創力 (LTRX) 2004 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Lantronix Incorporated second fiscal quarter conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session. At that time, if you have a question, please press star then the number one on your telephone. If you would like to withdraw your question, press the pound key. As a reminder, this conference is being recorded, Thursday, February 5th, 2004. I would now like to turn the conference over to Ms. E. Wong. Please go ahead ma'am.

Thanks for that Amy. Good afternoon everyone this is E. Wong, with Communication's Strategic Investor and Corporate Communications Counsel 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 Web site at www.lantronix.com, beginning today at 8:00 PM Eastern time and thereafter. There is also an audio playback beginning today at 8:00 PM Eastern time and running through 8:00 PM tomorrow February 6. The number to call is 1-800-633-8284, and the access code is 21183418. International callers should dial 001-402-977-9140, and use the same access code 21183418.

Before we begin the call, I would like to review the company's Safe Harbor guidance. 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, besides and growth of the potential markets for Lantronix's 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 at the time of such statement. And relate to among other things are applications of the business environments in which Lantronix's operates, projections of future performance, perceived opportunities in the market, and statements regarding the company's mission on this. Statements are not guarantees of future performance and involve certain risks, uncertainties, and assumptions that are identified from time to time in Lantronix's filings with the SEC, which 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 this webcast or any forward-looking statements whether as a result of new information, future events, or otherwise. Now that we have the housekeeping out of the way, it is my pleasure to introduce Marc Nussbaum, President and Chief Executive Officer of Lantronix. Marc?

Thanks and welcome to our second fiscal quarter 2004 conference call. Joining Jim and me this afternoon are John Warwick, Executive Vice President Of Operations, Michael Oswald our Vice President, General Counsel, and the news member of our management team Chris , Vice President of IT Management, Marketing.

Before I turn the call over to Jim to discuss our financial results, I am pleased to report that Lantronix continued to make progress in its fundamental operations. Revenues increased by $300,000 from the September quarter, making this the second consecutive quarter of increased sales, since our restructuring. More importantly, we continued to increase revenues in both our core business of IT Management and Device Networking, growing these product lines by about 7% over the prior period. Sales in the embedded portion of the Device Networking business led by export were particularly strong. I will elaborate more on out revenue growth in individual product categories later in the call. We achieved cash gross margin of 54.5%, an increase of three percentage points over the prior quarter. Expenses remained in the range of our business model even as we continued to pursue the strategy of expanding engineering capabilities in our core product lines. Finally, we continued to aggressively manage and control cash, when we refer to cash, we look at the total of cash and cash equivalents and marketable securities. During the quarter we further reduced cash usage from $611,000 in the September quarter to $214,000 in fiscal Q2 well within our guidance of $1m and a dramatic reduction from cash consumption of $4.3m in the same quarter of last fiscal year. The company achieved its targets for cash gross margin and expenses in fiscal Q2. While the core business has grown nicely this past period, we continue to have non-core product lines that depress our overall financial performance both in terms of the resources acquired and the simplicality of related revenues. It is imperative that we continue shipping the balance away from these ancillary businesses and into our Device Networking and IT Management product lines. Going forward, our focus will continue to be on achieving the third leg of the financial model through revenue growth in our core business. Before we get into the details of all this, I'll turn the call over to Jim, who'll discuss our internal financial results for the quarter.

Thank you Marc and good afternoon to 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 sit at www.lantronix.com.

As we stated in our news release today, Lantronix recorded revenues of $12.5m and a net loss of $5.3m or $0.09 per share for the three-month period ended December 31, 2003 compared with $12.7m and a net loss of $7.1m or $0.13 per share for the same period last year. Results for the December quarter included a non-cash impairment charge of $3m related to certain goodwill and purchased intangible assets of Premise Systems Inc., which we acquired in fiscal 2002. Approximately $800,000 of this impairment expense is recorded in cost to sales and $2.2m is recorded as an operating expense. For the six-month period ended December 31, 2003, Lantronix recorded revenues of $24.8m and a net loss of $8.1m or $0.15 per share compared with revenues of $25.3m and a net loss of $18.5m or $0.34 per share for the same period last year. With respect to the sources of revenues during the December quarter, approximately $77m came from our Device Networking category, $3.3m from the IT Management category, and $2.2m from other product lines. Marc will comment on the trends of our revenues in a few minutes.

For the second fiscal quarter of 2004, sales in the Americas accounted for 69% of revenues, and International sales were 31% of revenues. As you recall from our last conference call, GAAP gross margin in fiscal Q1 was unusually high due to inventory reserve credits. Our GAAP gross margin for the December quarter was 38.6% compared to 50% in the prior quarter and 39.3% for the same quarter a year ago. GAAP gross margin decreased from the September quarter, because we had the extra impairment charge of approximately $800,000 related to Premise assets and an increase in inventory reserves expense in the current period. Finally, these extra costs were offset by net favorable manufacturing expenses during the December quarter. Because our non-cash charges can vary significantly from quarter to quarter, we believe the metric of cash gross margin is a more appropriate indicator of our quarterly progress toward the goal of generating positive cash flow. Cash gross margin is a non-GAAP measurement and reflects the gross margin calculated without non-cash expenses including adjustments to warranty and retrenched reserves, excess and obsolete inventory reserves, and the amortization of intellectual property assets from past acquisitions. Cash gross margin is also an indicator of the pricing dynamics in our markets and our ability to offset any price degradation with internally driven cost improvements. For the quarter ended December 31, 2003, our credit cash gross margin was 54.5% compared with 51.3% in the September quarter and 49.3% for the second quarter -- fiscal quarter a year ago. Although this number is higher than our business model target of 54%, the margin results for this quarter reflect extraordinary costs, extraordinary cost benefits we achieved during the quarter that are not necessarily sustainable in the next quarter. We've been experiencing about 1.5% improvement for the past several quarters and non-cash gross margins have recently been in the 50% to 51% range. We expected that to be in that range, improving from that base in quarters going forward. During the quarter, cash, cash equivalents and marketable securities decreased by $214,000 within our earlier guidance of about $1m and compared to a decrease of $611,000 in the quarter ended September 30, 2003.

As of December 31, 2003, our cash, cash equivalents and marketable securities totaled $13.3m and we remain essentially debt-free. Our balance sheet is strong with continued improvement in our accounts receivable, payable and inventory balances. Gross inventory was down year-to-year from $12.5m in December 2002 to $10.4m in December 2003. Accounts receivable showed DSOs of about 33 days and we've been under 35 days for the past three quarters. We continue to make significant progress in controlling and managing our operating expenses. Our total operating expenses for the second fiscal quarter totaled $10m, down from $11.9m for the same quarter last year. That $10m total included $2.2m of the impairment charge so the operating expenses for the December quarter were quite low. Our SG&A expenses decreased from $6.7m in the September quarter to $5.5m in the December quarter. The decrease is due to a reduction in accrued professional fees related to delayed implementation of certain Sarbanes-Oxley legislation requirements until June 2005 and favorable adjustments to our bad debt accruals. During the quarter, our net legal expenses decreased from approximately $400,000 in the September quarter to a $300,000 credit in the December quarter because we received $1.1m in legal reimbursements from our insurance carrier. Gross legal expenses for the quarter were $856,000 in line with expectations and that compares to gross legal expenses of about $700,000 in the September quarter. Overall, we expect SG&A expenses going forward to increase back to levels incurred in recent quarters. We've improved cash usage significantly in the past several quarters. We expect to make cash payments totaling approximately $750,000 over the next two fiscal quarters that are related to past tax liabilities. However, we reiterate our guidance that cash, cash usage for the remainder of the fiscal year is targeted to be in the range of $1m per quarter. As I summarized last quarter, the benefits of the actions taken over the past 18 months are being reflected to have results and our ability to control and manage our business improves each quarter. Now I'll turn the call back to Marc to provide more insight into our financial modeling, our plans moving forward. Marc?

Thanks Jim. Performance for the second quarter of fiscal 2004 was a result of growth in our core Device Networking and IT Management businesses. During the last conference call, I briefly described our static financial model. This model drives our internal targets and comprises three key elements: operating expenses, cash gross margins, and revenues. Without any help from our asset efficiency improvement programs, we become cash-positive at about $14m to $15m in revenue per quarter and roughly 54% of cash gross margin. This model assumes cash outlays for ongoing expenses basically in line with our current levels.

This past quarter, we continued to make significant progress toward achieving our model. SG&A and R&D expenses for the quarter were better than our model, our target as Jim just explained. Cash gross margin slightly exceeded our target reaching 54.5% as compared to our results for the prior period, which was 51.3%. This increase is due in part to extraordinary cost benefits that Jim mentioned, which we achieved during the quarter and we believe that these are not necessarily sustainable in the March quarter. It's likely that in the near term, we will see cash gross margins in the range of 50% to 54%. Revenues grew from $12.2m to $12.5 quarter to quarter. As we have discussed in prior earnings calls, during fiscal 2003, we simplified Lantronix's business and in the process, discontinued certain product lines. Over the last several quarters, we've experienced increase in sales of significant portions of our IT Management and Device Networking businesses. These improvements were matched to some extent by the performance of our non-core product offerings and in fiscal Q2, our core IT Management and Device Networking product sales grew a healthy 6.7% from the prior quarter, while overall revenues grew only 2.5% during this period.

Other products that offset our growth in fiscal Q2 are from one particular product line within the category we report as other. The line consists of optical video standards and switches we collectively refer to as visualization. The market for these products consists primarily of government contractors involved in developing applications for commanding control centers in the military, aviation, and transportation sectors. Typically, we do between $500,000 and $1b in visualization each quarter. Our revenue from the category of Other declined 13% from fiscal Q1 to fiscal Q2, and this decline was entirely due to the visualization product family. The weakness was consistent with seasonality effects we typically experience as a result of the government sector's fiscal year end in September. It's also important to note that due to the big ticket pricing associated with visualization products, in any given quarter, our revenues from this line could be impacted significantly by delivering our delivery timing of one or two orders. To give you a feel for how this looks: one project from one customer accounted for about half of our revenues in visualization in fiscal Q1. This customer did not take any product from us in either the quarter prior to or the quarter after fiscal Q1 simply based on its project needs. In the recent past, our other business lines represented about 20% of total revenue and as such had an undue impact on overall financial performance. To reduce the impact of swings in revenues caused by this category, we are focusing on growing revenue contribution from our core business lines to operate at 85% of total revenues.

Now moving on to the core businesses, As I already mentioned, IT Management and Device Networking together grew 6.7% from fiscal Q1 to fiscal Q2. I will now discuss each of these in some detail. We continue to experience significant growth in our Device Networking product segment, growing 6.3% from $6.6m in fiscal Q1 to $7m in the December quarter. Several months ago, we provided guidance that export sales would exceed 5% of total revenues in the March quarter. I am pleased to announce that we pursued previous guidance reaching 5% of revenues from export in the December quarter ahead of plan. Export continues to build momentum as demonstrated by intense interest and design and activity. One indicator of this is the number of export evaluation kits sold, which exceeded more than 500 units on an average in each of the past three quarters. We are working closely with customers in the security, industrial control, IT office equipments, medical, electronics, and other segments. At this point, many export customers have actually started initial shipments of products to their end customers. Momentum has continued to build and I am pleased with the export sales progress. We expect the line will continue to grow rapidly throughout fiscal '04 and later in the year, we plan to introduce additional products, further expanding the markets, and applications we serve at the Console. In addition, we recently announced the launch of Lantronix DeviceView, a comprehensive remote device management service that eliminates the complexity of deploying fully integrated machine-to-machine networking solutions. In Lantronix DeviceView, we saw the privacy problems associated with controlling remotes over public networks. Companies that provide maintenance services can reduce cost and resolve issues before their end users even realize there is a problem. In many cases, the combination of Lantronix Device Servers and DeviceView has been deployed in just a few weeks, and by eliminating the barriers that make machine-to-machine deployments difficult, we expect to enhance the levels of sales in current Lantronix products, while at the same time beginning to establish an ongoing revenue stream for the company.

Moving on to our IT management business; sales for this group grew 7.6% from the prior quarter to $3.3m from $3.1m as we've started to derive the benefits from recently launched marketing programs. We believe the current low tax rate and the beginning of economy recovery represented strong opportunities for our Console Server products and the general IT remote management segment. We recently announced the industry's first fully NEB'S compliance dual power supplied Secure Console Server for the telecommunications and network service provider markets. As one of the few publicly held companies that address the remote management issues of IT and services departments, Lantronix has established its trait of being the brand of choice for many key Fortune 100 companies. By bringing NEB's compliant products to market, we address new applications with our existing customer base as well as offering enhanced level of functionality and reliability to the market in general. We intend to add new products to our IT management line in the coming months, further expanding both the breadth and depth of our market reach. As you may know, earlier we launched a new value-added reseller reward program designed to better serve the partners in our IT management sales channel. Today, we just learned that Lantronix has earned a five star rating from Barb Business Magazine, an influential publication specifically targeted towards solution providers and business and technology integrators. Out of 100 plus submissions, Lantronix is one of the select group of companies to have earned this distinction, which will be announced by the publication later this quarter. On the international front, we continue to make inroads into Asia, which represents a significant market opportunity for us. Most recently, we saw in Cayee Computer Limited the specialty network and communications products distributor. I mean, the terms of this agreement, Cayee will provide distribution, services as well as full technical and design support for Lantronix products in Mainland China. Over the past year, we have made progress in establishing a strong presence in Japan. During the second fiscal quarter, total Far East sales grew to 8% of revenues compared to less than 2% in the same period last year. I'm pleased to report on the positive gains we've made so far in fiscal 2004. We continue to drive revenue and margin improvements with our current product offerings while simultaneously introducing new and promising IT Management and Device Networking products. We are, as you can see, making excellent progress on our plan to grow the core business. As we continue to execute on the fiscal 2004 plan, the core business will come to dominate our overall financial results. And with that I'd like to turn the phone call over to the operator and will open up the section for questions.

Thank you. Ladies and gentlemen, if you would like to register a question, please press star then the number one on your telephone. If your question has been answered and you would like to withdraw your registration, please press the pound key. If you are using a speakerphone, please lift your handset before entering your request. One moment please for the first question. Our first question comes from Winder with Hills Capital.

Hi, Marc how are you?

Good, Winder, how are you?

Thanks. I have several questions actually. Relating with the legacy business, I know that you guys are still -- there's still a meaningful part percentage wise of the revenue, if we're going to model this, you know, it came in at 2.2, this quarter was 2.6, last quarter, you explained why it's fairly lumpy, what kind of like the trend was that, is it going to be more toward 2.2 from here on or more toward 2.6 and that's, you know, an anomaly?

Well, as I mentioned, the business is lumpy and it's also seasonal, and a reasonable range is probably in the same ballpark that we've been seeing, I'd expect it to move around between that 2.2 and 2.6 number over time.

Okay, I got it.

So, we really need to grow the other business to offset it.

You're right. Then with the device networking business, what -- say last 90 days or so, what would be the percent increase in design win activity or the level of design wins that you're seeing like today versus back in October?

Right. How many of that was seen? I think the number of kits to go out is a main indicator of that and the kits go out as I mentioned about 500 units a quarter go out at our kits, that's been consistent over the last three quarters. And based on that activity and what we know on the market, I think the design win rate has been pretty consistent.

So, once I have the kit, then you have the design wins, so basically what's like the time lag from when they get a kit to when they figure that they want to go ahead and roll it out?

Well, it depends on the customer of course, we've got some customers who take, well, I can't tell you where the decision point is, but I could tell you from the time that they get the kit to the time that they actually start rolling out product varies anywhere between six months to maybe as long as a year in a lot of cases. So, customers took samples back in the April time frame, many of them were still not in production, although I know that they intend to go to production with their products.

Okay. Final question, As you will know, there are some people out there that have some fairly substantial numbers and forecast for the M-to-M market in general, whether it's the devices, it's the service component. What are the other parts of this pie that we should be looking for that you're going to go after this year in terms of solidifying in terms of new partnerships and things like that so that you kind of like establish yourself as the leader in this new space?

Well, we have already done quite a bit as you have seen throughout the services product line, which is going to have a lot of legs on it over time I believe. a company upstream into a higher value acquisition in the area, but I think the big challenge for this company is to address all the different applications that are out there. There are so many applications for device networking and certainly the demand out there for it and our job is to bring products out that address each of the applications.

Okay.

But that includes things like wireless and things like special protocols to address different segments. Didn't answer this specifically, but we have been very strong recently in the securities segment, but there are other segments that await us to tackle.

Okay. Thank you very much.

Our next question comes from Bill Nasgovitz with Heartland Funds.

Yes. Hi, good afternoon.

Hi Bill.

I came on later. I might have missed this Jim, sorry but did you say -- did you give us a time frame in terms of when you are going to be cash flow positive? Was it this coming quarter?

No. We haven't talked about that. What we said is that we anticipate being roughly cash neutral, which for us is roughly $1m of negative cash flow per quarter. We have $13.3m in the bank and it will completely depend on when we get to our revenue levels. If somewhere around between $14m and $15m in revenue, we are cash positive. And so the whole job is to grow the business to that level.

Okay. And this export is now 5% of sales. What do you think it's going to be of sales in a year from now?

.

Well, it had better be.

Well, we are growing other piece of the business too. It's not the only thing that we have got for growth, but I still expect it to be a significant portion, a large portion of business a year from now.

All right. How many people are actually involved in sales and can you comment on the -- one to ten, ten being the best in terms of sales organization. Where is Lantronix in terms of that spectrum today?

Oh, Jesus. Obviously, we are ten. I wouldn't real answer a different question, I think maybe more to the point. There is a great deal of opportunity for Lantronix to increase its capabilities, particularly in the channel. Talking about the and the resellers and indirect channel -- indirect sales methods. So, our focus going forward is on leveraging the current sales organization that we have.

And how big is that sales organization?

There is now 30 people or so in sales at the company, both inside and outside, but we've got well over 300 people on the street through reps and that actually to sell the product. But we want to get more effective and get more of their mind share and there is a lot of opportunity there for us to do that stuff.

So, I mean -- we have been hearing a lot about the potential for these products in all those networking and so forth. But it seems like a very slow start. I mean who is responsible for sales?

I am not sure how you mean that.

Is it ahead of sales?

Yes, absolutely. David Schafer.

Okay.

By the way, over the last year, we tripled the number of people that were selling the product, and if I give you a perspective on it, what I see happening is the market is moving from the experimental stage to actually putting these things in products and bringing them to market. Now, the acceptance will depend on how well their products actually are accepted in the marketplace. But I am definitely seeing a shift over the last year from experimentation in niche to more of mass adoption and now, it depends on what the customer and the users' customer acceptance rate is going to be.

Okay. Well that's great to hear. Do these 30 people have sales quotas and what are they?

Oh, yes. They have sales quotas.

What will they be?

I am not going to disclose that for vendor reasons.

Okay. Do buyers have to reach a certain level to maintain their status with you? Or --

Yes, they do. There is three levels of buyers, you know you've missed this but we just recently won an award from a business magazine. Thank you. Based on the channel program that we got in place for our buyers.

Okay. Thank you.

Ladies and gentlemen, as a reminder to register for question, please press star then the number one. There are no further questions at this time. I'll now turn the call back over to you. Please continue with your presentation.

Thank you again everybody for your continued support and Jim and I look forward to seeing you all and giving you progress on the third quarter results on early May. And that's it. Thank you very much. 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.