Initiating Zoom Telephonics at Buy - Analyst Blog

Ken Nagy, CFA

Initiating Zoom Telephonics at Buy

Zoom Telephonics (ZMTP) designs, produces, markets, sells, and supports broadband and dial-up modems, Voice over Internet Protocol or “VoIP” products and services, WiFi and Bluetooth wireless products, and other communication-related products. Zoom is a major supplier to Best Buy, Staples, Walmart, and other leading retailers of electronic products. Over the past 10 years the firm has transformed its portfolio of products from dial-up modems to much faster DSL, Cable, and 3G modems, and has also introduced WiFi and Bluetooth wireless products. As technology ramps up, we expect long term service contracts to become less attractive, allowing individuals to more easily pick and choose superior technology. Further, the emerging LTE and WiMAX markets could transform how the Internet is accessed.

Zoom seems primed to enter a new growth phase. The growth engine in the short term is three fold. The first is the transformation of Zoom’s well rounded portfolio of technology from dial up to advanced technology products, the next growth engine is new customers as well as new product lines every quarter. The strength of the retail business model is evident in that the firm can roll out new business and keep operating expenses in check. Lastly the evolution and speed of technology will provide the firm entry into new markets such as WiMAX and LTE as well as free customers up from long term contracts.

Looking at 2010 Results,

Dial-up modem revenues increased from 2009 to 2010, the first annual increase in many years. Revenues decreased as a percentage of total revenues.
Cable modems had the strongest growth, due to introduction in 2010 of a DOCSIS 3.0 cable modem and continued strong sales of our DOCSIS 2.0 cable modem. In 2011 Zoom expects to introduce DOCSIS 3.0 with wireless-N.
Mobile broadband products had the second highest growth, fueled by strong growth in this category worldwide.
DSL modem revenues dropped, Zoom’s new line of Broadcom based DSL modems and introduction of a DSL modem/router with wireless-N may reverse this trend.

ZMTP should outperform given the IT market’s bottomless need for faster response times and increased bandwidth against the backdrop of cloud computing, virtualization, and Internet-based applications. We see value in the shares of ZMTP and set a $1.00 target price.

For a free copy of the full research report, please email scr@zacks.com with ZMTP as the subject.

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