Trading Zoom Technologies Pre-Earnings

| About: Zoom Technologies, (ZOOM)

The holding company Zoom Technologies (NASDAQ:ZOOM) is scheduled to release its first quarter 2013 earnings results after the closing bell and hold a management conference call at 6 PM Eastern Daylight Time on May 20 to discuss the future of the company. Investors will want to pay particular attention to this earnings announcement and the accompanying conference call with executives as this quarter will be a defining moment for Zoom Technologies.

On April 15, Zoom Technologies announced its fourth quarter and full year 2012 financial results that included an unexpected surprise about the strategic direction that executives are planning on guiding the company in the months ahead.

Since the April 15 conference call, shares of ZOOM have endured a stunning 50% drop from a close of 68 cents per share in the trading session that immediately preceded the Q4 2012 earnings announcement to their current market price of 33 cents per share. The tremendous decline in ZOOM shares mostly occurred within the first 72 hours after the news regarding the company's financial future became public and the stock was consequently punished by investors that were disappointed by the announcement.

As a result, Zoom's management realizes that the conference call for its first quarter 2013 financial results is likely to be an important opportunity to convey a sense of confidence about its ongoing operations to the investing public. For potential shareholders that are looking for an excellent turnaround stock, a closer examination of Zoom Technologies' strategic business, technical chart indicators, and past stock price history are all worthy of careful consideration before adding it to a stock portfolio ahead of this key earnings announcement on May 20.

On January 7, Zoom Technologies surprised the market by revealing that its senior management decided that it was in the "best interests" of the company to divest itself of its operations in China and Hong Kong. The initial reaction to the news was greeted warmly by the financial markets as ZOOM shares gapped to open at 64 cents per share from a previous close of 53 cents per share from the preceding trading session. The stock rallied further after the announcement to eventually reach a high for 2013 of 94 cents per share on February 20.

On April 15, Zoom announced that it had already agreed to a deal to sell its manufacturing operations, research and development, mobile game development, and sales operations in China and Hong Kong to Beijing Zhumu Culture Communication Company for $31.7 million in cash. Zoom executives announced that the proceeds generated from the divestiture of its China operations will be applied toward the acquisition of unnamed consumer electronics and mobile products distribution businesses in North America. While Zoom Technologies was formerly involved in the sales, manufacture, and development of mobile products and games in China and Hong Kong, the company's divestitures and new strategic initiatives would return its focus to its existing North American distribution business.

Zoom owns Portables Unlimited LLC, which is a wholesale distributor for T-Mobile communications services and mobile devices across North America. The management of Zoom Technologies decided to commit to the distribution of mobile devices and services throughout North America as its core business model and ongoing operational strategy. Zoom Technologies originally acquired Portables Unlimited in October of 2011, which its Q4 2012 earnings release singularly attributes to the company's ability to increase its full year 2012 revenue by $36.3 million.

As Zoom's senior management provided additional details regarding its decision, they also gave a timeline for the sales of various segments of its former China operations. Zoom completed the sale of its Hong Kong-based mobile gaming development business Celestial Digital Entertainment and sales operation Profit Harvest for an $11.9 million loss on December 31, 2012. The sales of Zoom's mobile handset development operations Nollec Wireless and Ever Elite were finalized on April 5, 2013.

In total, Zoom reported a $32.5 million net loss for 2012 compared to a $6.4 million net gain for 2011, which was based on a massive $34.5 million net accounting loss in the fourth quarter of 2012 from the sale of the business holdings in China and Hong Kong. Chairman and chief executive officer Lei Gu lamented that competition and financial markets had weighed heavily on Zoom's fortunes in the past two years as reasons for the company to sell its China operations. At the time of the April conference call, Gu did not provide specifics regarding which mobile device service and distribution businesses Zoom was planning to acquire in North America or how such purchases would be integrated into the existing infrastructure of Portables Unlimited.

The contribution of its North American subsidiary was significant to its 2012 financial performance by adding $36.3 million in revenue, which could potentially translate into enhanced earnings in future quarters as the company focuses its attention entirely on growing Portables Unlimited through strategic acquisitions and integration.

The chart of ZOOM stock shows that it is currently trading at a fraction of its 52-week high of $1.38 per share that was set nearly a year ago during intra-day trading on May 21, 2012. ZOOM shares have not tested their 50-day exponential moving average since the April 15 announcement of the details of the company's China and Hong Kong divestitures. Currently, ZOOM's 50-day EMA stands at 50 cents per share, which would represent a 52% increase from its current market price of 33 cents per share. Any positive developments conveyed by ZOOM management on its Q1 2013 conference call have the potential to lift shares up to a test of this key indicator.

Importantly, investors should be aware that when the company announced initial details of its new strategy on January 7, ZOOM shares gapped to open from 53 cents per share and rallied to close at 70 cents per share, which was exactly one penny below the stock's then-50-day EMA of 71 cents per share. A test of the 50 cents per share price level potentially awaits investors if Zoom's executives relay similarly positive guidance regarding the implementation of the company's new business plan. Investors looking to capture a large percentage price gain with manageable downside risk are presented with a tempting opportunity ahead of Zoom Technology's first quarter 2013 earnings announcement.

The preponderance of negative news has already been priced into ZOOM shares since the April 15 announcement, which leaves significant room for a positive earnings surprise. The company's identification of the superb business prospects available for mobile device and communications services in the North American market generated substantial operational revenue for Zoom in 2012. By omitting the negative accounting impact of the disposition of its former businesses in China and Hong Kong, Zoom Technologies is poised to return to strong earnings growth with its new operational strategy.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Tagged: , Communication Equipment, China, Earnings
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