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Zoom Technologies (NASDAQ:ZOOM)

Q3 2007 Earnings Call

October 29, 2007 4:00 pm ET

Executives

Frank Manning - President and CEO

Operator

Welcome to the Zoom Technologies third quarter 2007 earnings release conference call. Today's conference is being recorded. At this time for opening remarks and introductions, I would like to turn the conference over to Zoom Technologies’ President and Chief Executive Officer, Mr. Frank Manning. Please go ahead, sir.

Frank Manning

Thank you, Amy. Welcome to the Zoom Technologies conference call. First, I'll make remarks that supplement the 3Q07 earnings release made this afternoon and then we'll turn to questions.

Zoom reported 3Q07 net sales of $5.6 million, up 56% from 3Q06. The revenue increase was broad-based. Broadband was the star performer, particularly through high-volume retailers. DSL represented over half our revenues for 3Q07, with DSL sales in 3Q07 more than double DSL sales in 3Q06.

Cable modem sales were up dramatically due to Zoom shelf space at Best Buy, Staples, and other U.S. retailers. Dial-up revenues for 3Q07 were down only 3% from 3Q06 as we benefited from recent placements at retail.

Sales of Zoom's wireless products including Wi-Fi and Bluetooth products, also increased. Revenues rose dramatically in our major markets from 3Q06 to 3Q07. North American revenues rose $1 million to $3.3 million, or 58% of the quarter sales. Revenues outside North America also rose $1 million with particular strength in the UK and Latin America.

In Q2 '07, Zoom began shipping our DSL wireless product to PSG, the UK's largest computer products retailer. PSG has generated significant sales.

Gross profit was $1.3 million, or 23.2% of net sales in 3Q07, up from $0.2 million or 6.7% in 3Q06. The better gross margin percentage for 3Q07 was primarily due to three factors:

First, fixed costs were lower due to the move of Zoom's North American assembly, test, warehousing and shipping facility from Boston to Tijuana during the third quarter of 2006.

Second, revenues rose so fixed costs were a lower percentage of revenues.

Third, new designs lowered the purchase price of certain dial-up and DSL products.

Manufacturing and freight costs remain a concern and an opportunity for improvement. These costs totaled $270,000 in 3Q07, up 32% from 3Q06.

Operating expenses were $2 million or 36.4% of net sales in 3Q07 compared to $2.0 million or 55.7% of net sales in 3Q06. Variable selling expenses, particularly for freight, warehousing and sales commissions, went up in 3Q07 due to higher revenues. These increases were offset by reductions in G&A and R&D expenses, primarily due to lower personnel costs.

Zoom's cash balance on September 30, 2007 was $3.7 million, down $2.1 million from the start of the quarter. This change was primarily due to Zoom's previously reported investment in Unity, which was $1.2 million counting transaction costs, and Zoom's $0.6 million loss in 3Q07.

Zoom's current ratio was a strong 3.6 on September 30, 2007 with working capital of $8.6 million. Shareholder equity was $9.85 million, over $1 per share. Zoom has no long-term debt.

Now I will summarize some of our product initiatives.

(1) We continue to drive down the cost of goods for most of our DSL modems. About 90% of our X6 shipments benefited from cost reduction in 3Q07. Our X3, X4 and X5 shipments will start to benefit from cost reduction in 4Q07.

(2) We want to bring our DSL in the Fastlane features to the X5 ADSL modem. We already have the QoS Fastlane feature in our X6 Wireless-G DSL modem, and people like this feature because it improves VoIP phone calls, gaming, and other important applications.

(3) We are designing a line of products, the highest end of which includes DSL, wireless networking, a four-port router, and VoIP. A number of customers are asking for products in this product line and we hope to be shipping in volume in March or April of 2008.

(4) We are experiencing strong demand for our recently introduced dial-up modem, which is a USB mini-modem.

(5) We have started shipping our first product for Skype, and we have received a significant retailer commitment for shipments in the first half of 2008.

(6) We are shipping new Bluetooth products for the iPod and for mobile phones. Production delays have slowed the rollout of this product line but we are seeing reasonable demand in spite of that.

(7) We continue to work on innovative products and we will discuss some new ones as we get closer to shipping them.

Turning to other matters, you may recall that in our last conference call we discussed the investment Zoom made in Unity Business Networks, a leading hosted business VoIP service provider. I am a member of Unity's board now and I am pleased with the progress at Unity.

In summary, Zoom continues to work hard to make its base business successful. We are also actively seeking synergistic businesses that promote Zoom's success.

Before we turn to questions, I need to remind you that I cannot predict the future, and any forward-looking statements are subject to uncertainty and risks as detailed in Zoom's press releases and filings with the SEC.

Now let's turn to questions.

Question-and-Answer Session

Operator

(Operator Instructions) At this time, it looks like we have no questions in the queue.

Frank Manning

Thank you, everybody for joining. Goodbye.

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