創力 (LTRX) 2002 Q3 法說會逐字稿

Good afternoon, my name is and I will be your conference facilitator today. At this time I would like to welcome everyone to the Lantronix fiscal third quarter earnings conference call. All line have been placed on mute to prevent any background noise. After the speakers remark there will be a question and answer period. If you like to ask a question during this time simply press star then the number one on your telephone keypad. If you like to withdraw your question press star then the number two on your telephone keypad. Thank you Miss Harris you may began your conference.

Thank you and good afternoon everyone I am Aubrye Harris, Investor Relations, Lantronix. I would like to thank you for joining us today on our conference call to review Lantronix financial results for the fiscal third quarter 2002 which ended on March 31, 2002. Joining me today is Fred Thiel Lantronix Chief Executive Officer and Steve Cotton the company's Chief Financial Officer and Chief Operating Officer. An archive webcast of this call will be available on the company's website at www.lantronix.com beginning today approximately 7 PM Eastern Time. For those who are not be able to stand the entire call there will be an audio playback beginning today at about 6:30 PM Eastern Time and many of you may get at midnight Eastern Time. The number for the call is 800-642-1687 and for international participants the number is 706-645-9291. The access code for the conference call is 403-5180. Before I turn call over to Fred for opening remarks I would like to review the company's safe harbor statement. Statements made today during this call including statements made regarding future revenue profitability future industry turn, the perspective results of relationships with customers and partners and future product plans and availability date are forward-looking statements. Actual results and product availability dates could vary for variety of reasons including those described with the SEC. And with that I would like to turn over to Fred Thiel. Fred.

Thank you Aubrye. Good afternoon and thanks to everyone for joining us on the call. In the third fiscal quarter Lantronix continues to experience challenging market conditions across our product line. Reflecting the general softness and technology spending and slower than expecting Embedded device services by our OEM customers.

In an uncertain economic environment customers have been cautious of about committing to wide rollouts of networking technology. However, our competitive positioning means very stronger across our product line and later this week will be introducing two important next generation product one the Embedded device server and one in the server categories. That would be demonstrated at our analyst day on Friday afternoon before that the announcement of these products will occur tomorrow evening. The strong early customer reception to these products leaves us to believe that we will see an improving demand picture in the back up of calendar year.

With that framework in mind I would like to first discuss some of the challenges we have seen in the near-term and then talk of some of the key drivers of future growth. First we have seen unanticipated softness in demand in order to push out our systems management business and we believe that this weakness reflects temporary constrains in capital spending to enterprise IT due to the current level of economic uncertainties. That is by the ongoing challenges faced by key customers including communication companies and ISP's.

Significantly we believe that the competitor positioning of our Multiport products remains very strong. Our latest products is the leading edge in terms of functionality provided fact of our life budget treatment of labor and expertise required to maintain complex networking system and at a attractive price point. As investment in the enterprise infrastructure recovers we think that we are very well positioned for strong performance by this division.

That said now expect the current economic condition to be challenging in the near term. Second in February we implemented the restructuring initiatives we announced in our fiscal second quarter call and we are organizing our sales organization in two three division as long as our three product offering enabling technologies, systems management and software application. We are confident that this is the right direction to increase the customer focus be closure of the customers drive synergies across product line and leverage our channel relationships in the most efficient way.

Last month we announced that David the co-founder of resources joined Lantronix as Executive Vice President and General Manager of our systems management division bringing many year's experience in this specific space and very good understanding of the direct issues faced by the customers in the day-to-day problems in managing IT infrastructure. We believe we now have the right team and right structure in place to drive the future growth. Thirdly with the acquisition of Premise Systems and our strategic investment in Lantronix has invested significant resources in immigrating our enabling technologies to the advanced software application so as to create a compelling end-to-end offering to the home and building organization market.

Believes that these initiatives will be very significant contributors for our future growth as these technology crosses over to options. However, it will be terrific quarters before we really begin to realize the revenue benefits of this development initiative again we are confident that this is the right decision for Lantronix future. Finally in the embedded devices server category we experience in generational shift as customers continue transition from stand-alone device server to embedded device service and embedded device servers for chips.

The design to production cycle of these transition have been longer than we expected and we expect these issues to continue to impact fiscal fourth quarter results as we will not be manufacturing some of the new products that we are announcing whether this week until obviously later in the following quarters. I don't want to downsize the facts that these results for the quarter are below our expectations they are also below what we are going to accept for this company and given we believe it is the market potential of our advanced network connectivity solution we believe that it definitely have some key growth drivers for the future and we believe we are going to get through this transitionary period and see the benefits of the restructuring for our customers.

We continue to believe that this market has the potential for substanable rapid growth and high margins in the coming years. Lantronix remains the market leader and the only company were the complete end-to-end solution and a clear customer road map to achieve network connectivity quickly and cost effectively. Among the most important drivers for that growth were into in the coming quarter are some of the next generation technology that we will be announcing later this week. Let me just sort of at the analyst day we will be demonstrating functional version of this technology and discussing some of the market implication to the products which we believe the analyst on this call will find very interesting.

As we look at the Lantronix technology offering today we have a complete end-to-end solution that allows the customer to deploy network connectivity intelligent in an edge device. Provide control and management in controlled devices that control other devices. Manage and control systems infrastructure products that are used in the network web and lastly provide the software application that lies control all of these devices and infrastructure and so manage our infrastructure and devices more effectively. No other company in the industry offers this complete solution containing the hardware, software format and chips. Second growth drivers are industry vehicle expertise.

Lantronix continues to build strategic partnerships and win key customers from the key verticals that we feel are going to be major market fairly big with this connectivity. Verticals we have seen the highest we have interest in our solutions include healthcare resales point of sales security in building our mission. In each of these segments were are working in at least many factors to develop complete solutions in hardware, , software. That means this is the specific requirements in protocols of that effort for example in food retailing we have made progress working with network enabled in tight food preparation environment for quick service restaurants.

In home automation we now gestated comp would be using Premise Systems automation software to connect the devices and systems in digital living design centers. Last month we announced an agreement with Motorola to integrate our embedded our PC protocol in the next generation 2.5 G innovated conversion platform. And we are now just entering that software platform business which we feels is the major contributor to the future revenue growth. Our relationship with is another potential catalyst to increase sales of our embedded solutions as they have now standardized their products in our device service. Third is our end-user focus. I talked earlier about some of the transition issues associated with our new sales organization.

However, we are already seeing clear benefits of driving our sales process to focus on the key segment of system management enabling technologies and application. We have completed the integration of our sales force and crossed training and expect to see the benefits of this strategy over the next few quarter. Lantronix has the unique strategic advantage of being the only player in our state with an immigrated comprehensive solution providing customers in the clearest evolutionary roadmap to get a widespread connectivity and providing OEM to end-users of the short of time to market benefits.

The new sales organization will enable us to better leverage these advantages to the benefits of our customers and understand better what future technologies our customers require and they are able to drive a product roadmap accordingly. Finally we have made excellent progress on the initiative to reduce our cost structure that we announced in the previous call. We have taken a significant amount of returns to get our overheads. We will begin to see the benefits of that in the fourth fiscal quarter. Fiscal position of Lantronix return to a pattern of consistent profitability even in the current weak demand condition. With that I like to turn it over to Steve.

Great. Thanks Fred.

Before I start with some comments on our financial results I want to just share with the group or we are talking about the enterprise states consistent management states interchangeably to explain the results. As Fred mentioned our third quarter has been a transitional quarter for us and while we acquire from satisfying our own internal financial results we have taken the necessary steps inline our business with the changing industry fundamental and positioning Lantronix for future growth. I would like to remind our listeners we changed our accounting method last quarter which was basically were we now recognized revenue on sell through from our channel partners to end users and that is basically one of our products we sell to those end users.

So the purposes of today we will be comparing the results from prior period on a pro forma basis as if the change has al ready taken affect. Result for the third quarter were in line with our earnings preannouncement of April 4 as we indicated the time during the quarter we will take a one time restructuring charge we took that it was 2.8 million dollar or 5 cents per share and the purpose behind that was to consolidate the redundant overhead from our prior acquisition reorganized our sales forces along the three core operating that Fred talked about earlier those being enabling technology, systems management and software application. We believe this actions will result at approximately 5 million dollar in annual cost savings we should begin to see those benefits flow through our operating statements starting with the September quarter, which starts July 1.

Now I will spend a few minutes reviewing the highlights of our third quarter results and then after that I will like to provide you some guidance for the remainder of the year. Our net revenues increased 17.2 percent to 14.7 million as compared to the third fiscal quarter 2001.

Sequentially revenues felt slightly more than 10 percent from the 16.4 million dollar that we reported in our second fiscal quarter of 2002 which again was in line with our preannouncement revenues guidance that we have given. For the nine month period net revenues were 47.4 million dollars which is an increase of 30 percent from the first nine months of fiscal 2001. The year-over-year growth is driven by our device business, which increased 17.1 percent to 13.6 million dollar in the quarter compared to 11.6 million dollar in the same quarter last year. On a sequential basis however our device basis decreased 15 percent from 16 million dollars in the prior quarter. What we saw there was is that business dropped out sequentially that was primarily associated with our products that are being used in the enterprise paper enterprise application so that will be multiport products as well as our singleport external or in closed products both of those we saw a weakening as the enterprise phase continue to weaken. We will get into that a little bit more detailed in a moment.

As we mentioned in our conference call last month we have been experiencing weaker than anticipated and order push up in our systems management business really doing large parts of the current contraction of IT enterprise spending. The strong performer for the quarter of our different product lines was the multiport device service which increased 69 percent year-over-year keep in mind large part of that growth is due to the acquisition of Lightwave Communications on a sequential basis the multiport space was up slightly as well and again we believe that is just timing difference in the second quarter and the third quarter overall it is important to know here and you can see it again in the next quarter is that our mutliport products or any of our products restarting into the enterprise systems management phase continues to be sluggish.

We really believe that we are going to see sluggish growth or flatness in that business for probably the next two to three quarters our legacy business which most of you know is the server business actually increased a million dollar. I think the way you need to look at that is as I think we have some customers that make some unusual purchases we do not expect to servers to grow larger percentage of business and impact I think the expectation should be the next quarter and it will be back and below 4 percent or 5 percent. Talking about the gross profit our gross profit was 5.7 million dollar in the quarter as it was 25.9 percent decrease from the 7.7 million in the same quarter last year and 35 percent decrease from what we reported or the 8.9 million dollar that we reported in the second fiscal quarter. The reason for that decrease is really attributed to couple of things one is 665,000 dollars of the restructuring charge was flown through our cost of sales.

We also took an additional 600,000 dollar inventory reserve to associate with the weakness of the systems management enterprise space and most of you know we also go through the purchase IP or the amortization of the purchased IP, which was another 600,000 dollar. Now I will get into what that would mean our pro forma basis in just a second. Gross margins therefore actually came in at 39.1 percent from the 54.4 percent in the second quarter and as compared to 54. 8 percent in the third quarter of 2001.

Now on a pro forma basis our gross profit was 7 million dollar in the quarter which is a small increase in 6.6 million dollar we experienced last year and again a 26 percent decreased from the 9.5 million dollar that we experienced in the second fiscal quarter. The pro forma gross margin decreased sequentially and on a year basis to 47.8 percent versus 57.6 percent in the prior quarter and 53.4 percent for the same period last year. Again this decline was expected to do couple of things one is lower volume as well as the reserves that I mentioned as well as the purchase IP that we amortized. And again pro forma gross profit excludes 613,000 dollar of non cash amortization related to our acquisition to the U S Software Corporation Lightwave Communications and Synergetic Microsystems as well as purchased intangible assets and 665,000 dollars of restructuring charges related to purchased intellectual property.

So again if you kind to take all of that and if you try and look for comparability what you really say there is that our gross margin if you took out those reserves and took out those charges on a comparable basis we will give up 52 percent versus the 57 percent that we have imported last quarter. Selling, general and administration expense was 8.6 million dollar or 58 percent of sales in the third quarter as compared to 5.9 million or 41.8 percent of sales in the third quarter of fiscal 2001. Sequentially selling, general, and administration increased nearly 11 percent or about a million for the prior quarter and again this was due to the several one-time charges included in the increases in the reserve or accounts receivable specifically related to our systems management business.

Performance based bonus payment and deferred revenue fees as well as additional expenses associated with our restructuring that we have announced. We would expect our selling, general, administration to return to more normalized level in the fourth quarter and we will continue to reduce the overhead expense so what you should expect to see in the fourth quarter is an absolute dollar turn our selling, general, and administration expenses will come down and lot of that.

Large part of these one-time expenses and then I think the quarter after that you should see our SG&A expenses come down further, which you are going to see there is the effects of the restructuring. It is time to flow through the P&L. As you know as talked about earlier we continue to be committed to our product development, our restructuring developing extends, increased by 91 percent to 2.2 million in the quarter to the third quarter of last year. As we talked about we launched in several new products in this quarter and expect to announce a series of new products later this year across all major product line and again I think your expectations, I should be that we are going to continue to invest heavily in the research and development area.

Pro for ma net loss for the third quarter was 2.4 million or loss 4 cents of share. This excludes the amortization of purchased intangibles assets with the acquisitions like way if you say software and synergetic as well as stock base compensation related tax effects. This compares to a pro forma net income of 386 thousand or shares it period last year.

Turing the balance sheet, at the end of the quarter we have approximately 41 million in cash and equivalent. Positive shareholders equity of 165 million and very long term debt. In the quarter, is approximately 3.8 million and the in cash operating activities more than half of that was cash used, in connection with the restructuring, year to date we give 7.9 million of cash, in our operating activities.

Our receivables were at 10 million at the end of the third quarter, which is 61 days DSO which is in line with, kind of the company's performance was the last four or five quarters. Inventory is at 15.4 million at the end of quarter. With inventory turns slightly improving compared to the second quarter at 3.9 for this latest quarter compared to four times in the second quarter. It is actually the way around basically flat. Capital expenditures is 2.9 million in the third fiscal quarter and with that I think I like to talk to you little bit about how you see the fourth quarter, but right now this is where the rest of our fiscal quarter. These statements are based on current expectations as of today. And then obviously the statements of forward-looking statements and actual results may differ materially.

Business environment from our perspective has not changed materially from the third quarter and we are maintaining our staff on guidance for he remainder of year. Mainly we expect parameters to be flat in the fourth fiscal quarter from the third fiscal quarter and that will come in between 60 to 62 million for the full year in terms of revenue.

We are estimating the gross margins for the full year will be 54 to 55 percent for the year as compared to the 52 percent in 2001. It should let for our margin to return to more normalized level in the fourth quarter. We expect our pro forma EPS to be between 2 to 3 cents loss per share for the quarter and for the full year a loss of between 5 to 6 cents on a pro froma basis.

On the price side, lackluster, industry interest on getting connectivity solutions continues to be very high and again it is, as Fred mentioned earlier there is an opportunity here for you to see what we are talking about and understand finely, however, we believe that we are still 2 to 3 quarters away from seeing a material revenue ramp, on these new promising initiatives we are probably not going to see a return of the enterprise base for another two to three quarters as well.

In the meantime, we are going to mange our business for profitability and a more constraint environment, for the summarize before I turn I this back over to Fred, we believe that we are taking the necessary steps of restructuing our businesses to do what the diffcicult environement want us to and we do not believe is that it going to get that much easier for the next two to three quarters. That reflected the realities for the market place, in our balance sheet by taking the appropriate reserves but

We have taken revenue; we will be challenging the next couple of quarters. We do not expect the enterprise space to recover until 2003.

Our balance sheet is in good shape and we think we are very well positioned to take the balance of the recovery and to extend it when it comes on the balance sheet. What I like to do is to turn it back over to Fred.

I just like to close this one including one, obviously it was a very tough quarter. I want to readerate but we believe we have taken the measures that we need to write back the business, to we believe it is going to be environment that we are going to be in over the next quarter, well at the same time, making sure that we maximize the benefit of a new technology that we will be launching. On that now, our analyst on Fridays will be demonstrating the new products with the live web cast from 1 PM Pacific, 4 PM Eastern time and they will be presenting and demonstrating the tune in products one on our next generation embedded device service platform and then all of our new series and financial solutions, well before we announced later this week and with that we may now take questions.

At this time I would like to remind everyone if you all like ask question, please press star, then the number one on your telephone keypad. We will pause for just a moment to compile the Q & A .

Your first question comes from Stephen Levenson of Gerard Klauer Mattison.

Good Afternoon, Fred and Steve. Back in December we spoke about your manufacturing arrangements, you had indicated that you had new current truck manufacturing deal that you saw would help to get you better gross margins. So actually you have been on a pro froma basis down, over a bit this quarter. I know you said you expect that to come back. Can you give us a little bit more color on why they are lower now and where you expect them to be in the fourth quarter and going forward?

Steve, obviously they are down in the recent when I indicated in terms of the charges that we got, but even the absence of these charges, that on performance, the margins would have been down. This is really due to the fact that as your revenue comes down, you got a fixed element or fixed overhead operating cost and that which you are amortizing over a smaller base and the other is that while we have moved to contract manufacturers that we believe we are going to enjoy much better margin, as a result to that move, what we would expect first is to go through the existing inventory that we have, burn that off and then actually as we bring in new products from those, we start to enjoy that. That being said, it is won't be growth favorable in any difficult market like this, particularly in the enterprise phase we are going to go for share and when we go for share, there is going to be some high pressure and so we do anticipate that we are going to see some ASP pressure. That is what the reasons for why we made the move on the stand and that is not the reason for that we have taken the steps that we are

taking to ensure that we have adequately reflected that.

Okay. Then, going forward you said you are expecting to return to a more normal level?

I think the expectation should be in Q4. You will see the pro forma gross margins come back in a kind of 54 55 percent range and I think in the near terms we always see Ethernet will get more attraction as well another product that we are going introduce tomorrow. I think we should kind of think that where the margins are going to stay and I think we can get back on track on getting towards the 60 percent gross margin. That is what the company thinking about now. There will be more reflection of data mix of our revenue coming to software, which as you know has a much higher margin.

Okay. Thank you.

Thank you.

Your next question comes from Michael Weintraub of UBS Warburg.

Hai, a couple of questions for you guys. Number one on the guidance, I understand that the market has stopped there specially in the enterprise space, but is there anything out there, any signs that the market may continue to get worse over the next couple of quarters typically during the summer time, or do you really, you know your guidance suggest that you see a stabilized market with no growth.

I think Michael, our stands on the that is with you before is that we feel very good about our device server business.

We feel good about some of the other things that we have launched and with the enterprise space, I think what you are having sum up is that customers took outlook and as result we have adjusted for that reserve that we have taken etc. And I think the way people may think about is that the enterprise space is probably into the early next year recovery and we don't think that this going to significantly go down for auditors. Now, that being said, we are not forecasting to about to discount any growth for that space alone. In conjunction to this challenge in market, could you comment on the competitive landscape, what you see from others, if you see others in the network management space at all. Specifically, I would appreciate any comments about . Cisco trying to play in the network management space, they will be coming more aggressive on pricing and things like that.

And Michael, Fred I just spend the past 30 days pretty much on the road traveling Europe and Asia, visiting customers, visiting potential customers and sending internal channel partners. I don't see Cisco really touching this space that much. If anything needs to be in certain channels, from definite share gain that we have been trying to see mostly due to obviously program selling that we are doing in the channel to enhance share that we believe now it is the time that we can very effectively take share and as we come out of our next generation products this could be very helpful. The answer to your question against Cisco, we neither have nor run into them at all in the management part of the business.

Well. Thanks. I have two more questions. Once you comment on the into backlog, in the past we used to talk about the backlog in your business sort of enterprise, you had a relative visibility because of backlog in selling to OEMs what is going on with the back log today, any comments in DSTny, I guessed you didn't hear much about that? And lastly for Steve, with the new operational structure what is your revenue level for the break even results.

We will in fact still back our first five months break even. On the back log side, our back log has tried to come down in line with our business has and in other words it is like it has fallen off and actually it is where the business has come of sequentially. We still have some visibility there. The other thing that we do have and I didn't touch on this today is that we have much better end user visibility with our change in revenue recognition, so I think what are the think that you should be able to tell on the company being able to give in the future. It is much better on revenue guidance on what we are revenues, based on that end used demand; we now have visibility that is coupled with the backlog. We see the next quarter fairly being flat beyond that. We don't think we are in a position to given any kind of guidance as to where we are going to be sitting in Q1 and Q2 of next year and those estimates are really based on what the end user demand is. In terms of the rightsizing the business towards break even sign is essentially on a cash basis. We found that the break even signs were about 13 and a half 14 million dollars and with that we are not done here. We got to do restructuring process, which is clearly a difficult process, now we are starting is looking for other opportunities to reduce our expectations, with our partners with our external for the company.

So, you kind of think correctly, in terms of quarter there I am not saying it is going happen, but if you have 30 million dollar in September quarter, we would at lease see break even EPS? You had a right reading into what you said.

Cash. Okay, now to talk about EPS, our break even EPS is probably be about 14.1 million. Michael, on a casual basis, which is the way we are managing the business right now to make sure that we not burning cash. It would be probably about 13 and half million.

Thank you.

Your next question comes from Tad LaFountain of Needham & Co.

I have a couple of questions. First of all Sicon (Phoneti) at the end of quarter?

At the end of the quarter it is about 220 people and that is down about 49 people from the prior quarter.

What percentage of revues was international?

Our international business was approximately 22 percent of our total revenue.

To understand correctly that the pro forma number do not include 600 thousand dollars of inventory charges in the cost of good

We did not perform that.

Okay. And could you walk us through what happened to the embedded revenues in the quarter?

The embedded revenues, I take the way, that you need to rectify, this is my timing issue, I want give that actual forecast into the demand and when the shipment actually occur and I think what you see is, we report next quarter, we actually see the embedded revenue probably come out and that is really, that will come up sequentially much higher than this quarters sequential revenue is all about 2.1 percent and that is really much more that a timing issue. When they actually, really installed is the forecast of demand.

What was the sequential comparison because, I thought it was like 5.3 million in the second quarter?

Yeah. If you look at the embedded it was 2.5, I am sorry it is the back up that I gave you year over year. It is my policy. In terms of the sequential number quarter over quarter I think I totaled the wise revenue, I think in the last quarter it was about

I am seeing an embedded number that declined by 50 percent quarter to quarter.

5.2. And again I think which you are going to see Ted, that is what I am trying to say, you are going to see that coming back to more normalized rate in the next quarter. I it is specifically timing. The other thing Ted, to turn that 5.2 and I want to make sue that

I head on that, remember last quarter I talked about the fact that we have about a million dollars within the revenues associated

with the DSTni-LX Chip launch. I did not believe that you will see that follow up here in the next quarter. In other words I follow this contact demand. You know, I had introduced in the chip. We didn't see our follow up during up during the quarter and I wouldn't expect it to follow up during the quarter. So, for comparable purposes you really going for that 4.2 down to 2.5, I think what I am saying is that as I went back into timing initial and the forecast. I think that what you are going to see is that number come back strong in the next quarter, but I wouldn't want people to report strong embedded number to model that out, or that sequential growth rate out. Now that you have to take more out of two quarter to get it.

Okay. Thanks.

Your next question comes from William Becklean of Commerce Capital Market.

Hai guys, just one clarification question. What does the print server revenue show up as line item?

Yeah. It will show up in the other line, on the press release.

So bottom line here is that in this quarter you really haven't booked much in the way of software revenues?

We did not. Our software revenues are probably about 300 thousand and turn around.

And what line item does that show up in?

That shows up in our total device server line. It is basically IP associated with other server products.

So IP sacks off?

Right.

You talked about an inventory reserve that you took on the systems management products. I presume that it was on old stuff, not the new stuff that you got from Lightwave?

It was not specifically associated with new products that is more. I was looking at the demand incurred that is coming down and say what sort of a reserve to take for those products in general. So in other words, one of the ways we do our reserve, we look at two things one is the actual unit demand and then the demand compared against the amount of time it takes for us to turn that inventory and in a number months we actually go ahead and write that inventory off. We just felt that when we looked at the forecast demand and if you buy and do it you are going to be flat for the next two to three quarters. It was prudent to take an additional reserve to reflect that and that is just what we did.

Okay. I understand that. The final question is you talked of... when you explained... you first of all said you have taken the restructuring access to get expenses down, and I think you explained that. I got a little bit lost and you may help me out. How much in the SG&A line was one-time and how much of that goes away when we are looking at the fourth quarter?

You have got a couple of things going on, it has about a million dollars as one-time expenses, the one through the SG&A line and then you have additional expenses to go away as a result of the restructuring. The guidance I have given you guys to not look for that benefit until the first quarter and that is partly because there may be we do additional things that we think we do for cost long term but there may be expenses associated within the next quarter, but I think clearly in the forecast in the next quarter

there is no problem pulling a million dollars out of that cost and saying it will not be recurring. That's what we will be doing.

Okay. That's for all now Steve. Thank you.

Our next question comes from Jeff Vansinderen at B. Riley & Co.

Yes, I sure have got a number of questions. I mean I might not be able to hit all of them in this call, but I guess may be in terms of SG&A, the charges there, can you just give us a sense or sort of hit the what the main million dollars, but can you break this out for us?

You have the close to half a million was a reserve that we took related specifically to systems management receivables or the enterprise space if you will. You had the additional charges associated with the work of changing our revenue recognition, our policy and we are gaining approvals through our accounting firm as well as getting clearance from the SEC and that accounting change.

Okay, so roughly how much was that?

A couple of hundred thousand and the performance based compensation of about 300,000.

Okay so what was that performance based compensation?

Basically it was associated with a set of payments that were paid out in connection with the (Indsicernible) contracts.

Okay, so that went to management?

That's correct.

Specifically Jeff, if you go out there we had a release a quarter or two ago associated with both press and my agreements and the performance based payments, those were paid out and we elected to this quarter and take those hits and place these quarters.

Okay and then I guess you are taking a reserve for some systems market business. Are there issues there with customers that look like they may not pay or where do we stand on that?

I don't know if they won't pay, I think it is more again the DSOs specifically associated with that line of business started slowing and the way that we do our reserves that is tied to the DSOs, ultimately the effect will be successful but again I think the prudent thing to do here if we believe the enterprise takes it, which we built is to go ahead and take appropriate reserves to ensure folks that are looking at this business that we adequately reserved for that particularly wire business and that's what we have done. I can't, if you ask me to give a point to specific customer that there is an issue with, I can't really do that. I think is more based on the DSOs as well as the trend in that business we just felt it is appropriate to do that.

Okay. So we shouldn't think if there is any, let me ask the question this way, do you think that there is any issue, any major issue with any of your customers in terms of collecting receivables at this point or should we think that they are relatively safe?

I think that we are adequately reserved for any potential exposure that we may have associated with the weakness in the enterprise space and I don't believe that there is any material customer issue out there that will supply this in the next quarter.

Okay, I am just looking at the cash balance. Looks like your cash was down to about 41 million from I think 48.5 million?

Correct.

And I just wanted to may be you can stop with that, you burned would you say 3.8 million or something in cash and half of that it was due to the restructuring but what did the rest of the cash go?

The majority of the change in cash for the current quarter, as I said earlier was associated with the restructuring and then the balance in cash, reduction in cash was really the 2.8 million of capex that I talked about, which is really associated with an acquisition that we made and then we made a purchase of minority insurance in , which we announced before, if you take those together which is about 2.3 million, you take all of that together that is what the change in cash is and what I would expect for our next quarter that the cash from operating activities will be flat to slightly positive and we don't anticipate any major capital expenditures in the next quarter. And to be clear with every one the way we are managing the business now, it is basically through conserved cash as we go through this trough and the new products obviously hold and they will return to profitability investments make sense. But for now, we will be managing the business very tightly from a cash perspective.

Okay and then...what I need mention backlog, did you guys and may be I missed it, did you say what back log was or...?

We said it before right, that we are not really going to get into issuing the back log number and I think what I will say is that no material change in the backlog in the prior quarter than I would feel that I need to say, 'hey, the back log is deteriorating and therefore that is why we are giving the guidance that we are giving.' The real story is if you want to sort it all out the enterprise space is weak, it is going to be weak for a while, we have new products coming out, but we think we will accelerate our revenues but they will overcome the down trap that we have had in the enterprise space and that we will return to profitability sometime in the second half of this calendar year. And that is really the story. Everything else is fundamentally fine, the balance sheet is in good shape and we just had a tough quarter and it is going to be tough again next quarter and then I think we will see us return to profitability.

And I know in terms of an inventory reserve now should we look for any other inventory write downs, would you think at this point

you have pretty much accounted for everything, you know given the softness in the environment or where are we there?

We don't have like to say this, but the environment say is the same. Lets say we bottomed out or the enterprise space does not significantly deteriorate any further that I think that we are adequately reserved. We took the inventory reserve up to 15.5 percent of our gross inventory versus the 12 percent of last quarter, again I think we are being conservative. We do believe that we are going to be flat quarter over quarter and so in other words we don't believe that is going to deteriorate further. If it doesn't then absolutely we are more than adequately reserved and we shouldn't expect to see another inventory like that. I think really where your expectation should be if you see inventory levels dropping absolute dollar in terms quarter over quarter.

Just looking into the next fiscal year, I know you said Q4, I am sorry Q2 you were looking for things to get better. What should our expectations be for your fiscal Q1. Should we look for that to be flat as well, should we look for revenues to be up there? Is there a new product seeking in that can help you guys?

Here is what I can tell you, we have some very exciting products that are coming out and you guys check it out either webcast or in the analyst stand. I think that these products will do well for us in the long run. I don't think that we will see a lot of revenue in the short term from those products, and I think for us right now what we need to do is focus on delivering this next quarter, getting the company back to profitability, and that is going to be our focus. And once we have done that then we will start focusing on sequentially growing our top line and our bottom line and really that's the way we think about the business right now.

Okay and there is one other housekeeping question, if you exclude the acquisition of light wave, is there a way to look at your multi port device service sales elsewhere?

Here is the way to look at and when we did look at this, both the core business as well as the light wave business was down year over year and the multi port space in the sequential chart that you saw was the sequential chart offers. I think what was a sequential decline from Q1 to Q2. In other words if you looked at the two quarters, you wouldn't have seen a big sequential growth in that business and again it is a general softening in the enterprise space. But it wasn't just associated with the acquisition, it was both acquired as well as the acquisition.

Okay. Alright thanks guys.

Our next question comes from Stuart of Lehman Brothers.

Actually it is Joe. A couple of questions, in terms of software Steve and Fred, when will we can that come up with a meaningful number? When could one expect that to be over a million dollars?

I think that our expectations on the software revenue been over a million dollars really shouldn't be before the end of this year. Clearly if we talk to our guys that are running that business, they believe that will be sooner but I think for purposes of tracking the company, I really have to be thinking the fourth calendar of this year or first quarter of calendar year next year.

In terms of trying to figure out where kind of all the revenues are coming from, sounds like it is better to come back next quarter, multiport which is your I guess enterprise where this is going to be flat or is that going to be down a bit as well?

I think you should expect that the multi port business should be flat. I think you are through the embedded come back. I think you are through the device or external device products flat to slightly up and again I would normally say they have been up but we do have customers in the enterprise space who specifically using our MSS product line in the enterprise space and so that recovery is going to be a little bit of drag there.

So if I do my math and maybe I am not counting everything up right, sounds like embedded could make up that backs for 4.2 million level, that is an incremental increase of 1 to 1.7 and then drops off by 600,000 so you think your revenues are up may be slightly in the next quarter?

I can clearly make an argument and walk you right through maths that will show you that we are going to be up quarter over quarter and clearly we have done that math internally and it will be the same in the difficult environment. We think it is prudent for people to be thinking that we are going to be flat quarter over quarter. We think it is prudent to think that well. We have done this restructuring and we would like to see that all those benefits are going to flow through in the next quarter. The fact of the matter is we are in negotiations right now where we are trying to reduce cost further with third party suppliers to the company that may require to get those agreements in place and as a result we are giving some conservative guidance for the next quarter and when we get to the end of the year we will talk about what it might look like in Q1 and Q2.

Okay, right guys thanks.

Your next question is a followup question from William Becklean of Commerce Capital Markets.

Just one clarification. I understand the exposure of the multi port business to the enterprise, but what are the applications for the device server business in enterprise?

This is Fred. The applications t ypically are look at the which are largely served. They are typically using the single port device servers to manage single devices that could be a storage array or something like that. It is independent over rank or standing apart from a group of products, so they don't need have a need for single port device or they are using the single port device server for replacements or other traditional stereo connectivity system and so they might deploy them out in post offices or the country. That is the deployment that is driven by the enterprise.

Okay, I understand. Thanks Fred.

Your next question is a followup from Stephen Levenson from Gerard Klauer Mattison.

I am sorry, I forgot to ask you this before. Is the 20 million dollar line of credit still in place?

It is.

Yeah thank you.

The next question is a follow up question from Michael Weintraub of UBS Warburg.

I would like to know what your indirect revenue contribution was in the quarter and also guess if I understand correctly there is going to be a relaively large inventory of destiny sitting in one of your distributors. What are the plans for that inventory? Are you taking the reserve against that as well?

I am not sure I am clear on what the first part of your question is you are saying direct went through us?

No, what was the revenue direct of distribution partners?

For a sell through from our channel partners was about 7 million dollars and that was up about 30 percent over the prior quarter sell through. In terms of our ship as you know we had close to 2 million dollars with the sale in the prior quarter of which approximately 1 million and 1.1 million we did not recognize as revenue and in terms of the portion that we did recognize is revenue. Those ships have been integrated in the customers products and those have been put in users. So it will not be appropriate for us to take any additional reserve. And then on the last piece, we will have to wait for Friday. The chips that we do have and that we are going to integrate those into our own products and so we would expect to consume that inventory in our own product as well as selling that to in users. And we believe that we are adequately integrated in any of our raw material work in process and finished goods inventory, which would include those chips.

As you are talking about inventory could you give us an indication what the current level of inventory in distribution channels is?

I am not going to spend a lot of time on it all. Say it is less than 15 days work. Prior quarter we were sitting with our major channel guys, with product sitting somehwere around 4 or 4.5 million in the inventory. At the end of the quarter we have around a million and a half against the 7.2 million dollar sell through.

The 15 days will probably be higher for chips, right?

No, I will give you that inventory number.

Did you say you made additional inventory in this quarter? I thought the investment was made in the prior quarter.

The round was actually finished in the quarter. Our committment to do was the quarter before when we actually finished around in the current quarter.

Hai thanks.

Thank you Michael.

Once again I would like to remind everyone in order to ask a question, please press star then the number one on your telephone keypad. There are no questions at this time. Do you have any closing remarks?

I would like to thank everyone for joining us in the fiscal 2002 conference call. If you have any questions feel free to ring on these numbers. Thank you very much.

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