Zoom Technologies' Management Discusses Q1 2013 Results - Earnings Call Transcript

May.20.13 | About: Zoom Technologies, (ZOOM)

Zoom Technologies, Inc. (NASDAQ:ZOOM)

Q1 2013 Earnings Call

May 20, 2013 06:00 pm ET

Executives

Patrick Wong – Vice President-Corporate Finance

Anthony K. Chan – Chief Financial Officer & Director

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Q1 2013 Conference Call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. (Operator Instructions) I must advice you that this conference is being recorded today, Tuesday the 21st of May 2013.

Now I’d like to hand the conference over to your speaker today, Mr. Patrick Wong, Vice President of Corporate Finance. Thank you, please go ahead.

Patrick Wong

Thank you operator. Thank you for joining Zoom Technologies for its first quarter 2013 earnings conference call. My name is Patrick Wong, Vice President of Finance. Welcome back everybody. We will recap our results of operations for the first quarter of 2013 and our financial position at March 31, 2012. Afterwards, I will briefly talk about our current initiative and then we will open up the call for questions.

Before we begin, we must make a disclaimer regarding forward-looking statements. During this call, management of Zoom Technologies may make forward-looking statements within the meaning of Section 27A of the U.S. Securities Act of 1933, as amended and Section 21E of the U.S. Securities Exchange Act of 1934 as amended.

Such forward-looking statements involve known and unknown risks and uncertainties and other factors, which may cause the actual performance, financial condition or results of operations of the company to be materially different from any future performance, financial condition or results of operations implied by such forward-looking statements.

Further information regarding these risks, uncertainties and other factors is included in the company’s most recent annual report on Form 10-K and in the company’s other filings filed with the U.S. Securities and Exchange Commission.

As expected, the results of the first quarter of 2013 were weak. Let me now provide you with financial highlights for the first quarter of 2013. Full details of the financials can be found in the 10-Q filed with the SEC on Monday May 20, 2013. For the first quarter of 2013, we reported net revenue from continuing operations of $7.4 million, down 54.29% from $16.1 million for the first quarter of 2012. We attribute the decline in revenues in the first quarter to a slow economy and then undergoing mix of products on ourselves in Q1.

2 million of our sales revenue was attributable to handset and accessory sales and the remaining balance of 5.3 million was attributable to activations and residual commission income. Gross profit for the first quarter of 2013 was $1.5 million, down 46.4% from $2.7 million of the same period a year ago. Gross margin for the first quarter of 2013 was up 2.9% from 17.1% to 20.0% based on a mix of products and services.

Our total operating expenses from continuing operations for the first quarter of 2013 were $2.3 million compared to $2.9 million for the same period in 2012. The three month operating expenses for 2013 were comprised of SG&A of $2.1 million and non-cash stock compensation expense of $0.2 million compared to $2.5 million and $0.5 million for 2012 respectively. The decrease in operating expenses in the first quarter of 2013 was a result of the restructuring of the company including general reduction inflows.

For the first quarter of 2013 loss from operations was $0.8 million, an increase of $0.6 from $0.2 million for the first quarter of 2012. We also had a $0.3 million loss from discontinued operations as compared to a profit of $1.1 million on discontinued operations for the same period in 2012. The sale of TCB Digital, our old manufacturing company in Tianjin is still pending. The sale of Ever Elite and Nollec Wireless, our old R&D business in Beijing closed on April 5th, 2013.

Our net loss for the quarter of 2013 was $1.5 million, an increase from net loss of $0.5 million for the first quarter of last year. We’re working diligently to ramp up the restructuring of our business as soon as possible and such efforts should be completed in the second quarter of 2013. We believe the losses we have incurred recently are one-time in nature and we do not expect such losses to be recurring.

In a review of our financial position at the balance sheet date, March 31, 2013, we had cash and equivalents of $204,000 and restricted cash of $19.1 million as compared to cash and equivalents of $430,000 and $19.0 million restricted cash at December 31, 2012. The restricted cash is money held in escrow that will be fully released upon the completion of the sale of all the entities to Beijing Zhumu under the securities purchase agreement. Net equity net of non-controlling interest was $51.1 million at March 31, 2013 as compared to $52.1 million at the end of 2012.

Total assets were approximately $265.1 million at the end of first quarter 2013, as compared to approximately $235.7 million at the end of 2012. There were $176.0 million of assets that are held for sale as part of discontinued operations. There was also $169.8 million of liabilities of these discontinued operations. Upon completion of the sale of these certain operating units, both the assets and corresponding liabilities are expected to come off our balance sheet.

A quote from Mr. Lei Gu, Chairman and CEO of ZOOM issued the following mandate to his management team. We need to work quickly to complete the sale of our assets, improve the results of our existing continuing operations, and invest in opportunities where we can add value to our acquisition targets. We must drive profits to our bottom line. With that said our efforts these past several months has been to complete the sale of our old assets, improve the business of our existing assets and perform due-diligence on the acquisition of new assets.

We also point out that we expect top-line revenues to pick up in Q2 of 2013. We have new products and services being rolled out. On a note iPhones are now being sold in our stores, also new voice and data phones are being introduced to the market. We believe the bottom is behind us and we should be a (inaudible).

Operator that concludes our presentation and we will now take questions.

Question-and-Answer Session

Operator

Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions) And the first question comes from the line of [Thomas]. Please ask your question.

Unidentified Analyst

Hi I guess to ask several questions. First of all I wanted to clear up a question I had regarding the ownership of Spreadtrum, it actually has to do with your partners, what they’ve done with the equity that I’m hoping maybe you can shed some light. Spreadtrum claims are to own 10% of SpreadZoom and there is another entity called Tianjin. But the Spreadtrum indicates that as of December 2012 they transferred 100% of the equity interest in (inaudible) VVI to the third party. I was wondering if you could shed some light if you know who this third-party is because they seem to be the second largest holder in Spreadtrum…

Patrick Wong

We are not too clear on who they have transferred their ownership with. It sounds like you’ve got that from Spreadtrum’s filings. We unfortunately cannot really comment on their filings, I wish we could that as far as we’re concerned their ownership and they have divested it completely under their control. We still work with Spreadtrum as our business partner in terms of the chipsets and the engineering, however, how they control their ownership is not under our supervision.

Unidentified Analyst

Okay. And they did the change with a consulting you or without you now basically?

Patrick Wong

Well certainly it doesn’t. Certainly, they’re going to my authority to allow them to change.

Unidentified Analyst

I understand. Okay I was just wondering if you could give an update on AFT listing, what the dollar share price and stuff like that if there is not any movement or thoughts on that.

Anthony K. Chan

This is Anthony Chan. I believe I am – can you folks hear me?

Patrick Wong

Yeah, we can hear you Anthony.

Anthony K. Chan

Okay, yeah this is Anthony Chan, Chief Financial Officer of Zoom Technologies. As a matter of fact I have correspondence with NASDAQ. The first 160 day period to regain compliance regarding that $1 bid price is expiring on May the 28th. But it seems like that we are in compliance with all other criteria for continued listing and also for initial listing expect for the $1 bid price then we will be granted a second 180 day period to regain compliance. So I’m in the process of submitting a letter to request for that by or to May the 28th and it looks like we can expect NASDAQ to gives us a second 180 day term to regain the compliance and that will bring us into November, it probably the third week of November 2013.

Unidentified Analyst

Okay, good. And I was wondering I notice that Portables stick out to $2.5 million for your loan during the period. And I was wondering if you had any knowledge of what the funds were used for?

Anthony K. Chan

Actually, Zoom and Portables both signed on this loan from the MNC bank and this $2.5 million was to replace a higher interest rate loan that was filed from a private party. So we replaced I don’t have the exact interest rate differences in front of me, but it was substantial, it will substantially reduce from a third-part private loan to this much more affordable loan from the MNC.

Unidentified Analyst

Okay, the new one is LIBOR plus 3.5 can give us. I was wondering since I were like six weeks or long into the quarter or any comment on how Portables is doing in this current quarter?

Patrick Wong

Yes, I would like to give some light on that. During the first quarter, I’m not putting, assigning any real particular reason for the downturn, but the identifiable one is that we have a sluggish economy, coming out of Christmas shopping season, so the first quarter is naturally a little bit slower, but it was quite a bit slower than the same period last year. And some of that is due to two reasons. One the long waited for iPhone into the T-Mobile stores did not [making this] until April. So we would miss that – the iPhone miss the whole first quarter of 2013. And also T-Mobile was in the process of completing their virtue with (inaudible) which is now final and it’s completed.

And as of the end of the first quarter, T-Mobile has been very impressive in putting up the new pricing programs on the voice, data and text programs. You would probably have seen them on television. With that said we would believe that the worse is truly behind us. We believe that T-Mobile business is on an upswing. And as you know the subscription base of cellular users in the United States is basically flat and stable. The only reason one carrier can grow is that they take subscribers away from the other one. And it looks like that this Pro-Smart program of that T-Mobile that they have in pretty aggressive advertising in all sorts of media is picking foothold rather nicely. So we’re expecting Q2 of Portable business to come back to normal level.

Unidentified Analyst

Okay. Is this a better goal you mentioned that TCB Digital? Was that still pending as of the statement date or is it still pending as of today’s date, closing of that?

Patrick Wong

As of today, it is still pending.

Unidentified Analyst

As of today...

Patrick Wong

We expect to get it closed, between now and June 30, we expect to get it closed.

Unidentified Analyst

Okay.

Anthony K. Chan

Just to give a little bit more color on why the delay because TCB is partially owned by a large state-owned enterprise what we call an SOE in China and because of that component the records are expect that we have to go through is just multiples of TCB it’s not partially owned by an SOE. The process is something that we are taking care of maybe nicely and manage the process well. I don’t see any barriers that we cannot overcome but it is just rather a long market.

Unidentified Analyst

Okay. And finally I just wanted to ask a question because I go through the website and I try to ask investor questions through the contact on the website and I never get a reply. Is that website email monitored? Is am I using the wrong link? Or how does one get a reply to questions?

Anthony K. Chan

Actually, we have been replying to inquires that have gone to the contact person on the website when Lynn gets it, she either answer herself or if you need additional information from Patrick and myself then she would forward those over to us. So we have been answering shareholders meetings based on that connectivity. So if you don’t mind shooting it over one more time and I will make sure that Lynn is aware of that and then Patrick and I will take a step…

Unidentified Analyst

We’re actually [recovering]. Here my question was about the ownership on SpreadZoom.

Anthony K. Chan

Okay.

Unidentified Analyst

I was asking for a clarification and I never heard back on that. So, okay, I will try it again in the future but I don’t have one right now that’s my last question.

Patrick Wong

Thank you.

Operator

And the next question comes from the line of [Frank Melling]. Please ask your question.

Unidentified Analyst

Yes, thank you. I’ve a few questions. The first one, can you say that the SpreadZoom quote owns and operates mobile phone manufacturing facilities in Tianjin. Where are those facilities? Is that the new building? Or is that the old TCB facility? Or is that somewhere else?

Anthony K. Chan

Frank, this is Anthony. It is still operating within the old facility and from other correspondences that we had I actually owe you another answer. You said you read that there was related party transaction that was reported on Spectrum Technologies financials that we didn’t listed as a related party transaction on ours. And first of all the reason that it’s not listed on ours is because we do not consolidate Spectrum as SpreadZoom’s financial into ours. We do not have ownership control and we do not have look board and a financial control. So the financials of SpreadZoom is not consolidated into ours and thereby that that transactions is not listed on ours. And you said you need a clarification on that transaction of why there was I believe about 4.0 something million RMB fee that was paid and actually it was documented by contract between the two parties for licensing and engineering costs. I believe Patrick do you have additional information on that?

Patrick Wong

Well, it’s basically like Anthony just said it’s like a licensing and certification basically. I talk to be finance and engineering team actually just recently to get the bottom. So that’s exactly what, they actually send me the contracts. Unfortunately, they’re all in Chinese. So I don’t think we do a lot good to put out there, but they it’s just like if you were to get certified a little I am just doing this out there you get Cisco certified or whatever it’s similar to that. You have to pay licensing and certification fees, so that’s what it is.

Unidentified Analyst

Okay, thank you. That’s helpful. I have just a few more questions. The Q says that Tianjin Leimone which is controlled by CEO, Lei Gu, sales raw materials to the “company.” And I am wondering which company is that at this point given that we no longer own the main phone manufacturing company?

Patrick Wong

There is still products and it still helps SpreadZoom to do sorts of things. Yeah like Anthony just says we don’t control SpreadZoom but obviously it is a piece of our financials. Keep in mind that also that up untill you know at this momentum TCB is not can fully disposed of yet. There is still working business relationship between TCB Digital and Tianjin Leimone. So we are making efforts to “advertise” but it’s evolving and it’s not an overnight process.

Unidentified Analyst

Do you have any new insight into when that $11 million will be paid back?

Patrick Wong

I don’t have an exact date of older receivables in enterprise, we’re working diligently to one is obviously to finish the sale and then chase those monies down because frankly we need to get that money back in our hands and deploy it and use it for acquisition in North America.

So there we don’t have a definitive date of – when all that money will be back in our hands but we are certainly making our efforts to do that. I will make another example for a different item. The company use to own Profit Harvest and we no longer own that.

There is some receivables owed from Profit Harvest to the company and we’ll see that actually Profit Harvest has been paying some of that back as well. There are not small amount, so it takes some time to get the money back, but we are chasing down that money. So it’s managed in debt just care about all available working capital to be used in the most – in the highest level of return for our shareholders.

Unidentified Analyst

There is an advance of $9 million to SpreadZoom to purchase components. And so I guess my guess is that the balance sheet could be good at some of these giant amounts that are due from related parties, we get paid back but (inaudible) very much clarity as to when that might happen?

Anthony K. Chan

Yeah Frank we actually had a discussion just this morning with our auditors that these related party receivables, we listen separately rather than Langtong into the discontinued operation even thought they (inaudible) parties that are no longer or in a purchase of being sold off from the umbrella of Zoom. We want to make sure that these are not going to pull away with the discontinued operation that’s why it is listed on our balance sheet as assets that is due to us. So whether that discontinued operations are sold off eventually these payables, these due from related parties receivables for us are still going to be there and you can rest assure that we’re going to be keenly going after these to make sure that these are payback compliance.

Unidentified Analyst

That’s correct. That’s good to hear.

Anthony K. Chan

What are the reasons why that money (inaudible) was actually TCB and SpreadZoom is doing tremendous volume servicing the Southeast Asian customers? First of all I apologize for being a little bit noisy in the background, I am at an airport. We need to board a plane in about two hours on another due diligence – with one of the decision targets negotiations bank and ongoing. But going back to these related party transactions, we want to make sure that when the discontinued operations are completely eliminated from us that that will be the time that we want to have these related party receivables paid back to us.

It is crucial for us, so that we can move forward with this cash that is meant for our acquisitions but at the same time since these guys that we’ll be dealing with for a very long time, they’re still very near to us even thought that we’re selling off these properties because we foresee the necessity of engaging them to do contracted business for us in the future. SpreadZoom right now together with the CD efforts they’re selling more than 1.1 million units per month on a monthly basis to India, Vietnam, Indonesia and the Philippines.

So these very high volume of manufacturing causes some churn of capital and we have somebody in our sales and since these are related party that they are very trustworthy entities that we don’t mind lending this money out for them to turn, so that they are able to sell these large orders from these south East Asian customers. But sure that we’re going to be keeping a very keen eye on this and we need this money to pay back loss.

Unidentified Analyst

Thank you. That’s very helpful, I just have one last question. When you really brought up sort of perfectly SpreadZoom and what I know is does that there is only 1% of gross margin and the huge volume that you just referred to and it’s interesting because I believe that everyone of those 1.4 million units is using straight from chipset so obviously it least appears to be highly valuable for spectrum that’s not at all obvious to me it is valuable to us and I am just wondering what the chances are that that this will go from just signed volume generator to an actual profitable operation.

Anthony K. Chan

I was in – with the operations team, a couple of weeks ago and you know frankly speaking the first quarter wasn’t great even though there was a lot of volume that they were just, there was excitement on floor, they are just saying that new order are picking up and as always as you expected bank financing is important so that was that condition in China is improving but this was in April. So it is a lot about how fast is working capital in that OEM business. So…

[Multiple Speakers]

Unidentified Analyst

To me it obviously if you could get it to up even 2% gross margin – that margin. So I’m just wondering what prospects are there to actually make money?

Anthony K. Chan

I think it’s getting better, to be honest it did well in great Q1 but at least I could say that there is excitement on the floor and I think it’s agent on the sales teams and the new purchasing and operations teams are I said those are – when I drove to office it looked like a trading floor of stock security. So that kind of business activity I think it’s a very positive thing and of course everybody is trying to build margins but frankly speaking margins were not good and it’s been tough but this thing was continued with new efforts, they picked up some new customers over there. I don’t know all the names, I think I want to say that they are shipping into more in the Philippines as well as may be in Russia I don’t call them – I need to chat with them.

Patrick Wong

Let me tell you how I personally feel about this low end business. Okay, the volume is huge, the profit margins will be for ever compressed, okay because you have to find out a slew of other manufacturers from left deal and right deal. Okay, and how I feel about this is that the benefit the company is getting is that the TCB and these guys that we’ve been working with all these years were gaining leverage in terms of being a buyer or components imagine we’re actually buying 1.4 million pieces of batteries on a monthly basis that puts us on really good term with a battery supplier and so forth and so forth with the other component vendors, what that does do for a public company that is listed in the United States not a whole lot if we forever keep making these low end products with one or two or maybe 3% margins, I don’t think we’ll get any respect and so I do believe that the Board of Directors and Chairman Gu have made a very sound decision to sell off these assets, but keeping these relationships and use the cash from the sale of these assets to redeploy them and to get into businesses that are more meaningful for the combined companies.

Anthony K. Chan

I think that’s a prudent strategy because we’re making 14 million, 16 million units of these low end phones to Southeast Asia even if we get them up to 25 million units, I think the respect level that we get from the public market is going to be the same. Okay, because these are lower end products $18 phones, $22 phones. Okay. So I think if we sell these assets, take the cash and redeploy them and put them into a more meaningful products where there is better hope for margin expansion, I think that would be a prudent strategy for the company.

Unidentified Analyst

Okay, that make sense. But I’m sorry just have one follow-up question. I can tell who you’re talking about although I know you are selling, TCB Digital but you’re trying almost 50% at SpreadZoom and they are the one that if I heard it correctly you have 1% margin in it. I’m not aware that you’re selling that? So I’m just that’s what I’m asking about the SpreadZoom going to – it seems like a vehicle for Spreadtrum and my question is really that would be a positive vehicle for the shareholders at Zoom Technologies?

Anthony K. Chan

I give this is more of a matter that’s Spreadtrum should address and I don’t want to say things on their behalf and the chipsets that Spreadtrum technologies is famous for so far the non-3G type chipset. Okay they’re beginning to rollout 3G chipsets. First of all one can argue that Southeast Asian markets are still relying on the 2.5G or some 3G chipsets that we can see for the near future, the near future being the next 6 to 12 months.

How is that going to change? It’s a tough guess. It’s rough guesstimate. As we all know that the mobile technology just changes on the time. As of right now Spreadtrum is still enjoying very much. So being able to supply into the Southeast Asian countries will they stop 3G chipsets, how long is that going to last or is there going to have to be an above phase or is it going to be chipsets that spectrum will not have on the shelves and we may have to go elsewhere, that perhaps is a separate discussion and I see that it is not appropriate for us to discuss it here.

Unidentified Analyst

Okay, thanks very much.

Anthony K. Chan

Thank you, Frank.

Operator

(Operator Instructions) And the next question comes from the line of [Michael Hunt]. Please ask your question.

Unidentified Analyst

Yes, gentlemen, good afternoon.

Anthony K. Chan

Hi

Unidentified Analyst

Follow-on question to I believe it was Frank that was asking about the balances due from Profit Harvest, can you just show in some more color on that, and what likelihood the company had actually collecting on those money?

Anthony K. Chan

Well, Profit Harvest, that was the one I thought of, actually let me just explain something very simply, Profit Harvest you see a subsidiary of them not actually within business between current subsidies, you’re going to have some inter company transactions, and balances in the normal course of business just for example Zoom maybe paid for something on behalf of Profit Harvest.

So Profit Harvest owes Zoom Money, but because we sold Profit Harvest it’s no longer part of them and it’s no longer they deploy either, under the circumstances, Profit Harvest owes money to Zoom, actually what I said earlier and in our filings is about Profit Harvest actually has been paying Zoom back do I know what they need it will be completely paid off, I don’t think that is giving answer to that right now but part of that obviously you will see the balance open part of that it actually reduced over the first – from 12/31 to 3/31 there has been a reduction of the balance of by our Profit Harvest.

So we continued to how to chase that money and reduce that bill of balance and make sure that the money owe to us is returned to us and we use it for purposes that are best benefit of reserve.

Unidentified Analyst

Okay very good and with regard to these related party transactions some of these balances have you discussed are rather significant the Zoom hold any security for those balances or they unsecured or maybe you can try some color on that?

Patrick Wong

I believe if you look on our filings they did, securities let’s say not it is unsecured I mean ultimately the related party balances are material that we need to get back are the one that I just mentioned Profit Harvest – searching their loan. It believes certainly security on that because while we don’t consolidate them, we still own a significant percentage of ownership and obviously we do is under Board of Directors.

So we do have a control in that respect generally being a individual party but also has been a highly controlled by Chairman Gu to do certainly in many respects allow – underwritten order, on the legal, I think legal is not the word, but there is a level of security that we know that we can get that money back.

And frankly speaking we disclosed it. And we put it and we are very much to the fact that making sure that we get it back. So we have tried to, we didn’t included as continued operations, and we didn’t tried a write-off, because stability we believe that their money is due to access and we need to get it back. And as Anthony said that’s orders brought us and we getting a very clear explanation that’s why we separately disclosed and shared that we expect that money come back to us.

Yeah, keep in mind that in many respects even though money is urging Tianjin Leimone, to Zoom Technologies, SpreadZoom still has a very tight working relationship with Tianjin Leimone as well. So in that regard while not directly through indirect aspects we think that we can we have a pretty strong hold to get that money back as well because there is a ongoing business relationship between SpreadZoom and Tianjin Leimone. So I hope that sheds some light on that relationship and the recoverability of those receivables.

Unidentified Analyst

Okay, thank you. Anthony I have a follow on question for you about margins and the reduced margins and so forth with that being a driver for the Board to decide that it would be in our best interest to sell off the assets of the company, but this sounds a lot like when the company moved out of the EMS business and into the own phone business. We’re going into own phones because the margins are better and it kind of seems like we’ve heard this before. So what else can you say to us that we’re reassurance you folks have made the best decision for our interests and was there ever any decision about perhaps bringing this forward through the shareholders and maybe asking the shareholders for their opinion on what direction they would like to see their company go?

Anthony K. Chan

Well, first of all these mobile phone business is tremendously competitive. It is not easy just to stay alive; I mean that’s the (inaudible). EMS is how a company like ZOOM and there were many similar situation, they started off many doing EMS for other people. Then going into own brand, ODM, it’s a natural progression. You can at least theoretically you can add more value to it, you can have design costs, you can have – if you able to build a brand perhaps you can license the brand noise.

The easier step and (inaudible) we had all the wishes to make the ODM business more profitable and more respectable than EMS business. But however, we were top of realistic lesson going into these markets in Southeast Asia where the marketplace is tremendously competitive, I will sits at only (inaudible) mall, seven story mall in the Philippines that’s help 90% telephones, there is got to be I would imagine no less than 100 brands of phone that are selling less than $50 per piece. It is an extremely competitive and commodity market that if we compete in that space, I think the margins there will for ever be very low single digit.

If we want to move up in the ranks getting into the smartphones or the mid phones like our (inaudible) handsets then there is room for the margins to increase but as you move up the ladder in terms of the suggested retail price then your volume comes down.

But it becomes a balancing act of how you are going to balance your manufacturing keeps the labor forces hired but at the same time generate profits for the company while competing in the ever changing environment of cell phones.

So it is like I said I’m not saying that this is an excuse but in theory ODM is probably that OEM because you can sell in those things that you can make profits on. But the realistic picture of a Southeast Asian markets for hardware is – competitive. So I think the (inaudible) to our strategy that we are moving away from being a manufacturer that service the lowest end market in Southeast Asia that we rather redeploy the cash and look for better opportunities in the United States is the right direction to go. Obviously we cannot guarantee that we will find results of acquisitions that will give us a combined, putting a picture on our bottom line, but obviously that’s the bow that we’re seeking. Then the question is, how can we do it and when can we do it?

Patrick Wong

To add to Anthony’s point is that, frankly speaking we’ve creating with (inaudible) a lot of your own R&D and building a brand and trying to go off market with mobile products. There to be honest there is a one mega challenge is that there is a significant cash burn at the R&D level and we all know that and that’s indicative of that the risk in front of it.

But ZOOM in the recent path had reserves, but not Apple or Samsung type of reserves to throw infinite amounts of cash at R&D to turnout these high margin 20%, 30% gross margin type products. So that was one of the challenges and we’re going to say lessons learned. And…

Anthony K. Chan

Let me share another story with you. When we announced that we have cash that we want to deploy it, we’re actually being approached by investment banker types from all sorts of industries, okay, even including the entertainment industry. There were properties of the entertainment industries that they need a better distribution in Asia and they approached us, these are the Hollywood type of entertainment projects that assets we maybe interested in.

Well, so leaving those stones unturned, we look into them as well and then the whoever brought these opportunities to us by telling us that hey you got to be careful, this is highly risky business. I said really if you think the entertainment business is a highly risky business, you haven’t touched telecom yet. So the story there is to add there are a much larger companies much more well know than Zoom Technologies in the telecom space that are struggling to stay alive. I don’t want to name any names there; I think we all know who they are.

With the difference of a few handful of brands that are enjoying very good business in worldwide, everybody else is have to make sure that whatever products that you have lined up for the market coming out of the gate going to be a winner and that is just not so across the board with the exception of Samsung and Apple and they’re able to hit with pretty good products, but I challenge anybody to show me that other brands are able to successfully improve their margins on models beyond models coming out of the product line.

So it is hardware and manufacturing in the Telecom space, it’s a tremendously risky endeavor. So going back to what we said that we want to sell up our manufacturing on but however the relationships are still there, it’s indeed we’ll get into a situation in North America and Europe that can use manufacturing that we can always go back to the same guys that we will be working with for years and contact them to do the same work.

But for us to be responsible for the CapEx for holding the inventory to have the vision to deliver the right product in to the market space in a highly competitive markets like cellphone, it’s probably something that we can sleep at a night if we’re moving away from that and going into like a distribution type of business in the United States and Europe.

Unidentified Analyst

Okay, thank you. Moving on to Portables, I’m having a hard time reconciling the company’s results with T-Mobile’s results for the first quarter, really it seems to me like T-Mobile is pretty satisfied with their performance and I know that they have launched a new initiative as far as being the un-carrier, so hopefully Portables will see some of that trickle down. But moving forward, how closely do you think we can align Portables performance with T-Mobile’s performance with Portable reliance on T-Mobile for bringing customers in the door and ultimately bringing money on the door?

Anthony K. Chan

I think you see that lag for about one quarter, we’re about halfway through the second quarter and we are seeing significantly different results for the first half of the second quarter already.

So I believe that the worse is behind us, and I think we’re going to get into sync T-Mobile’s upswing, I mean our Portables division will see that will enjoy the same upswing with T-Mobile the parent company itself into the second quarter. I have visited Portables just about a week ago and while I was there, I saw representatives of T-Mobile and everybody feels like there is plenty of light at the end of the tunnel.

Unidentified Analyst

Can you show in any color on the iPhone’s introduction at T-Mobile and what…

Anthony K. Chan

Okay, let me share a tit bit with you. So I believe it was the second weekend in April that the iPhone was launched into the T-Mobile stores nationwide. I believe that the static came back while it started selling at 9 am in the morning that will have million units on the shelves of the various T-Mobile stores in the United States by 2 pm that same afternoon they were all gone.

Unidentified Analyst

That’s exciting to hear.

Anthony K. Chan

That’s yeah. That’s all...

Unidentified Analyst

How does the sale of the iPhone with the plan at T-Mobiles with many other carriers that have the higher upfront subsidy obviously and they’ve been pretty good at retaining the customer or are we anticipating seeing that and with the current product offering with the iPhone?

Anthony K. Chan

From what I understand from a Portable subsidiary, the T-Mobile programs are now different. It is no longer a subsidized program when you signed a two year contract. There is no more two year contract; it is a month-to-month contract. However, the contract is in an installment payment on the phone. So buying the expense of smartphones, iPhone being one of them and there are other models of course, you pay a down payment and you sign a contract for making payments for the value of the phone over the next two years. So that’s the hook on the customer. The voice plan itself is not contacted. It goes on a month-to-month basis. That’s an appropriate change in the previous model where T-Mobile subsidies the phone, but then the retailer have to sell the phone at a loss and then get a subsides from T-Mobiles to compensate for the sale of the hardware at a loss, at the retail level. Now, there is no more event I think the accounting actually is simple. There is an installment payment on the hardware and then month-to-month payment on the usage.

Patrick Wong

I would like to add Anthony, not to correlate (inaudible) Zoom and Portable’s business for T-Mobile but there is obviously a high correlation. If I am not mistaken, the T-Mobile will be rolling out 4G very soon later this year.

Anthony K. Chan

In October.

Patrick Wong

Yeah so that should drive customer demand as well that should drive activations as well as a lot of volume. We think that those – a lot of – obviously the iPhone and the other high end Samsung product should go work well with that within that arena. So we think that all do a lot for Portables. We also think that the parts of the business that can be controlled and not just historically tying Portables with T-Mobiles is the ability to source certain accessory and type products that that can help drive bottom lines as well as those are things that we think Zoom and Portables is able to do independently and add value to the business.

So with the new iPhones and the top end Samsung products, there is a whole set of [side in] peripheral cost that we believe we’ll go ahead hand in hand with that that should help with the product mix and drive dollars to bottom line really frankly speaking when you like cases and things like that they really don’t cause loss in terms of ex-factory price but that can do a lot for the company’s bottom line.

Unidentified Analyst

Okay, thank you gentlemen. I appreciate your time answering my questions. I have no further questions.

Patrick Wong

Thank you.

Anthony K. Chan

You are welcome sir.

Operator

And the next question comes from the line of Sebastian Victor. Please ask your question.

Unidentified Analyst

My question is I was just wondering if there is any company in North America that is only, already negotiated for opportunities to add value to Zoom Technologies?

Anthony K. Chan

There are handful of companies that are in, that we are in active negotiations, but obviously we cannot at this point now disclose who they are, but at the point in terms of (inaudible), you will be sure, you will hear about these and we are looking at these opportunities at how we can add value into the picture either that we can provide some kind of R&D services, manufacturing services or even sourcing services. In consumer electronics we all know that more than 95% of consumer electronics were all made in China. So we’re actively seeking synergy in the sense and in industries that we have experience with. So to answer your questions we’re actively negotiating with multiple parties as we’re hopeful that one of these will land rather quickly.

Unidentified Analyst

Okay, thank you.

Patrick Wong

We actually won’t – we won’t but Anthony come back to the office and so find the deal that we can close. That is why he is constantly on the road. That is why he is at the Airport right now.

Anthony K. Chan

Yeah that is very close to the truth.

Unidentified Analyst

Okay. That’s my question.

Operator

And there are no further questions at this time.

Patrick Wong

Okay, well Anthony I think if you don’t have any other closing remarks but otherwise basically we would like to thank everybody for being on the call today. And we certainly hope that we will be bringing new existing news to everybody at both of our next calls also we will have some press releases and some informational filings keeping our fingers crossed that might happen in the near future. Anthony I don’t know if you have anything else to add. All right thank you very much.

Operator

Thank you ladies and gentlemen. That does conclude our conference for today. Thank you for participating. You may all disconnect.

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