創力 (LTRX) 2002 Q4 法說會逐字稿

Good morning. My name is Amy and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Lantronix fourth quarter fiscal year 2002 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. If you would like to ask a question during this time, simply press star one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you, Ms. Wong. You may begin your conference.

Thank you, Amy. And good morning. I'm E. Wong, Strategic Investor and Corporate Relations Counsel to Lantronix. Joining us on today's call are Marc Nussbaum, Interim President and Chief Executive Officer and Jim Kerrigan, Interim Chief Financial Officer. An archived webcast of this call will be available on the Company's website at www.Lantronix.com beginning today at approximately noon Eastern time. There will also be an audio playback beginning today at noon Eastern time and running through noon on September 19th, 2002. The number to call is 1-800-642-1687, and enter the conference ID number 5513078. International callers should call 001-706-645-9291, and enter the conference ID number which again is 5513078.

Before we begin the call, we would like to review the Company's Safe Harbor guidance. The Company undertakes no obligation to update the archived webcast of this conference call. And this conference call does contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended . And Section 21E of the Securities and Exchange Act of 1934 as amended. Which are intended to be covered by the Safe Harbors created thereby and the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. For example, our guidance on future revenues, profitability, sequential growth rates, gross margins, head count levels and restructuring charges, cost savings and benefits are all forward-looking statements. Actual results could vary for a variety of reasons including those described in our SEC filings. Now that we have the housekeeping out of the way, I'd like to introduce Marc Nussbaum, Interim President and Chief Executive Officer for Lantronix.

Good morning and thank you for joining us. During the first part of this morning's call, we'll briefly discuss our financial results for the fourth quarter and fiscal year ended June 30, 2002. This will be followed by a discussion of our plans and expectations going forward in fiscal 2003, and the actions the Company has taken since Jim and I joined the Company late in the fourth quarter, including the restructuring plan we announced earlier today. Finally, we will open up the call for your questions. And now, let me introduce Jim Kerrigan, who will briefly provide an overview of our results for the fourth quarter. Jim?

Thank you, Marc. And hello to everyone. As stated in our news release today, Lantronix recorded revenues of $11.5 million and a net loss of $72.5 million, or $1.35 per share for the fourth fiscal quarter ended June 30th, 2002. For the same period last year, the Company recorded revenues of $12.8 million, and a net loss of $5.8 million, or 15 cents per share. A review of our statement of operations indicates that we had gross margin loss for the quarter. I would point out that we had a $4.9 million charge for impairment of intangible assets. And depending on how you classify them, one-time inventory adjustments and reserve charges of $1.7 to $2 million for the quarter. These adjustments would restore more normal margins to the numbers. The primary cause for the large losses were a $54.6 million non-cash charge related to impairment of goodwill and other intangible assets and what we can identify as other one-time charges that total approximately $12 million. These include a $4.4 million note write-down, $2 million Lightwave settlement, $1 million write-off of in-process R&D, $1 to $1.5 million of extraordinary legal and audit fees, $700,000 of restructuring charges, $1.7 to $2 million of inventory adjustments again depending on how you categorize some of the expenses and other charges.

For the 12 month period ended June 30th, 2002, Lantronix's net revenues were $57.6 million, up from $49 million in fiscal 2001, or 17.7%. Total net loss was $91.3 million, or $1.78 per share, compared to a loss of $7.8 million, or 21 cents a share, in fiscal 2001. Now I'll turn the call back to Marc to provide some insight into our performance during the quarter and our plans moving forward. Marc?

Thanks, Jim. As expected, our loss Incorporated intangible asset adjustments and one-time charges that were related to the establishment of a fresh start for the Company. Following the restatement of our fiscal 2001 and nine months fiscal '02 results. Circumstances were further impacted by the continuing sluggishness in the economy and in particular in depressed capital equipment spending. Although it has been a difficult period in the Company's history, we believe that the actions we have taken with regards to our financials and operations were necessary in the best interests of the Company as we move forward. Before I begin discussing our plan, I think it is important to stress the management team and I are very excited about the opportunity before us.

Lantronix is a Company that has leadership technology and a strong strategic position as the only network solutions provider of its kind to offer both hardware and software connectivity. We have a new executive team and with the help of the Lantronix board we have moved aggressively to establish a fresh starting point for our recovery. During our last conference call, I outlined four key initiatives that we would be pursuing as part of this year's turnaround and our long-term goal of profitability to enhance shareholder value. First, simplifying our focus and the business in general. Second, matching our cost structure with revenues. Third, reorganizing our process of selling and customer relations. And fourth, installing operational discipline.

Our approach for implementing these changes can be broken down into three phases. The objective of Phase 1 was establishing a fresh start. Namely, developing a plan, reducing staff and expenses to be consistent with the current revenue base, establishing tight cash limits and expense controls, bringing to resolution old business commitments, and re-establishing our balance sheet to help position the Company for going-forward profitability. I am pleased to report that Phase 1 is moving forward according to our plan and we will complete the Phase 1 tasks by the end of this month. Phase 2 has started in parallel and includes consolidating our sales operations into one centralized unit and accelerating our marketing and sales efforts. The objective for Phase 2 is to grow revenue reaching cash break-even by fiscal year end.

Phase 3 leverages our new financial base and several exciting new products with the objective to achieve sustainable profitability going forward. During the current September quarter, the new management team's first full quarter on board, we aggressively reviewed operations and prepared an achievable plan to deliver improved results for fiscal year 2003. We believe that the actions taking place this quarter Lantronix will begin to experience improved financial results starting in the second fiscal quarter. Our immediate priorities for fiscal '03 are to reduce operating costs, conserve cash, return the business to normal product margins and become cash-neutral during the second half of the year.

One major step we have undertaken in this process is restructuring the Company's sales and marketing operations. Going forward, our value proposition includes taking advantage of the synergies between the products we offer, the way we reach our customers and the various communications mechanisms used throughout the Company. With our focus shifting towards delivering solutions, it made sense for to us create one centralized worldwide sales organization. Our clients want to deal with a single Lantronix and managing the business this way simplifies our internal structures and related costs of getting to market.

To lead the worldwide sales organization, we are currently in the final stages of a completing employment negotiations with a seasoned sales professional with more than 20 years' experience in managing world class OEM and channel sales operations. All Lantronix products will be sold by this new organization including our device servers, console servers and the Premise Sys product software line. We intend to announce this executive next week. With the new sales organization, we are also consolidating marketing activities for our system management and enabling technology products into one centralized network products marketing group.

Leading this effort will be our newly promoted Executive Vice President of Marketing Jeff Boyce, a seasoned professional who joined us in July and Jeff is here with us today on this call. Mike Justice will take on the role of Vice President of Strategic Marketing driving certain initiatives designed to address the needs of targeted vertical segments. Dan Quigley will continue to lead the applications business unit and drive the growth of our Premise software product line.

Lantronix is transitioning from a pioneering startup company into a mature business intent on execution and competitive excellence. With the new senior executive leading worldwide sales, Jeff Boyce leading marketing for network products, and Dan Quigley leading our applications business, we have the high volume emerging technology experience required to grow Lantronix to the next business stage. Now I'll turn the call over to Jim, who will discuss the financial elements of our cash management and restructuring plans.

Thanks, Marc. Our cash position remains strong. As at the end of Q4, our cash and investments totaled $35 million. Our 2003 plan calls for aggressive efforts to conserve cash without accumulating any long-term debt or utilizing our credit facility. In fiscal Q1 so far, we have made scheduled payments related to past acquisitions totaling approximately $6 million. We expect our normalized cash requirements to be at the same level as in Q4, that's 4 to $5 million. Starting in Q2, we expect normal operations to use approximately $2 million in cash and our plan is to reduce our cash needs to neutral during the second half of fiscal 2003.

In addition to consolidating our sales and marketing functions, the Company will reduce head count by approximately 22%, or 50 people, by the end of this month. We will be shutting down our manufacturing operations and moving these products to contract manufacturers consistent with the model we have already executed for the majority of our products. We're also reducing our R&D spending on certain Legacy product lines and focusing on accelerating product introductions in key growth areas such as console servers, device servers and software. We have examined our SG&A and support activities and are making substantial reductions on the order of 66% from fiscal fourth quarter to fiscal second quarter. Or approximately 45% reduction after adjusting the Q4 numbers for non-recurring one-time expenses.

More recently, we announced acquisition of Stallion Technologies, an Australian and U.S. supplier of Serial IO Adapters. Stallion brings to Lantronix added arsenal to our growing IP portfolio. This acquisition will add a small amount of additional revenue to our combined results. In total, our actions are expected to reduce expenses going forward by an estimated $12 million on an annual basis. These reductions which are targeted to take effect beginning in the second fiscal quarter will lower our cash break-even point from operations from about $22 million in quarterly revenues to approximately $16 million. Our expectation is that revenue for the first two quarters of fiscal 2003 will be about flat relative to Q4 2002. Now back to Marc.

As you can see, we have taken aggressive action to simplify the business model. We've re-energized our sales and customer relations and we've put in place programs that will allow us to match our cost structure with revenues. Networking is no longer a PC-only business. Consumers are demanding and getting networking in their cell phones and PDAs and demand is growing for the same types of services and connectivity in their automobiles, home devices and more. Networking technology naturally builds on each previous generation's platform. The first great networking wave to use LANs to connect computers. The second wave used the Internet to connect people. The coming wave will use device networking and related applications software to connect all the devices on the planet. With each new wave came new players who dominated the business and led the charge. With our leadership experience and state-of-the-art solutions, that incorporates best of -- and software technologies, Lantronix was ideally positioned to carve out significant position and what we are beginning to refer to as the pervasive Internet.

In just last few months alone, a review by Network Computing Magazine placed Lantronix's SCS-1600 as its top pick for console server products based on ease of configuration, security and value. Also finishing in the top 3 was Lantronix's SCS-1620. We have a strong pipeline of new products which are on schedule for introduction in Q2. These introductions will include initial versions of our new One U Low Profile Linux -based console servers. This month we launched new OEM marketing program called the 30-minute challenge. To educate the market about how easy it is to incorporate Lantronix's networking technology into their devices. Typically customers are achieving a successful integration in under 10 minutes. So far, this program has experienced a high success rate and continues to add new sales prospects to our pipeline.

Our Premise software technology platform continues to attract attention and interest. We recently announced a pact with FutureSmart, a leading provider of digital communication and networking systems for homes. FutureSmart will be selling Lantronix's Premise with their structured wiring solutions. In addition, Comp USA has invested in 1500-square-foot displays and end caps that will offer our Premise solution to consumers nationwide. As one step in our Phase 2 plan to grow the business, we will be opening an office in Japan in fiscal Q2. Japan represents a significant OEM revenue opportunity for Lantronix in the second half of fiscal '03.

We are also expanding our sales capability by increasing the number of feet on the street through direct sales additions and by adding new channel partners. Before I open the call to questions, I'd like to take a moment to thank Fred Thiel who is leaving the Company. Over the last several months, Fred has been 100% supportive and has helped me achieve a smooth transition in my new role. On behalf of the electronics team, I extend all of our best wishes to Fred in his future endeavors.

In summary, we set out to establish a fresh start under Phase 1 of the recovery plan. I am pleased with our progress over the past three months and as I mentioned, we will complete Phase 1 in the next few weeks. This gives us a solid foundation for Phase 2 which is designed to take us to cash break-even later this fiscal year. Both Jim and I look forward to reporting the improved financial performance resulting from the recent actions which will have a significant impact in our fiscal Q2 results. Thank you. And I'd like to now open the call for questions.

At this time, I would like to remind everyone in order to ask a question, please press star one on your telephone keypad. We'll pause for just a moment to compile the Q & A roster. Your first question comes from Jeff Vansinderen.

Hi, Jeff. Go ahead.

I know you guys mentioned that cost of goods sold reflected I think it was a $4.9 million charge and a wonder if you can just take us through charges against SG&A and anything else.

Uhm... the charges in SG&A, we had a total of $18 million worth of SG&A during the period. And, uhm, give me one second... there was a great amount of adjustments and one-time charges in the results for the period. In terms of a G&A, for example, we had the $4.3 million I mentioned for notes. We had the $2 million shareholder -- Lightwave shareholder settlement. We had legal and audit fees. We had I think I went through about almost $12 million worth of expenses in my earlier comments. I could go back... and get those for you. But the, uhm, the amounts generally were on the order of a $12 million of one-time charges.

Against SG&A?

Uhm, let me -- I think all but that one $4.9 million. All the rest were SG&A.

Okay. And then also, maybe you can talk a little bit more about some of the new products you're coming out with and I know you mentioned revenue growth that you're anticipating in the second half of the year. Maybe you can just address that a little bit more, in a little more depth.

Sure. We don't want to telegraph too much information to our competitors here, but as I mentioned, there is a brand-new product line of console servers being introduced in Q2. Which is which is a Linux-based platform for us and takes our [PIPE] profile down to 1 U in certain versions of the product. And that will be a significant introduction for us. We are also doing a refresh in roughly the same time frame for our device server products. However, that's pretty transparent. It's more of a cost reduction in internal architecture issue. We're also going to be introducing -- we have already announced the export product previously to this. And so there's activity in that space. And we believe that that product line will become significant for us towards the very end of the fiscal year going into a ramp in that time frame. So we're in the process -- that program is on schedule. We're sampling internally and moving that project forward.

Okay. Are you seeing at this point any improvement or any areas where you're encouraged in your business? I mean, results you're reporting over June, is there anything that's happened over the last couple of months that looks encouraging to you?

Well, there's really -- if you think of each of the pieces in the IT space where our console server and multiports sell into, that still seems to be fairly flat from a demand standpoint for the industry. We're starting to see -- I believe that all the inventory has been flushed out in terms of servers. And depending upon how many servers get sold, we get to sell, you know, one for x number of servers, whatever that happens to be. So right now, that market is still flat. We're seeing some encouraging signs. But I wouldn't expect any significant improvement in the next couple of quarters. On the other hand, with our new products that we're introducing, we'll be able to take some opportunity there, some market share perhaps.

In the device server space, it's really all up to us because the challenge there is educating our OEMs about the opportunity of device networking. And so some of the programs I have mentioned like the 30-minute challenge and others that we're rolling out are designed to educate and drive, so that really is in our hands. And it's somewhat a last -- so it's a question of effective how effective we are in our marketing and sales efforts. And then finally, if you look at the Premise software product, we're seeing encouraging signs there but it's hard to forecast when that is going to start growing for us. Everything looks positive. There is samples all over the place. Our releases are taking place on schedule. And we'll just see how that winds out. That's probably a question of consumer acceptance and to some extent qualification of the product by a certain OEMs.

Okay. And then if you could possibly address what we should look for in terms of gross margin and operating expenses on -- from operations, uhm, obviously excluding charges, uhm, for Q1.

Could you repeat that one more time, Jeff?

Sure. Gross margin and operating expenses excluding charges. I know you mentioned you're going to take a charge in Q1. What we should look for there?

Let's take those one at a time. From a gross margin standpoint, we'll be improving that going forward. But we expect -- it's hard for me to comment about -- I'd like to refrain from commenting on Q1 specifically on gross margins at this point. I can tell you that going forward under our new model we expect to be in the low to mid-40s pretty shortly. So that's a significant improvement from where we have been in the past. In terms of operating expense, I'll turn that over to Jim.

Operating expense in the first quarter is roughly consistent with our current levels without all the extraordinary expenses. We anticipate that Q1 will result in an operating loss in the range of 6 to $7.5 million-dollar range because most -- we haven't really implemented the changes that we have got in process for Q2. In addition to that loss, that would be our regular operating loss, we have restructuring costs that we expect on the order of 3 to $5 million to be booked in this quarter.

Okay. And then finally, if you can maybe briefly comment on the Japan opportunity. I understand you're opening a sales office there.

Yeah. For that let me introduce Jeff Boyce, who actually is the person who's been championing the opening of that office and I'll let him comment. Good morning, Jeff.

Good morning. Japan is a very strong as you know in consumer electronics and in the industrial automation market segments. With our -- -- we have a very seasoned professional team that will be opening the office in the beginning of next quarter and they will be focusing on those two market segments with some of the product introductions coming into the back half of this fiscal year, we should be able to take advantage of those market segments.

Okay. Uhm, all right. That's pretty much all I had. Thanks, guys.

Thank you, Jeff.

Your next question comes from Joseph Toe of Lehman Brothers.

Hi guys. Just a couple of questions. In terms of gross margin, you said your new model is low to mid 40%. If I'm not mistaken, gross margin was closer to mid to high 50s in the past. Is it is it -- is this a new dynamic going forward? And if so, what's changed?

Yeah. I'd say that from the past numbers I've seen, probably in the low 50s is probably about where it is. I think, Joe, that I'm just being conservative here right now. Gross margins have been so depressed recently, uhm, that it's a question of crawling out of it. And I would -- if you think about a 40 to 45% range in the Q2 time frame with improvement past that, it's probably appropriate.

Is that -- is that just because of pricing, or what's been the issue with gross margin?

Combination of pricing, inventory that we've got here that we have bought at an earlier cost to us. Things like that. Mostly internal issues. At this point, I wouldn't say that there's a big change in the dynamics out there.

Okay.

Although I would add this, that, uhm, going forward, growing this market will take some aggressive actions to bring device networking down to the point where it's cost-effective and it has a 100% attach rate.

Okay.

And there is increasing competition along those lines and there will be -- as the market develops, there will be competition we'll have to deal.

Okay. And then for Jim, I don't know if you have a sort of continuing EPS number with all the charges, one-time charges taken out for the fourth quarter?

No. That would be a pro forma number. And we have tried avoid pro forma numbers.

Okay. Then in terms of just revenue for the fourth quarter, how much of that was device servers or do you split this out by end market or hardware or software?

I have the information broken down into the typical four groups that we have reported -- well, three groups that we have reported. Of the, I'll give the quarter or do you want the year or both?

The quarter would be great. And actually both would be great.

Okay. For the -- on device servers, for the quarter were $$7, 163,000. For the year, $31,371,000. For the multiport servers, for the quarter, $4,135,000. For the year, $23,953,000. The third category is print servers. The total there for the quarter is 777, and for the year, $3,226,000.

Okay.

Then I have one more group called "other" which is really allowances that are unapportioned right now to those groups. And that's a credit of 566 for the quarter and a credit of 904 for the year. And so that would tie out to the roughly to the total numbers within a few thousand dollars.

Okay. And then, uhm, just lastly, Marc, in terms of some of the new products, the old management team had introduced such as Destiny, can you talk a little bit how that's performing if most of that inventory is gone and what you see for that product going forward?

Yeah. This is Jeff. On the Destiny piece, we'll be doing a product launch on the Destiny technology in Q2 and that's one of the marketing activities that we plan to launch in the October time frame.

Okay. Great, thanks a lot.

Thank you, Joe.

Your next question comes from William Becklean of Commerce Capital.

Hi, Bill.

Mr. Becklean, your line is open, sir.

I'm sorry, I was on mute! Hi, Mark.

Hi, Bill. How are you?

I started talking. My question involves your sales reorganization. Was there any adjustment in your channel partners in association with that, and what does the channel partner relationships look like during all this change?

We have added certain manufacturers' reps recently to add some feet on the street in several areas. In fact, we have a map I looked at just yesterday that still has pins stuck in it for opportunities as we grow that sales channel. So that's one thing that's been very successful over the last quarter. And we have to complete that over the next couple of months as the map is filled out. That's step number one. The other piece is that, uhm, as I said earlier, the leader that we are going to be bringing in house shortly will have a lot of relationships and ideas about how he wants to drive this. Very seasoned professional. So while we have added a few people, I expect you are going to see a lot more going forward in restructuring on the sales side. And we can take a little bit more about that at some point in the future.

So you really put that off until you get your new sales guy?

Well, I wouldn't say we put it off. We added -- I have actually taken down some internal sales resources and spent that money outside with feet on the street.

Aha.

But the actual -- but a more aggressive restructuring is waiting for that individual to come in.

Okay, fine. Thanks.

Your next question comes from Bryant Riley of B. Riley and Company.

I have a few questions. I'll just whip them out. First of all, why are you avoiding -- it's hard when you don't have pro forma numbers. I'm curious why avoid them.

The SEC is, uhm, -- I means the experience of other companies based on things we hear both from our auditors and others, our attorneys, is that the SEC has a big heartburn with pro forma because there's not a standard accounting definition of pro forma and companies will one-sidedly give explanations of something without putting in credits. For example, I could say our cash during the quarter went down $8.1 million in my statement, and then I wouldn't be exactly right if I gave an allocation of that because I wouldn't necessarily point out that we received an income tax refund of $1.4 million and I might make up an accounting of the 8.1 without pointing out the fact that I got $1.4 million in and available to me and things like that so -- so they kind of warp the numbers. And what happens is, you issue statements or you make statements with respect to pro forma, even pro forma-like statements that I have in some of the numbers I gave, and the SEC will write demanding a comment letter and explanation for all of the things.

Well, trying it put in your estimate of savings and operating expenses of $12 million, can you give me the base of which that comes from? What is the base operating expenses that you are taking that $12 million from?

Just a second, Bryant.

And if you could break it -- and I also would be curious of how much of that is coming from G&A and how much is coming from R&D?

The R&D reduction that we've done is roughly -- would annualize out to about, let's see... about $4 million a year. About a million dollars a quarter in R&D reduction that we've taken.

The R&D --

Let me point out, by the way, that that R&D reduction is -- was easy for to us get out of the business because a lot of it we had been focusing some R&D effort on Legacy products so we have made some decisions to not invest in some of those pieces going forward. So it doesn't affect our product introductions for growth businesses going forward. So I can give that you piece.

The SG&A number is a couple million dollars.

A couple million dollars per quarter based on -- so based on --

Basically, about a million dollars in R&D or almost that in operations is about a million dollars. And about $2 million in SG&A.

Per quarter.

Okay. But what is our base quarter? What quarter are we -- is it off this quarter and we're going to start to see that from this quarter's G&A and R&D or what is our base quarter that we are going to see these reductions from?

Those numbers -- I'm going to answer that question a little roundabout. Those numbers are off of a base of Q4 after we subtract out all of the one-time charges. So we've taken out the one-time events, looked at it from a run rate standpoint, and then took another $12 million out in the quarter.

So I guess that's why in this case, pro forma numbers -- I guess we'll follow up with you to get the pro forma R&D and G&A.

Let's discuss that off line.

Okay. Is Premise generating any revenue?

It is generating some revenue, but it's, uhm, a minor contributor at this point.

Can you clarify the cash burn on the Premise division?

I don't think we want to break that out separately. No reason to do that.

Well, as a shareholder, there's a reason. I mean, we'd like to know how much we're spending to keep Premise going. So... as a shareholder, there's certainly a reason to try and understand that. What about, I think your current investment is in Zamboo is $7 million which given the fair market cap is pretty significant. Can you give us an updated status on Zamboo?

We're not prepared to discuss the Zamboo update. Nothing really has changed there at all as an investment. You can kind of watch it as easily as we can. No specific activity there.

Okay. The Lightwave settlement that you made that was because of registration that didn't take place quickly enough, is that right?

Right. I believe the situation was that when we made our deal with the Lightwave partners, we gave them registration rights and -- and -- and made the deal to sell some stock and provide them with funds. And what happened was there was a shortfall in the number of shares that were registered and sold and so we had to make up with it.

Did you give any consideration to that being kind of a disappointing acquisition and, uhm, at least settling with them somehow or you just felt like the best thing to do was get it out of the way.

Our obligation was black and white. It was the right thing to do, and we fulfilled our obligation.

Your next question comes from David Wright of Henry Investments.

Good morning. I had questions on the cash burn and revenue guidance that you gave in the opening remarks.

Sure, David.

$35 million of cash at June 30, and a suggestion of 4 to $5 million of operating cash burn in the first quarter and then, Jim, you made a comment about plus an additional requirement of $6 million for previous acquisitions. Am I understanding that correctly?

$6 million, a combination of things. Including shutdown costs, severances, those kind of deals. The total was $6 million.

So that's guidance of 10 to $11 million of cash burn in the first quarter, correct?

In that general range, I hope it will be a little less.

And then your further guidance was possibly $2 million of cash burn in the second quarter?

Yes.

And in --

Of operations, correct.

And in blending towards neutral over the third and fourth quarters?

Right.

Okay. You also said that as -- after you make the first quarter restructuring, that your cash break-even will be at $16 million of revenues?

Yes. That's correct.

And you've in the press release guide that first and second quarter revenues will be similar to fourth quarter revenues, which were $11.5 million.

Right. $11.5, $12 million.

And you also guide that the revenue growth for the year will be 10 to 15% sequentially starting from the fourth quarter?

No, I think what we -- Yeah. I think what we said was the first two quarters will be flat and we'll end up the fourth quarter up 15%, I believe.

Yeah. That's exactly right. The fourth quarter will be 10 to 15% above the previous quarter's revenue.

So then here's my question. To get from $12 million to $16 million of revenues, i.e., cash break even, is 25% revenue growth. And you're guiding revenue growth lower than that. So how are you going to be at cash break-even by the end of the year?

Well, first of all what we have given you is approximate numbers. There are other things that help us in a cash situation including our inventories. We have substantial inventories that are still movable. That's one thing. And we do have a plan to grow revenue more aggressively than perhaps I'm willing to commit to in this call.

Right. So... uhm, thank you. Uhm, another question in the press release, you allude to the possibility of additional goodwill and intangible impairment charges in the first quarter.

Yes.

And the condensed balance sheet that you provide in the press release has goodwill and intangibles of $24 million. What I'm wondering is why, after all of the impairment charges you have taken in the fourth quarter and since we're -- what, two-thirds or more of the way through the first quarter, are you not sure that you'll have additional goodwill charges in this quarter?

We're not sure -- we had a long discussion with Ernst and Young last night about this. We were an early adopter of FAS 142. And we're sort of forging -- we have discussed with them we're even forging new ground here. When we have a -- had a valuation started and performed this past quarter, we gave a series of information and so on and the market cap of the Company was a certain value. But between the time we started to study and even this week, the market cap of the Company's stock has declined what I would say is significantly. It's a decline from, for example, $50 or $60 million down to a $30 million range opens up a $20 or $30 million difference. And under the appraisal or review guidelines, there's a big gap between the $40 million market cap and $100 million type book value for the Company. So there's not necessarily -- it's not necessarily going to happen that there is a further impairment charge.

There are other mitigating things that have to be taken into account, like just the fact that the Company goes up and down 20% in a day... in market cap over the last couple weeks under the uncertainty of even this earnings announcement. But there is a possibility that we could have -- have a subsequent event between now and the time we filed the 10-K and frankly, there is no precedent right now. The handling of how that would be booked, whether it becomes a subsequent event and is booked in the fourth quarter of fiscal 2002 or it's a subsequent event that gets booked because it occurs during the first quarter of 2003 is not -- the accountants aren't even clear of that right now themselves, so we just put that in there as a disclaimer. It's a very technical question -- but a technical question with a very technical sort of uncertain answer.

So the decision in this case is not based entirely on management's judgment of the value of the goodwill. It's influenced at least partly by the price of the Company's stock?

Yes.

Okay.

Very, very -- the current circumstance is driven very heavily by the value of the Company's stock.

The reevaluation of the goodwill is complete at this point it's an accounting treatment question.

Okay. Three quick questions additionally. The condensed balance sheet, you don't show long-term investments. Was there any impairment of the long-term investments category as part of the fourth quarter charges?

No. None at all.

Okay. Next question: Do you anticipate filing your 10-K timely?

Yes, we do.

Absolutely.

And then the third question: With the prospect of cash break-even and the price of the Company's stock ex the Company's cash balance assigns virtually no value to the Company's business. What's the possibility of a share repurchase?

We have no intention to pursue that at this point. We've got better things to do with our cash than be repurchasing stock right now.

Thanks for answering my questions.

Sure.

Thank you very much.

Ladies and gentlemen, we have reached end of the allotted time for questions and answers. Gentlemen, are there any closing remarks?

No. That's it. I look forward to giving all of you an update going forward, in another quarter. And we appreciate your support. Thank you very much. Bye bye.

Ladies and gentlemen, this concludes today's Lantronix fourth quarter fiscal year 2002 earnings conference call. You may now disconnect.