 1996 rose to 16.2% of sales from 15.3% in the second quarter of 1995 as research and development expenses rose to 2.9% of sales from 2.2% and general and administrative expenses rose to 4.1% from 3.0%, primarily due to increases in staff to support growth. Sales and marketing expenses declined to 9.2% of sales from 10.0% of sales primarily due to the lower selling expenses associated with OEM sales.
The company's operating margin decreased to 1.4% of sales for the second quarter of 1996 from 10.0% in the second quarter of 1995, primarily due to the decline in gross margin.
"There is still strong demand for V.34 modems," said Frank Manning, Zoom's President. "However, price competition has caused our selling prices to come down faster than our cost of goods. We continue to reduce our costs to get our gross margins back in line. We are also introducing higher-margin products including our new Zoom/MultiLine family and our Zoom Business Products, which begin shipping in volume during the third quarter. In addition, in the third quarter we will begin shipping a number of new 33,600 bps models and our first modems with simultaneous voice and data capability. Our products continue to get strong reviews, with our Zoom/FaxModem PCMCIA V.34C selected as PC World's 'best buy' for 6 straight months, the same modem picked by PC Laptop as the 'best value', and our V.34 external modem chosen by Windows Magazine as one of the top 100 hardware products of the year."
Zoom's balance sheet strengthened during the second quarter. Zoom's current ratio improved from 2.2 to 10.0 during the quarter reflecting $11.6 million in net proceeds from a public offering in April and reductions in inventory, accounts receivable, and accounts payable. The company ended the quarter with $11.1 million in cash, an unused $10 million bank line of credit, and shareholders' equity of $6.51 per share.
Zoom also announced that its Board of Directors has authorized the Company's repurchase of up to $7 million in Zoom stock. Such purchases may be made from time to time in the open market or in private transactions, depending on market and business conditions.
Further Comments from the Conference Call
The company is trying to get costs and gross margin back in line while it is set to introduce a record number of products in Q3.
US Robotics did have significant price cuts in the last quarter, which prompted Zoom to match those. To some extent, US Robotics felt pressure outside the retail area from Motorola. Motorola did attribute part of its earnings weakness to modems. There are signs that come companies are losing money and do have excess inventory, which may weaken prices further. Going forward, Zoom thinks that the rate of decline in prices may slow. There has been a lot of pressure to get V. 34 modems to the $99 price range. Once that price is reached, it is hoped that the rate of price decline slows.
Zoom is about to shift the bulk of its high-volume products in N. America to 33.6 kbps. Clearing the shelves of 28.8 products caused some pricing pressure. Average selling price on these products has declined 25% from the Q1 average to the end of the first month of Q3.
Price protection reserves on inventory increased 50%, on the basis of entry compared to exit from the quarter. Significant credits were issued during the quarter. All of this added up to about $0.12 per share for the quarter. The company has seen a pick up in business over the last week or two but cannot forecast a trend. June and early July were sluggish. The balance sheet has never been better, which was a comment made in response to a question of share buybacks.
The company is already quite efficient on the labor and overhead side of gross margin; historically, component costs have accounted for gross margin efficiencies. In the early stages of a product's life, gross margins are lower as software content is paid for. There seems to be ready availability of chips right now. This means better pricing on the component side but indicates less-tight production restraints and lower prices in the channel.
The company is looking to add more value to products and is anticipating videoconferencing demand to drive the need for high-speed modems with better pricing.
Manning sees some parallels between Intel's experience with the modem business and Motorola's. There is little value-added in Motorola's modems, being that there is little MOT content in them. Manning sees more value in Zoom's modems and also sees excess inventory at MOT, which could cause pricing pressures if they begin to unload that inventory in an exit from that business. "Hayes almost never comes up around the offices of Zoom." There's much more competitive pressure coming from other companies.
US Robotics' modems have maintained good shelf-space and only seem to gain when they have new products. Motorola has increased shelf-space, pushing Zoom into the number three shelf-space position by a small margin. Motorola may have planned a money-losing strategy while Zoom has made some small space gains recently. Marginal players may have fallen off the shelf. Zoom is gaining share in OEMs as Boca may have.
Zoom buys silicon exclusive from Rockwell, which might have lost market share last year, due to capacity constraints, to US Robotics. Manning believes, though, that Rockwell is coming out with some "wonderful" technologies. * A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. | |
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