創力 (LTRX) 2003 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Lantronix Inc. fiscal year 2003 results conference call. During the presentation all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded Wednesday, September 10, 2003. I would now like to turn the conference over to E.E. (ph) Wong.

Good afternoon, everyone. My name is (technical difficulty) Wong with (indiscernible) Wong Communications, strategic investor and corporation communications council for Lantronix. Joining us on today's call are Marc Nussbaum, President and Chief Executive Officer, and Jim Kerrigan, Chief Financial Officer. An archived webcast of this call will be available on the company's website at www.Lantronix.com beginning today at 8:00 p.m. Eastern Time and thereafter. There will also be an audio playback beginning today at 8:00 p.m. Eastern Time and running through 8:00 p.m. tomorrow, September 11th. The number to call is 1-800-643-8284 and the access code is 211-58758. International callers should dial 001-402-977-9140 and use the same access code, 211-58758.

Before we begin the call, I would like to review the company's Safe Harbor guidance. Lantronix undertakes no obligation to update the archived webcast of this conference call. Statements made during this call including, but not limited to, statements regarding the Company's future SG&A and research and development expenses, future margins, financial performance, impairment charges, the size and growth of the potential markets for Lantronix products and technology in the future, product development, strategic investment, new product introduction, engineering and design activity, and manufacturing efficiencies in the future are forward-looking and are based on information available to management at the time of such statements and relate to, among other things, expectations of the business in which Lantronix operates, projections of future performance, perceived opportunities in the market, and statements regarding the company's mission and vision.

Statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions, including risks related to the highly competitive market in which Lantronix operates. Graphic changes in technology that may displace products sold by Lantronix, declining prices on networking products, the Company's reliance on distributors and contract manufacturers, delays in the company's product development efforts, consumer acceptance of Lantronix products, and changes in the company's level of revenue and profitability. These and other risks, uncertainties and assumptions that are identified from time to time in Lantronix's filings with the Securities and Exchange Commission could cause the Company's future results to differ materially from those expressed in any forward-looking statements made by or on behalf of Lantronix. The Company disclaims any intent or obligation to update publicly any forward-looking statements whether as a result of new information, future events, or otherwise. Now that we have that housekeeping out of the way, it is my pleasure to introduce Marc Nussbaum, President and Chief Executive Officer for Lantronix.

Thank you, E.E. I think that's gotten longer every time we do it. Welcome to our first afternoon conference call and special thanks to our West Coast investors who in the past have faithfully listened in during the early hours when we normally did the call. This time slot, we feel, is much better overall. And I appreciate our East Coast investors understanding and participating this late in the afternoon. Joining Jim and myself this afternoon are Geoff Boyce, Executive Vice President of Marketing; David Schafer, Executive Vice President of Worldwide Sales; John Warwick, Executive Vice President of Operations; and Michael Oswald, our Vice President and General Counsel.

Last year at this time, the company was immersed in the most challenging situation in its history, a slow down in IT spending worldwide had not only stalled the communication sector's revenue growth, but drove the industry into contraction beginning in late 2001. But Lantronix saw our stock was trading at less than half the book value; our cash burn rate was as high as $9 million a quarter; our sales, marketing and operations workforce were in disarray and immoralized; and we had a plateful of lawsuits on our doorstep; plus we had the threat of NASDAQ delisting upon us. From the starting point we made tremendous progress in fiscal 2003. First we brought expenses in line with our revenue. Since fiscal Q1, after adjusting for our unusual legal costs, we have reduced operating expenses by 5.2 million on an annualized basis, a 12.7 percent improvement. As of the fourth-quarter, we have essentially achieved a cash neutral position, using less than $1 million in cash.

We simplified our business model. When the new management team started about 16 months ago, we found a company that had initiated four acquisitions in a little less than two years, resulting in a highly complex business with an unwieldy set of divergent product offerings. There was virtually no integration of operations and there were deep conflicts internal to the organization as a result of cultural differences left to fester after the acquisitions. This past year we addressed all these issues, consolidated down to two core sites, restoring a common vision and creating a single team with everyone pulling in the same direction.

We also transitioned our engineering, sales and marketing organizations to focus on a few core growth opportunities. It became evident that the age and wide diversity of the electronics product portfolio made it difficult to maintain the company's fragmented revenue base, and more importantly it would be ineffective to spread our R&D dollars over all the product lines. To deal with this problem we established a clear strategy as to which lines were to be end of lifed, which lines would receive minimal attention, and which lines would become the center of our growth initiatives. The result has been a strict focus on two core businesses, device networking and IP management.

At the beginning of Q1 last fiscal year, your Company offered nearly 2400 and parts for sale. About two-thirds of these products were introduced into the market over two years ago, and many were introduced more than five years ago. Today we are down to about 500 parts being offered for sale. In fiscal 2004, we will continue to simplify the business as we institute additional efficiencies including a new platform approach to product design. We also reorganized and simplified our marketing and sales infrastructure, establishing a single team sell our products and tripling our feet on the street by signing up new manufacturing representatives, VARS (ph) and by expanding our operations in the Far East. We transitioned to a more cost-effective contract manufacturing model and created a culture where continuous improvement in operational processes, efficiency and quality is the standard. We consolidated our engineering resources, creating a team that is more focused and better enabled to move quickly and cohesively in creating the next generation products that our customers are demanding.

Taking advantage of the unique underemployment situation in the technology sector, we aggressively hired new engineering talent, tripling our headquarters based Irvine R&D group in the last 12 months. This consolidation into two core engineering sites and emphasis on R&D enabled us to introduce and launch Export, the world's smallest Web server, months ahead of our competition. We plan to continue strengthening our engineering capabilities throughout FY '04 and have a strong pipeline of products slated to launch later in the fiscal year.

Finally, I'd like to think that our increased stock price represents the investment community's recognition of the team's dedicated efforts and progress throughout a challenging year. As a result of climbing above $1.00 a share a few weeks ago, we are now in full compliance with NASDAQ's continued listing requirements and have essentially eliminated the potential of a delisting action. There is no question that we have achieved a lot in this past year, but we still have a tremendous amount of work ahead of us. Before we get into that I will turn the call over to Jim who will briefly discuss our financial results for the quarter and for the year.

Thank you, Marc, and good afternoon to everyone. If I begin discussing our numbers, I'd talk moment about impairment charges. Each year, according to FAS 142 and 144, we're required to do an assessment of our goodwill and intangible assets. Goodwill and intangible asset values are principally the result of allocating the assets from prior acquisitions we've made. If the results of this annual valuation are less than net book value of the assets, an impairment charge and the appropriate tax effects of that charge is recorded. Some of this impairment charge could be recorded as cost of revenues and some could be charged to operating expenses, depending on the nature of the asset.

Now I'd like to highlight that we have completed the final accounting for the year to include all of our impairment charges related to FAS 142 and 144. These impairment calculations and independent valuations are complex and we're still in review. We will reflect the final impairment charges which we believe to be an additional adjustment of $7 to $12 million when we file our 10-K with the SEC before the end of the month. With that in mind, a brief summary of our results is as follows. Revenues for the first quarter -- I'm sorry, revenues for the fourth quarter ended June 30, 2003 were 11.8 million compared to 11.5 million for the same period last year. For the fiscal year ended June 30, 2003, net revenues were 49.5 million compared to 57.6 million in fiscal 2002. Net loss for the quarter ended June 30, 2003 was 9.7 million or 18 cents per share compared to a net loss of 74.6 million or $1.39 per share for the same period last year. Net loss for the quarter included a small $900,000 impairment charge for transactions in the fourth-quarter.

As I just indicated, we expect an additional charge of $7 to $12 million related to our annual test. This would result in a revised net loss for the quarter ended June 30, 2003 of between 16.7 million, or 30 cents per share, and 21.7 million, or 39 cents per share. Net loss for the same period last year included an impairment charge of $57.3 million. Net loss for the year ended June 30, 2003 was $38.2 million or 70 cents per share, reduced from $93.5 million or $1.82 per share for fiscal 2002. Net loss for the year ended 2003 includes again the $900,000 impairment charge for transactions in the fourth-quarter. And again, if we book an additional impairment charge of $7 to $12 million it would result in a revised net loss for the year ended June 30, 2003 of between 45.2 or 83 cents per share and 50.2 million or 92 cents per share. Net loss for the fiscal year ended June 30, 2002 included an impairment charge of 57.3 million. Now we'll discuss the specifics of the quarter and the year just completed.

Revenues for fiscal 2003 were lower than fiscal 2002 due to a combination of poor economic environment for technology in general, our transitioned to all contract manufacturing, and the elimination of older, slow-moving products and accessories from our product portfolio as we simplified our business. With respect to the sources of revenues, during the quarter approximately $6 million came from our device networking category, 3.6 million from the IT management category, and 2.2 million from other product lines. For the fourth-quarter, sales in the Americas accounted for 72 percent of revenues and international sales have grown to 28 percent of revenues, principally from Europe and Asia. During the quarter cash and equivalents decreased by $459,000, which was better than our earlier guidance of 1.3 million. We consider this rate to be in the range of cash neutral. We believe that we have control of our cash within reasonable limits going forward, and we'll comment more on that later.

We exited the year with $14 million in cash, cash equivalents, and marketable securities. Our balance sheet is strong. Our Accounts Payable level is current and normal, reflecting a normal flow of goods from contract manufacturers. Our inventories and trade accounts receivable are improving, the result of hard work by our staff. For the fourth-quarter we reduced our net inventories down to $6 million from $6.6 million in Q3 and down from $10.7 million at June 30th a year ago. We've continued in making progress in revolving our outstanding lawsuits. Last week we announced the settlement of the Dunstan lawsuit which was settled with zero impact to our cash balances. Our cash gross margins remain steady at 50 percent in the fourth-quarter. Cash gross margin is a gross margin net of non-cash inventory reserve or variance adjustments and amortization of intangible assets. Selling, general and administrative expenses for the quarter were $6.8 million, down from 7.8 million in the same period a quarter earlier, and down from $7.9 million in the first quarter was fiscal year.

As part of our continuing ever to streamline operations and reduce costs, we decided to close our Swiss office, and going forward all our sales, administration and operations activities for international business will be coordinated through our Irvine headquarters. In Q4, we closed an R&D facility with 11 employees in Biligan-Schwenigan (ph) Germany, and we intend to replace these positions here in Irvine. As Mark indicated, we continue to invest to improve the effectiveness of our R&D dollars through our consolidation efforts. Our expenses in this area were $2.3 million for the most recent quarter just completed, compared to $2.5 million in the prior quarter.

Our core cash usage in operations at the current revenue and expense levels is about $2 million per quarter. However, with our programs focused to improve asset management, along with some help from prepaid expenses and insurance reimbursements, we have been able to reduce this quarterly cash usage to the range of $1 million. Going forward we will continue this approach to manage our cash burn while we continue to make the necessary investments to grow our topline and secure long-time term success. Now I'll turn the call back to Marc to provide more insight into our financial model and our plans moving forward.

Thanks, Jim. (indiscernible) today is a stronger, more focused company, and this was evident in the fourth-quarter as we achieved our cash management targets and demonstrated a slight year-over-year revenue improvement. This was not achieved overnight, but was the result of actions that we took throughout the year to consolidate, simplify, focus, and lay in the infrastructure of people and programs essential to support smooth operation of the company. We've been asked to describe our financial model, and I believe it is important that everyone understands where we are heading in the short-term. Our SAT (ph) model, which drives our internal financial targets, is comprised of three key elements -- revenue, cash gross margin, and operating expenses. That would be four elements.

Based on this model, without any help from our asset efficiency improvement programs, Lantronix was cash positive at about 14 to 15 million in revenue per quarter, and roughly 54 percent cash margin. This model assumes cash outlays for ongoing expenses basically in line with our current levels. Now moving into fiscal 2004, we believe that it is critical to continue building on our investment in R&D in order to maintain our competitive edge and launch leadership products. Our internal plans anticipate revenue growth in the new fiscal year. If revenues and expenses remain our fiscal Q4 2003 rates, we could continue to burn approximately 2 million per quarter in cash from core operations, as Jim mentioned. Our plans, however, are to reduce this cash consumption with additional asset management programs, increases in cash gross margin by driving revenue growth, with a target of achieving a quarterly net cash consumption in the range of $1 million.

While we continue to seek out expense reduction opportunities, we are committed to operating the business at the appropriate level of investment required to deliver long term growth and value to our shareholders. Therefore it is our preference to hold our spending on R&D sales and marketing relatively steady as we continue to focus on topline growth initiatives. I'll now address how we drive margin and revenue improvements toward our model for fiscal 2004. First, our cash margins have been fairly steady over the last year, as Jim mentioned, at about 50 percent. Our model is to reach 54 percent. Through fiscal year 2003, we experienced inefficiencies in inventory, purchase components, warehousing, and manufacturing operations caused primarily by our transition from in-house to contract manufacturers. We already have taken many of the actions necessary to reduce these costs and we believe this will start flowing through as margin improvements in the coming quarters.

On the revenue front, fiscal 2003 was down from fiscal 2002 due to a combination of market conditions, manufacturing transition issues, and the elimination of products from our portfolio as we simplified the business. Throughout fiscal year '03, our Legacy product lines, which consist primarily of print servers, serial board, matrix hubs, KVMs, and visualization products made up about 18 percent of sales, and on average sales growth in this category was flat after taking out the Stallion line, which we acquired after the start of the fiscal year. We expect our legacy business to decline in fiscal '04, and our plan to grow revenue includes offsetting this decrease with gross in the device networking and IT management business. With a stronger and more focused sales and marketing force, and with our new product introductions, Lantronix has already begun to benefit from increased sales from our growth product lines.

In fact, over the past year, although our average decline in revenue was about 1 percent per quarter in total, our IT management product lines actually grew on average at about 7 percent per quarter. Overall the device networking product lines declined by about 3 percent per quarter over the past year. However, in the second half of fiscal 2003 we launched Export, a new product in the device networking family. We expect that as Export sales ramp up, we will grow the device networking business. To date, more than 2,000 potential customers have ordered and received Export evaluation kits, and many of these have already turned into production design wins. Some of these design wins are of Fortune 1000 OEMs. We recently announced that Bosch, a $39 billion global technology company, will be using Export in its electronic alarm systems. This is only one of many design wins in the past six months since customers have already begun shipping initial volumes of products using Export.

We will continue to be circumspect about announcing specific design wins for competitive reasons. However, from a market standpoint, we are finding that the segments of security, industrial control, IT office equipment, medical and consumer electronics are adopting device networking at an increasing pace. We are pleased with the design in (ph) success rate so far, and we expect Export to contribute more than 5 percent of our revenues beginning in fiscal Q3. In terms of the life cycles of our products, about 25 percent of our revenues are currently derived from new products and 75 percent from products that were introduced more than two years ago. We need to improve this. As we move forward our goal is to increase the contribution from products that are less than two years old to the range of 35 to 40 percent towards the end of the fiscal year.

As you can see, both our device networking and IT management product lines will play an important role to bringing this closer to our financial model in fiscal 2004. This has been an exciting year for all of us, and I'm particularly proud of the accomplishments of our people. The company has solidified into a single entity moving in the same direction, and it has been truly rewarding to see this momentum building. While we have achieved much in the last 14 months, I and the rest of the management team are well aware that we have a lot more work ahead of us as we move into fiscal 2004. Although we have succeeded in changing the propellers midflight, the team is not at all satisfied with the flat revenue performance of recent quarters.

As we enter fiscal '04, I believe we are now in a position to reap the benefit from some of the seeds planted last year, even as we lay the groundwork for the next wave of opportunities in the face of Internet space. We're committed to capitally managing our financial resources and investing in the necessary people, initiatives, and products that will bring value to our shareholders, our customers, and employees in the coming years.

With that, I'd like to turn the call over to our operator, Lena, and we'll take some questions.

(OPERATOR INSTRUCTIONS) Our first question comes from the line of Wes Cummins with B. Riley & Co.

To start off just on the financial side, Jim, can you help me out with what the cash gross margins were during the quarter and what the COGS on the cash side was?

The cash gross margin I had indicated was 50 percent.

What is in that? What are the non-cash items in the cost of goods?

Well, that would be amortization of our intangible assets. There is some portion of that up above. There is the variances, our excess and obsolete inventory reserve adjustments, and that's principally it. The non-cash items that are up there -- the biggest component of that is normally our amortization of IP -- intellectual property.

When does that -- does that decline in FY '04 and when does it go away?

It is scheduled out more or less by individual assets, but it falls off rather precipitously I believe in another four or five quarters (multiple speakers). And to the extent that we have our impairment charge that we will book, that also will result in a substantial decrease in that IP charge that we amortize each quarter going forward.

Okay. What were your legal expenses in the quarter and how much money did you recover from your insurance company?

The net expense of our -- let's see. We booked about $2.1 million of legal expense for the quarter that included a $550,000 credit from reimbursement of our insurance proceeds. So the gross would've been about 2.7 million offset by 550,000 of -- and we also include in that -- that big number includes $1.5 million of settling the Dunstan lawsuit. The total amount of actual cash received from our insurance carrier was $950,000 for the quarter, but 400,000 of that receipt was offset -- offset a $400,000 receivable we'd established when we first started billing the insurance company.

Okay.

And the good news there is that we've been getting a reasonable response from the insurance company on reimbursements, and Jim's been able to smooth out the effect based on balancing the income and the outgo on our legal expenses with that.

What's left as far as lawsuit? Is it just a shareholder suit?

We've got the shareholder lawsuit and there's a derivative lawsuit that's associated with it. There's also a wrongful termination with Steve Cotton that we're still dealing with. And then we another lawsuit with -- the Goldstein lawsuit has to do with the Synergetics acquisition. And then the last item is the one where we're the plaintiff going after Logical Solutions.

Okay, all right. Going back, on the Export, you said Export should be 5 percent of revenues starting in Q3 of '04?

That's right.

So we're looking at a little over 500,000 in revenue by that quarter, and you guys did -- I think you announced around 500,000 for -- it was about a two quarter span, right?

A little bit less than five months, that's correct.

So what are your production levels right now with Export and is it going to be a pretty steep ramp to get to that 500K? It doesn't sound like it will be.

Until we actually have -- the way this works, people book orders with us with relatively short visibility in duration. We're able to respond to those orders, but it's pretty difficult to forecast the exact timing that the order is going to come in. Plus once our OEMs start taking product, their actual acceptance rates of their product is very difficult to forecast as well. So I think it's very difficult to be any more precise than what we've been at this point.

Okay, and on the cash burn rate, you said on your OPEX side or just running at operations you're at about 2 million, using basically some balance sheet items you can get down to 1 million a quarter. How long can that last before those items that are helping you out run out?

It depends on whether you believe in continuous improvement or not, and the plans are to (technical difficulty) accrue things like inventory management and receivables and other things like that. I think there's a reasonable amount of runway in front of us to still make asset management improvements. However, it's very critical that the margin improvements and that the revenue improvements start to kick in and start to grow, and that's what we're focused on.

Have you seen any kind of improvement in the demand for your products? You're two weeks from the end of your quarter, I would think you would have a pretty good handle on what's going on in the September quarter.

I don't want to get into any forward-looking statements at this point, but demand is certainly at least as strong as it's been over the last couple quarters. We're optimistic.

Okay. In June obviously it declined a little bit or your ASPs eroded or something happened to go down sequentially again. Should we expect some kind of -- is demand as strong as Juno or is it as strong as March?

Well, traditionally the summer quarter is slow. Europe basically shuts down for a large part of it, and of course in the U.S. a lot of vacation time impacts us. So we're just going to have to wait and see how that turns out. But I'm optimistic.

And I think if I recall right, in your last quarter you said in the March quarter you missed some revenues that you could have captured because of continued manufacturing problems. Did you recapture those in the June quarter or did they go away?

In the June quarter we really didn't have any impact from our manufacturing issues that were significant. So we've caught up with our supply, and the June quarter, with a couple of minor product issues there, but not enough to be a significant financial impact.

And the last thing, if revenues don't come up, I mean we've been flat to basically we're doing our fourth-quarter of sequentially down revenue -- actually, yes, our fourth-quarter sequentially down revenue. If revenues don't rebound, what kind of room do you guys have to cut expenses to get back to cash flow positive even at this revenue level?

There is room to do that if we need to, and we are continuing to investigate ways to improve our efficiencies and actually reduce expenses. So we anticipate some expense reductions potentially as we go forward. But one of the things that's important notice from our discussion is that we've already seen growth in the IT management space, our Console Server/Terminal Server product line, and that's a large portion of our business. And really the decline that we've seen in the device networking part of our business, every indication is that we're going to be able to compensate for that going forward based on Export.

Okay, but that's -- I mean you're not really going to be able to compensate for that until probably the second half of the year, right? Second half of your fiscal year?

That's a reasonable assumption.

Okay. I'll let someone else ask some questions.

Winder Hughes (ph) with Hughes Capital.

A question on other products outside of Export. As the M2M, VRM (ph) space starts here like to heat up, what other types of either hardware or a software -- solutions have you all been thinking about that will fortify your position (indiscernible)? For example, if Export is the piece that connects this device on the network and makes it intelligent, who is supplying software to these OEMs that build the intelligence? Like in the product, because it has to come from somewhere, and if that's a void, or like an opportunity, what are you all doing there with that?

That's a good question. I think it's a strategic intense question that you're asking, Winder. What we're trying to do is focus at the component level for the moment. And I think there's a lot of opportunity for us to grow the embedded component business, and we're focusing our resources on that space. Over time we may choose to move up the food chain and bring out other offerings that complement the component business. But that's really our focus at this point. I would like to say, though, that if you look at the area that our components currently address, the markets that it addresses, there are adjacent markets in the device networking space that we can go off and take our technology and bring it into. So our R&D efforts are more horizontal in nature, if you will, than vertical in nature.

So in other words, if you're Boston Scientific and you had these medical devices out there, who is building the intelligence though in these devices that says this monitor is not working or it is working or it's running too fast? Like are all these things kind of being done oneoff like in-house per OEM? I mean each OEM has to do it himself?

We'll let Geoff Boyce answer this I think.

So the answer to your question is yes, essentially. On -- let's take the medical segment that you brought up. There are individual companies that design the solution for the products that they're using. For example, there's a company that would design our product into a CAT scan machine, they have the resources in-house that actually developed the software that works with our hardware that completes the entire solution. Does that answer the question you have?

So what's happening here is folks aren't just going to buy this Export, stick in their device and all of a sudden it's intelligent. There has to be a quasi redesign of the OEM's product altogether, right? Because now he's going to have to build this intelligence into it and thus your stuff is going to make it network enabled obviously. But so there's a retooling here like across the board, which I guess that's part of like the time -- like in the process and all that kind of stuff. I'm just trying to make sure that I understand how the change is going to play out here.

It's a mixed bag there, because what happens in a lot of cases, you've got intelligence in the product that just as latent, so the intelligence is there, it's all from the data that's being collected. Maybe it's communicating over serial port to a PC today, but the actual use of that information is somewhat slowed down because the networking element is not there. So I don't think it requires in many cases a complete redesign of the OEM product we're being designed into. A lot of times the functionality is there and we're just bringing it out. What is required is on the receiving side to make use of that data, eventually application software to sift through all the information, going past things like crystal ports for generating graphs, things that actually make intelligent use of the information. That's the missing link I think in this whole device networking space over time.

So there's not an opportunity for you guys to have a software -- like a platform that, whether you're making CAT scans or office copiers that you can go to all these players and say, look, here's the platform now and you can customize it and build intelligence into your device and then you put our piece into it as well so that you can kind of double leverage those conversations with each OEM. Is that not something that's doable here in terms of opportunity expansion?

It is something that's doable and it is an opportunity expansion possibility for us. But again, right now we're going to keep the business focused on the embedded space and getting -- in the device networking world anyway, and getting out the core product capability. I think over time I'd like to be able to bring in to an existing customer or a new customer more than the component itself, but that's not what our focus is right now this year.

Last question. With Export kind of introduced in March, what kind of activity metrics are happening out there today versus say six months ago in terms of number of kits that you've sent in the last month versus the number of kits you sent out just like in April? Or what metrics have you got your hands around now that you can talk about the would point to some meaningful list here in the product line for the second half of '04?

Let's see. The initial design activity, the sampling activity was very strong for the product, as I think we already mentioned when we talked about 2000 samples going out -- 2000 samples plus kits going out. I think the new metric for us now is design wins, and products shipping with our product in it. And those numbers are -- I don't want to go public with what those numbers are at the moment, but they're very healthy where we are. So the real metric that you've got to look for is simply revenue growth in that line as it starts to happen. And we'll make that available as soon as we cross the 5 percent mark.

Okay, thank you.

(OPERATOR INSTRUCTIONS) Wes Cummins with B. Riley & Co.

Can you guys give us an update on Premise and what's going on up there, any new projects, any developments on when they could really start contributing to revenue?

Sure. Premise revenue has been -- again, it's less than 5 percent, so we don't break it separately. It's running pretty steady from quarter -- from Q3 to Q4, roughly steady. It's not a significant revenue contributor yet. And there are programs that we're working on that will get some press as we actually close contracts and we're able to announce these things. Now, over the coming quarters that, I'm sure, will help, but by and large the Premise business unit is focused on a space that is the consumer control, consumer networking space. And the rate of acceptance in the consumer space of this kind of product is a question for everybody that's participating in it. I think that the consumer space will happen later than the commercial space and therefore we're all just waiting to see what happens.

Okay. The revenue that these guys are generating now, is it more -- I mean is it software sales or is it kind of development for specific project revenue? Can you give me some info on that?

Actually it's a combination of all at this point. We do have a contract -- I'm not sure we publicly announced it. We do have a new contract that gives us some NRE (ph) revenue, so it's like a 50-50 split between software product sales and some NRE revenue.

Okay. On the development side, the stuff that you're doing there in getting revenue for -- can that be ongoing revenue once it's completed, any kind of sales revenues from that -- the development you're doing there? I guess what I'm trying to get at, is some of the work you're doing kind of a onetime item or is it ongoing? Can it generate ongoing revenue?

I would think of it as a onetime item.

Okay. And just back on the lawsuits, can you give me any more detail on when you might expect to wrap some of these things up and we can start to think about the legal fees going down in your model?

That's a tough one. I don't think we have any real visibility into the timing for any these things wrapping up. We are constantly working on the ones that we can work on, and the SEC work and the shareholder lawsuit, all that stuff just is an ongoing investigation -- an ongoing suit. So, I really can't provide any more visibility than that at this point. Whereas we anticipate that as much as anybody, but there's no way for us to know when we're going to start wrapping those things up.

Last question. Just kind of an aside here, just any kind of update on Xanboo and what's going on there and any kind of business you might get from Xanboo anytime soon?

Well, we've completed our program in terms of delivery -- delivering product to samples to Xanboo. The state of their project and their programs is up to them to discuss, and we're just hopefully waiting for some revenue opportunity from them. I put all of that in the 'other' category. It's not part of our device networking or IT management program or product businesses. And it's not, as far as a revenue forecast that we use internally, I'm not anticipating any significant contribution from those programs that would affect or not affect fiscal Q4 -- fiscal '04.

All right. Thanks.

(OPERATOR INSTRUCTIONS) Edward Moore (ph) with Moore Enterprises.

My question is in reference to the news release, September 2, 2003, where Bosch, the major security company, has selected the Export to be used with their products. Is this going to be starting a trend in the industry, because they're a very large security commercial, industrial and residential manufacturer?

Is it going to start a trend? I hope so. We're certainly focused on that as one of our prime sectors. That's one contract that we're able to announce. One thing that I'd mention is, in many cases, although the Export is a very important product to us and very fundamental to network enabling, in terms of our customers sometimes we are not as important from their overall customer base as we would perceive. So in other words, when I go to a major company and I ask for a strategic announcement between us, oftentimes I'm not able to do that. And just because they're so much larger than a Lantronix. So many of these substantial contracts that we're working on, we have not able to announce and will not be able to announce just because of the policies with these other companies. But to answer your question directly, certainly I think it's a trend and we are certainly penetrating that sector.

For the follow-up on the previous question in reference to Premise, Bosch, they also in the residential market -- security, and with Premise your system has the software ability to integrate with security and various other connective -- home automation or commercial automation products. So I see that there's the -- is the software itself boosting this feel, or this came independently?

The software really came independently. Many of these companies, Bosch included, have their own software and tools that they've deployed that are not necessarily today ethernet network enabled, but still rudimentary network enabled that they're trying to extend with things like Export. So they're pretty dependent. However, in many cases the opportunity that we address, we do bring in our software and talk to them about it and see if there's alignment there. But they're pretty independent, as we saw it.

I guess in the follow-up on this -- I noticed that the various electronics shows, including electronic (indiscernible) show, they're actually providing an IT pavilion. And it seems that from what I see Premise and Lantronix is the key to be (indiscernible) to network those products that are out that?

That's right. We've been very active in those pavilions and demonstration homes, things like that.

Well, if this is all the case and there's such a demand for it, then why is this not forecast in your next year forecast, or are these sales behind scenes and you're not allowed to release them?

I'm not saying that none of it's in the forecast, some of it is. But the consumer space takes a long time to change. The consumer products, particularly, the kinds of products that we're discussing here, don't get designed over night and introduced. It's easier for us to go into a commercial environment, explain these savings that they're going to get as a result of network enabling. Their ROI is pretty evident. And it's just a -- right now it's a more compelling conversion. But it will happen. It's a question of timing.

You don't see -- you don't see the crossover between the commercial and the residential home? Because these manufacturers that you're dealing with in the commercial sector where they see the rewards, they all have products in the residential sector at the same time. You don't see the crossover?

Over time there will be, but we're not seeing it right now.

Thank you.

There are no further questions at this time. Please continue with your presentation or any closing remarks you may have.

I appreciate all of your attention today, and as we go forward I'd just like to make a comment about where we are in our year. It's the end of our fiscal year. It's also about two years ago tomorrow that we had the September 11th tragedy. And we've got our loved ones, many of us have loved ones in harm's way in Iraq and Afghanistan. I have family there as well. And those of us who are here working and creating wealth in our American capitalist system are able to do that because of the sacrifices that our loved ones are making for us over there in fighting the battle. And I'd just like to acknowledge that all of us at Lantronix our thankful and appreciative for what they do so that we can continue to do what we're doing here. With that, I thank you for your continued support and I'm looking forward to giving you a progress update on our first-quarter some time in the month of November. Thank you very much.

Ladies and gentlemen, that does conclude your conference call for today. We thank you for your participation and ask that you please disconnect your lines.