創力 (LTRX) 2004 Q1 法說會逐字稿

Welcome to the Lantronix Incorporated first fiscal quarter 2004 results conference call. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded, Thursday, November 6th, 2003.

I would now like to turn the conference over to E. E. Wong. Thank you.

My name is E. E. Wong (ph) with Furlough-Wong Communications (ph), Strategic Investor and Corporate Relations Counsel for Lantronix. Good afternoon, everyone.

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 web site at www.Lantronix.com beginning today at 7 PM Eastern time and thereafter. There will also be an audio playback beginning today at 7 PM Eastern time and running through 7 PM tomorrow, November 7th. The number to call is 1-800-633-8284, and the access code is to 21164806. International callers should dial 001-402-977-9140 and use the same access code -- 21164806.

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 margin; financial performance; the size and growth of the potential markets for Lantronix products and technology in the future; product development; strategic investments; new product introductions; engineering and design activities and manufacturing efficiencies in the future are forward-looking and are based on information available to management as of the time of such statements and relate to, among other things -- expectations of the business environment 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; rapid changes in technology that may displace products sold by Lantronix; decline process -- prices on networking products; and -- the company's reliance on distributors and contract manufacturers; delays in the company's product development efforts; consumer exceptions (ph) of Lantronix's 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 or -- 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 of Lantronix. Marc?

Thank you, E. E., and welcome to our first fiscal 2004 conference call. Joining Jim and me this afternoon are David Schafer, Executive Vice President of Worldwide Sales; John Warwick, Executive Vice President of Operations, and Michael Oswald, our Vice President and General Counsel.

In our last conference call on September 10th, we discussed the results of our fiscal year ended June 30th, 2003. And I also reviewed the operational improvements and financial progress made over the past year in some detail.

Over that 12 month period, we streamlined operations, focusing on two main business lines. We stabilized the company financially, reducing cash usage from about 9.1 million per quarter to less than 1 million per quarter. This past quarter, we continued to hit our cash targets, and for the first time since our restructuring, have delivered increase revenues sequentially from the prior period.

We continued to improve our fundamentals on all fronts. Revenue increased by 3.6 percent from the fourth quarter of fiscal 2003. As many of you are aware, during the past year, we simplified the business by discontinuing more than 75 percent of the individual items we offer for sale and by scaling down or exiting business lines. While we expanded certain product lines over the past year, up until this quarter, our simplification efforts resulted in sequentially flat or slightly down revenue. I will share additional insights into what drove our recent revenue improvement later in the call.

We also reported improved gross margins -- from 35 percent in the same quarter a year ago to 50 percent the first fiscal quarter of 2004. Our cash gross margin improved one-half a percentage point from the prior quarter, to 51.3 percent.

We reduced net loss, both on the year-over-year and quarter-to-quarter basis. Finally, we continue to aggressively manage and control cash. During the quarter, we maintained cash usage at a neutral level, using $611,000 of cash within our guidance, which was in the range of 1 million.

While we made significant progress in the first quarter, our focus continues to be on achieving our financial model for revenue growth in Lantronix's two core product lines -- IT management and device networking. Before we get into that, I will turn the call over to Jim, who will discuss our financial results for the recent period. Jim?

Thank you, Marc, and good afternoon, everyone. Some of the financial information used in this call includes non-GAAP measures in order to provide a more apples-to-apples comparison of our performance over time, and we use these metrics in our internal measurements of performance. Reconciliation of these figures to GAAP is in the Investor Relations section of our web site at www.Lantronix.com.

As we stated in our news release today, Lantronix recorded revenues of $12.2 million and a net loss of $3 million, or 5 cents per share, for the quarter ended September 30, 2003. That compares with revenues of $12.7 million and a net loss of $11.4 million, or 21 cents per share, for the same period last year. Revenues for our prior quarter ended June 30th, 2003 were $11.8 million, and we recorded a net loss of $19.1 million, or 33 cents per share. Our June 30th quarter included special impairment charges of $10.6 million that reduced our asset balances for intellectual property and goodwill.

With respect to the sources of revenues, during the September quarter, approximately $6.6 million came from our device networking category; $3.1 million from the IT management category; and $2.6 million from other product lines. Most of the decline in revenues of $0.4 million from a year earlier is attributable to reduced sales of legacy print server products, which we classify as part of our other product lines.

For the first fiscal quarter, sales in the Americas accounted for 78 percent of revenues, and international sales were 22 percent of revenues. Our gross margin for the quarter was 50 percent, compared to 26.3 percent in the prior quarter, and 35.4 percent for the same period one year ago.

Our gross margin improvement is due to several principal factors. First -- as a result of the impairment tests we were required to perform at the end of each fiscal year, we reduced the balance of our intellectual property assets, and therefore reduced the amount of non-cash amortization charges going forward each quarter. In the September quarter, this amortization was $597,000, compared to $1,028,000 for the same period a year ago, a reduction of 431 dollar -- 31 thousand dollars (ph) in expense. The effect of this non-cash expense reduction will continue throughout the fiscal 2004. And as we described in our published financial statements, this IT amortization phases down substantially over the next few years.

During the September quarter, our GAAP gross margin benefited primarily from our utilization of excess products. We recorded a favorable pick up of $914,000 in our excess and obsolete inventory reserve as a result of this. We'd had an expense in prior quarters when we increased our inventory reserves to cover exposures that could arise due to the discontinued products we have spoken about.

These changes in our reserve accounts may occur from time to time as we continue to deal with old inventories and either recover or add to our reserve balances. This will affect margin as reported by GAAP standards, and therefore, we believe our GAAP gross margin for the last quarter of fiscal 2003 in the next several quarters are not a good indicator of our underlying financial performance. Our normal range for GAAP gross margins, assuming no significant adjustment for our reserves, will likely be in the 35 to 45 percent range over the remainder of the fiscal year.

Because our non-cash charges, especially those related to inventory reserves, can vary significantly from quarter to quarter, we believe the metric of cash gross margin is a more appropriate indicator of our quarterly progress towards our goal of generating positive cash flow. Cash gross margin is a non-GAAP measure, and reflects the gross margin calculated, excluding non-cash expenses, that are caused by adjusting warranty reserves, excess and obsolete inventory reserves, and the amortization of the intellectual property assets from past acquisitions. Cash gross margin is also an indicator of the pricing dynamics in our bar -- markets and our ability to offset any price degradation with internally-driven cost improvements.

For the quarter ended September 2003, our cash gross margin improved to 51.3 percent. During the quarter, the cash decreased by $611,000, within our earlier guidance of about 1 million. This is another favorable cash quarter -- in line with last quarter, when we burned only $459,000, and it's a far cry from a year earlier, when we went through $9.1 million in the quarter.

As of September 30th this year, our cash and equivalents balances totaled 13.5 million. Our balance sheet remains strong, with continued improvements in our accounts receivable, payable and inventory balances.

Gross inventory was down, year-to-year, from $17.7 million in Q1 a year ago to $11.8 million in the first fiscal quarter just completed. Net inventory was down from the $11.2 million to 6.1 million.

The most notable changes in our operations are evident when we compare our results of operations for the September quarter this year to the same period last year. Last year, we recorded a restructuring charge of $4.9 million, so that total operating expenses were $15.9 million versus $9 million in the first quarter of fiscal 2004. Looking in more detail, we can see SG&A expenses have decreased from $7.9 million down to 6.7 million.

Included in SG&A, our first quarter net legal expenses were $374,000. These results include $325,000 credit for reimbursement from our insurance company.

We continue to see benefits of the changes we made over the past year to reduce our costs and streamline our operations for the long run. With cleanup of old issues and continued improvements in our operations, our ability to control and manage the business effectively continues to grow month after month.

Now I will turn the call back to Marc to provide more insight into our financial model and our plans moving forward. Marc?

Thanks, Jim. Performance of the first quarter of fiscal 2004 reflects the results of long-term initiatives we put in place last fiscal year to improve efficiencies while we continue to invest to drive growth going forward.

During the last conference call, I briefly described our static financial model. Our static model, which drives our internal financial targets, comprises three key elements -- revenues, operating expenses, and cash gross margin. 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 gross margin. This model assumes cash outlays for ongoing expenses basically in line with our current levels.

This past quarter, we moved these factors closer to our model. Revenues grew from $11.8 to $12.2 million, an increase of about $400,000 or about 3.6 percent. SG&A and R&D expenses for the quarter were $8.7 million, consistent with our model targets.

Cash gross margin improved over the last 12 months, moving from 48.8 percent at the end of the September 2002 quarter to 51.3 percent in Q1 of fiscal 2004. This is an overall improvement of 2.5 percentage points. We're making steady progress towards our model target of 54 percent cash gross margin through attention to product costs and operational efficiencies.

As I mentioned earlier, revenues of fiscal 2003 were negatively impacted as we implemented actions to simplify the business. During this time, Lantronix actually experienced an increase in sales in significant portions of our business. However, these improvements were masked, to some extent, as we discontinued several product offerings, and I'd like to illustrate with an example from this past quarter.

This past July, we stopped selling one line of industrial controller products that were designed and sourced to us by a company based in Germany. The product line contributed up to $500,000 of revenue in recent quarters, but these products did not fit our strategy. Although we have reported a sequential increase in sales of about $400,000, or 3.6 percent, this past quarter, when we adjust out the revenue for this discontinued product line for both fiscal Q4 and fiscal Q1, we see that the ongoing Lantronix business actually grew about $780,000, or about 6.8 percent, quarter-to-quarter.

As we look at revenue on a business line basis -- again, after adjusting for the industrial controller products we discontinued in July -- from fiscal Q4 to fiscal Q1, we experienced about 16 percent growth, or about $900,000 growth in our core device networking business. This increase was driven primarily by Device Server and XPort sales.

XPort continues to build momentum, as demonstrated by intense interest and designing (ph) activity, and I want to reiterate our expectation that XPort will contribute more than 5 percent of our total revenues in fiscal Q3 of this year. During fiscal Q1, XPort device sales nearly doubled from the previous quarter, indicating a trend -- the traction we are gaining in the marketplace as customers begin transitioning XPort from the design stage towards production. We continue to work closely with customers in the security, industrial control, IT office equipment, medical consumer electronics, and other interesting segments.

On another front, we recently announced a strategic partnership with emWare, a leading developer of machine-to-machine, or M2M, software technology, to jointly develop, market, and sell comprehensive device management solutions. This partnership, which will leverage the strength of Lantronix's award-winning networking technologies with emWare's leadership in software and services will allow us to cost-effectively deliver a complete machine-to-machine solution. Not only will Lantronix be offering device servers and embedded web server components, we are now able to bring device management services to our customers.

We have already started to benefit from opportunities represented by the joint emWare/Lantronix offering. Recently, we announced an agreement to help add remote service capabilities to MGE's uninterruptible power supply line of enterprise power protection products. MGE is one of the world's leading providers of solutions that increased power availability and system uptime to PCs and enterprise-wide networks, mission-critical telecommunications systems, and industrial manufacturing processes.

Revenue from our IT management lines declined 13.9 percent quarter to quarter, primarily due to seasonality effects, including the traditional summer slowdown in Europe. It is also significant to note that this decrease immediately followed a quarter in which we had just experiences 13 percent growth in IT management. We expect that any future pickup in IT capital spending will possibly affect our sales of IT management products. In addition, we continue to expand our representation and marketing efforts to users and integrators of these products.

Our other business lines actually grew 15.9 percent this past period, mostly due to seasonality driven by an increased demand from national security and other government-services-oriented customers.

As I mentioned on our last call, fiscal 2003 represented a major transition for Lantronix. Now that we are almost four months into the new fiscal year, I am pleased to report that the year has started off on a positive note.

Lantronix now has a foundation to accomplish our mission -- to be the highest-volume supplier of intelligent subsystems for products that can benefit from being connected to the internet, and to be the brand of choice for complete, easy-to-use remote management solutions for information technology systems.

We have a tremendous amount of work ahead of us as we drive programs designed to improve revenue and margins throughout fiscal 2004.

Our only (ph) Lantronix team appreciates your support as we work to accomplish our mission. We look forward to ongoing improvement throughout fiscal 2004 and to achieving positive cash flow and, ultimately, profitability.

And now, I'd like to turn the call over to Tricia, who will open up our Q&A session.

(OPERATOR INSTRUCTIONS) Winder Hughes (ph), Hughes Capital.

Seems like you've turned the corner. One question on the pricing of XPort. Let's say that you're a vendor of, you know, elevators or copiers, what have you. What might they be buying from you today -- at what price point versus that of XPort? Meaning that the current things that folks have been buying, history, to date, have been, you know, like $100? Or $200? And XPort's is only 30 -- I'm just trying to understand that a little better --?

Sure. That is a good question, Winder. Roughly -- I can't -- you can't keep me -- you can't quote me on this ASP, but roughly $100 is what the embedded solution costs today -- maybe $80, somewhere in that ballpark, if you use our older technology. And XPort's anywhere in the, you know, $35 to $45 range.

Okay. But if they're embedding this in very high-value items -- let's say like an HVAC system in a building, or something like that -- I mean, will be cost be that low, as well? Or, will the, you know, higher-value items always be, you know, north of 100, and it's the lower things -- like what analyzers and copiers and mass-market type of products -- are at the low end?

Well, what we find is a lot of the applications that are lower volume -- perhaps like elevator controls and things like that -- tend to use the box-level products and not the embedded products, just because of the nature of the attach rates at this point and the requirement to have to go back and redesign for a product like an XPort. So there we still enjoy substantial ASP's, because we're selling box-level products.

In the case of embedded applications, it does depend, to a large extent -- to some extent, excuse me, on the application we are designing into. Sometimes there is a requirement for, say, security protocols, and that increases the cost of XPort.

And although we talk about XPort today if it as if it is one product, going forward, if you sat for our customer presentation, you'd see that it actually is a roadmap of different products at different value and functionality performance points.

The last question. Have you got anything in the works for wireless?

Yes, we do. I think I've mentioned this on occasion before. We have some -- we actually offer a wireless product today at a -- not an embedded product, but a stand-alone box product. And we're in development of an embedded wireless solution, which we will announce later on when it is ready.

Thank you.

(OPERATOR INSTRUCTIONS) At this time, I show no further questions. Please continue with your presentation or closing remarks.

Well, thank you very much. Jim and I look forward to seeing some of you at our annual shareholder meeting here at our Irvine headquarters on November 20th. Our next planned conference call will be in early February, when we report on our progress for the second quarter of fiscal '04. And again, thank you very much for your continued support. Have a great day. Bye-bye.

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