創力 (LTRX) 2004 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, welcome to the 3rd 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 the one, followed by the four on your telephone. As a reminder, this conference is being recorded Thursday, May 6, 2004. I would now like to turn the conference over to miss Huang. Please go ahead ma'am.

Thank you, Susan. Good afternoon everyone. My name is E.E. [Huang] with [Furlough Huang] Communication 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 web cast of this call will be available at 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 play back beginning today at 8:00 p.m. eastern time and running through 7:00 p.m. tomorrow, May 7th. The number to call is 1-800-633-8284. And the access code is 21194406. International callers should dial 001402 977 9140 and use the same access code 21194406.

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, 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 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, percieved 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 that are identified from time to time in Lantronix filings and the Securities and Exchange Commission and 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, wether as a result of new information, future [inaudible]or otherwise. Now that we have the housekeeping out of the way, it's my pleasure to introduce Marc Nussbaum, President and Chief Executive Officer of Lantronix. Marc?

Thank you, E.E. and welcome everyone to our 3rd fiscal quarter 2004 conference call. Joining Jim and me this afternoon are David Schaffer -- [ audio difficulties ]

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The operating profit this quarter was principally due to a reversal of restructuring reserves that were established in September 2002, more than 18 months ago. Top line revenue in the March quarter was $12.3 million, approximately flat compared to the same quarter one-year ago. However, revenues from our ongoing business lines were up by about 4.6% over the same period, driven primarily by increases in the embedded device networking family. On a sequential basis, our March quarter revenue for continuing operations was 1.5% less than the December quarter or essentially flat, reflecting in part the effects of industry seasonal cycles, as we will discuss later, a mixed change toward our lower price device networking solutions masked an otherwise stellar increase in unit sales. The big news is that, we see clear signs of a significant increase in device networking adoption, in our prime target markets of security, medical, industrial automation, building automation and others. Also of key importance to our future financial performance over the last few months, we have made substantial progress in bringing the market not only extensions within existing product families, but entirely new offerings that will expand the size of the markets we conserve. In the high technology world, at the end of the day, what drives growth are new products.

During the March quarter we launched four new product lines, the highest number of new introductions in one quarter throughout the company's 15-year history. It is a response to these offerings, has been very positive, which I will elaborate on later in the call, during the past year, we have been fanatically focused on expanding R&D, and we are now seeing the results of this strategy. Lantronix is positioned as a technology leader in M to M and I have no doubt that our new lines will fuel growth later this calendar year. We increased our channel sales and marketing activities and expanded our worldwide distributor and reseller network by over 40%. New selling partners were added in Japan, Germany, Greece, France, Israel, Korea and the U.S. If you follow the company closely, you may have noticed our increase presence at trade shows and in the press. This increase in visibility represents the beginning signs of the successful execution of our marketing expansion plan.

We achieved cash gross margins of 56.6%, an increase over the prior quarter. We completed the divestiture of the premise line of business, sharpening our focus on commercial networking applications and freeing up resources to increase our investment in the core product lines. During the March quarter, expenses remained consistent with our business model even as we continued to pursue the strategy of expanding our engineering and sales capabilities.

Finally, we continue to aggressively manage and control cash, during the quarter we maintained a low level of cash usage, consuming $390,000, well within our guidance of 1 million. At the end of the period we had 12.9 million in cash, cash equivalent and marketable securities. During the quarter we borrowed $500,000 from our line of credit to finance a contractual obligation that Jim will discuss in his comments. With are pleased with our progress in driving forward the new product introductions necessary for us to live a long-term profitability. The company achieved its targets for cash gross margins expenses, however, our focus continues to be on driving the revenue components of our financial model. Before we get into the details of all that, I'll turn the call over to Jim who will discuss our financial results for the quarter. Jim?

Thank you, Mark, and good afternoon to everyone. Some of the financial information used on this call includes nonGAAP measures to provide a more apples to apples comparison of our performance over time. And we use these metrics as internal measurements of performance. Reconciliation of these figures to GAAP is in the investor relations section of our website at www.lantronix.com. I would also note that because of the Premise sale, all the of the financial information being discussed today has been adjusted to reflect Premise as a discontinued operation for all periods with the rest of our business as continuing operations.

Typically, we experience a slight decline in revenues in the March quarter as a result of the extended holiday season. As we stated in our news release today, Lantronix recorded revenues from continuing operations of $12.3 million and a net loss of $553,000 or one cent per share for the 3 months period ended March 31, 2004. Compared with revenues of $12.3 million and a net loss of $9.9 million or 18 cents per share for the same period last year. For the 9 month period ended March 31, 2004, Lantronix recorded revenues of 37 million and a net loss of $8.9 million or 16 cents per share, compared with revenues of $37.6 million and a net loss of $28.4 million or 53 cents per share for the same period last year. With respect to the sources of revenues, during the March quarter, approximately $6.8 million came from our device networking category, $3.2 million from the IT management category and $2.3 million from other product lines. For the 3rd fiscal quarter, sales in the America's accounted for 67% of revenues, and international sales for 33% of revenues. Mark will comment on the trends of our revenues in a few minutes.

Our GAAP gross margin for the quarter was 56.2% compared with 45.2% the prior quarter and 25.2% for the same period one-year ago. Because our noncash charges, especially those related to our 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 the goal of generating positive cash flow. Cash gross margin is a nonGAAP measurement and reflects the the gross margin calculated without noncash expenses such as adjustments to warranty reserves, excess and obsolete inventory reserves, and the amortization of an intellectual property from past acquisitions. Cash gross margin is also an indicator of pricing dynamics in our markets, and our ability to offset any price degradation with internally driven cost improvements. For the quarter ended March 31, 2004, our cash gross margin was 56.6%, compared with 54.4% in the December quarter, and 49.7% in the 3rd fiscal quarter a year ago.

During the quarter, we closed out restructuring activities started in September 2002. You may recall that in that quarter we took a charge of $4.9 million that represented costs associated with plans to reduce staff, close facilities and operations, and restructure our business and reduce expenses and negative cash flow. One portion of this restructuring plan included addressing a substantial multi-year multimillion dollar contractual obligation to a third party. We are pleased that in the March quarter we were able to reach an agreement with this party which is favorable to Lantronix, the terms of the agreement included a one-time cash payment, which we financed using it our credit line, so that the repayment will match our past contractual payments, over the 12 months beginning July 1. Because of this settlement, we will benefit from a net expense reduction of $120,000 each quarter, starting in fiscal 2005, the close out of our restructuring activities of the September 2002 and March 2003 quarters, reduced our restructuring costs for continuing operations by $2.1 million. When combined with the effect of recording the Premise business as a discontinued operation, this resulted in Lantronix acchieving income from continuing operations for the quarter. We don't expect this to recur until our revenues increase in future quarters.

The sale of Premise was a significant event for Lantronix going forward. As we indicated in our earlier press release, the cash flow to carry this product line has been in the range of 5 to $600,000 per quarter for the last several quarters. Some of these savings are being redirected to enable us to expand R&D and marketing activities in our core businesses.

Our balance sheet remains strong, with reasonable balances in our receivable, payable and inventory accounts. Gross inventory was down year-to-date from 14.0 million dollars in June 2003, 13.6 million in March 2004. The net inventory balance increased by $1.3 million due to lower reserves resulting from better inventory management. Accounts receivable balances showed DSO's of about 28 days, and DSOs have been under 30 days for the past four quarters.

We continue to make significant progress in controlling and managing our operating expenses. Total operating expenses for the 3rd fiscal quarter were $6.6 million including the $2.1 million restructuring credit compared with $10.4 million for the same quarter last year and $7.1 million in the prior consecutive quarter. SG&A expenses for the quarter were $6.6 million in line with expectations, and included a net -- an increase in net legal expenses of approximately $1 million over the prior quarter. If you recall, during the December quarter, we received a large reimbursement for legal fees from our insurance provider, which resulted in a net $300,000 legal expense credit for that quarter. We will begin working with our lawyers and our insurance providers on ways to smooth the impact of legal expenses on our quarter-to-quarter results going forward. In the March quarter, we made notable progress in resolving old issues, the benefits of the actions taken over the past 7 quarters are being reflected in our results, in our ability to control and manage, our business improves each quarter. Now I'll turn the call back to Mark to provide more insight into our financial model and our plans moving forward. Marc?

Thank you, Jim. As many of you are aware, Lantronix uses a static model to drive our internal financial targets, this model comprises three key elements: operating expenses, cash gross margin and revenues. Our model is cash positive at about 14 to 15 million in revenue per quarter and roughly 54% cash gross margin. This model assumes ongoing ordinary operational expenses, basically in line with our current levels.

This past quarter we continued to make progress towards acchieving our financial targets. SG&A expenses for the quarter were 6.6 million, up from 5.2 million prior period. But in line with expectations and consistent with the outlook we discussed on our last call. At that time we indicated that SG&A expenses would increase back to our target level of about 7 million. As you recall, the December quarter benefit from large insurance reimbursements and reversal of reserves related to professional fees, as Jim just mentioned. R&D expenses were 2 million compared to 1.8 million in the prior quarter. Our total SG&A and R&D expenses together of 8.6 million for fiscal Q3 are in line with our financial model. And on a year-to-date basis we've saved over $6.1 million by reducing these expenses compared to the same period in fiscal '03.

Cash gross margin exceeded our target reaching 56.6%, as compared to our results for the prior period, which were 54.4, and our model target of 54%. This improvement was due in part to the extraordinary revenue from royalties and licenses, associated with legacy products and reduction in discounts allowances which we believe are not sustainable. It's likely that near term we will see cash gross margins close to our 54% target.

As already discussed, revenues were 12.3 million in fiscal Q3 compared to $12.5 million in the previous quarter. Our revenue from products classified as other, increased 5.3%, as the visualization products recovered from an unusual low in the December quarter, which we discussed last time. As I will explain next, revenue from our core product lines of IT management and device networking, declined by about 3% in the face of a 26% increase in XPort revenue. Analyzing our device networking results further, it's important to note that for the 9-month period beginning -- or sorry, ending March 30, 2004, revenue from core, ongoing device networking products were a healthy 6.6% compared to the same period last year. Also comparable to one-year ago, unit sales of these products increased substantially. This increase is indicative of an expanding customer base, and signals the movement towards wide spread adoption of our innovative solutions. For example, XPort purposely represented a new price point designed to increase market adoption, driving hundreds of new customers to adopt Lantronix device networking solutions, higher volume end user products that at one time could not afford the burden of productivity, are now able to incorporate networking.

Our XPort line continues to perform well, with revenues increasing in double-digits again in the March quarter, the number of customers who bought XPort last period was up over 25% compared to the prior period. Interest by new customers and design winning success continues to be strong, as indicated by a healthy evaluation [inaudible] rate of several hundred units this past quarter. We expect sales from the XPort line to continue growing in double digits going-forward.

As expected, we have experienced significant growth in unit sales, particularly with our latest generation solutions, which tend to be lower priced in our older technology. While many new customers were driven to Lantronix, we're also able to bring cost reductions to certain projects within key existing accounts. For most of this fiscal year, the increase in unit volume more than offset the effect of these cost reduction transitions. However, in the March quarter we experienced small net decline in device networking revenue. Caused in part by several customers who are in transition to our newer offerings. These transition projects are limited, and although we will continue to experience their effect in fiscal Q4, we believe unit growth will drive increased revenue going forward.

During the March quarter we launched several new products in the device network category, including XPort's wireless sister device, the WiPort. WiPort, our 80211 or Y-FI embedded web server was introduced during our media tour in February. WiPort is the first solution in the industry to offer both wireless and wire connectivity in a complete comapct, integrated module. An article about the technology of wireless networking featured in the April 26th issue of Business Week stated that in a few years there could be "more gizmos chattering away over the net than there are people". Lantronix believes the advent of a portable wireless edge technology and infrastructure components will serve to eliminate one of the key barriers to wide spread adoption of device networking. With the introduction of the WiPort, we are well positioned to capitalize on the wireless networking phenomenon.

Insuring privacy when transporting sensitive data over the network, particularly the public network, has long been a core competency of Lantronix and critical to comercial and government related applications. In March, we rolled out our new line of Secure Box products, the world's first advanced encryption standard or AES secure device servers to be certified by the national institute of standards or NIST. Currently Lantronix is the only company that offers AES certified device servers that meet the stringent U.S. government standards. Not only is the standard required by the government, but many nongovernment related applications are adopting the technology since it provides significantly improved security over older encryption methods.

Thus far the response to this new product line has been strong. In late March we announced that Honeywell, the global leader in diversified technology manufacturing, selected our Secure Box product family to provide enterprise class security management and access control of the Honeywell Enterprise Building Integrator Suite. We expect to see increased revenue contribution from this new product line beginning in the June quarter.

Our IT management revenues for the quarter were 3.2 million, representing a 2.1% increase over the same period last year, and a 3.2% decrease over revenues in the December quarter -- fairly flat. Revenues from this business are particularly susceptible to the seasonality effect since new data center buildouts traditionally fall off during this period. In the mid and later part of the March quarter we experienced an increase -- we experienced an increased return to normal sales levels compared to the month of January, which was low.

In February, we introduced the industry's first full level, free NEBS compliant, secure Console server to the telecommunications and network service provider markets. Level 3 NEBS is the most rigorous standard developed by the Networking Equipment Building Association, which qualifies equipment under extreme environmental conditions for the TELCO industry. With this carrier class certification, customers are assured our Console servers comply with the strictest requirements in the event of a disaster. As part of that certification process we demonstrated that our products operate successfully under extreme simulated environmental conditions such as lightning, vibrations, humidity, electromagnetic interference and corrosion. As one of the few publicly held companies that addressed the remote management issues of IT and service departments, Lantronix has an established history of being the brand of choice for many key fortune 100 companies. By bringing NEBS compliant products to market, we address new applications within our existing customer base as well as offer an intense level of functionality and reliability expanding our serve markets. Our Console server line is currently being evaluated by three of the largest U.S. communications providers.

What is particularly exciting for the Lantronix team is our March introduction of a brand new family of remote management solutions for keyboard, video, and mouse access over the network. Our new secure links remote KBM product line allows the user from virtually anywhere in the world to access Windows based servers or PCs over the internet, essentially as if they were sitting in front of the server or PC. We estimate the remote management opportunity for Windows based servers and PCs represents an incremental $100 million of market today, and that this market will grow at an annual rate of 24% over the next several years. By adding the remote KBMY, we more than doubled the size of opportunity addressed by our IT management business, which up until now, consisted primarily of our Terminal server and Console server product families.

With the launch of SecureLinx, Lantronix has established itself as a complete provider of remote management solutions for both Windows and non-Windows operating environments. We began shipping this product in March, and expect incremental revenue from this new line in the current quarter.

To ensure we take full advantage of the opportunity that opened up with our new broader product offering, we have added resources and initiated new programs in sales and marketing designed to drive the pull of our products through the channel. This January we dramatically expanded sales reach by increasing our resale of partners by 40%, almost 100 organizations. We had 11 new distributors partners worldwide, and doubled the number of value added resellers participating in our new Premiere Partner program. In addition, the Premiere Partner Channel program was awarded a five-star rating, the highest rating possible by VAR Business Magizine. Today our network of sales resources consists of over 30 Premiere VAR partners, 55 other Channel partners including regional and national distributors, and between our own direct employees and contracted sales representatives, another 200 sales professionals. Although we will continue to add more partners, the emphasis has shifted from building our extended sales team to improving the effectiveness of these partners through an increase in training, advertising, lead management and demand generation programs, the effect of these programs will build over time and we're already starting to benefit from execution of this strategy.

During the quarter we added new leadership in the critical areas of marketing communications, channel marketing and channel sales, strengthening the company's selling capabilities. Beginning in January, we stepped up our trade show and public relations activity at customer-centric industry conferences, such as the embedded System Conference, the International Security Conference West, the M to M Conference, the Buildcom Conference and others, generating hundreds of new customer leads. We also conducted press tours for our new AES Secure Box, WiPort, and the Secure Linx lines.

The last quarter we executed exceedingly well in bringing a new portfolio of products to market and in expanding our partner network to effectively sell these products. We made progress towards acchieving our operational performance objectives, improving gross margin and operating profit. We also completed the restructuring activity and freed up additional resources to invest in driving sales.

Now, I've been asked on several occasions to provide a forward-looking revenue outlook for the company. At this time it is difficult for us to provide meaningful revenue guidance due to the current nature of the markets we serve, the characteristics of our customers and the complexity of our extent to sales network. As explained earlier, Lantronix sells products primarily through a network of resellers and other partners. In fact, last quarter over 1800 customers purchased Lantronix products. The breakdown of these 1800 customers provides more clarity on why we have difficulty providing revenue guidance. During the March quarter for example, only 14% of our revenues came from large end users or OEMs who provide reliable forecasts, the other 86% came through our network of resellers. This is not a business where 80% of revenue comes from 10 customers, so that the forecast from these 10 accounts could be used to develop a total outlook.

The situation we're in is typical of an emerging market such as device networking. I would characterize the nature of our market somewhat, as a grand experiment by thousands of customers who are discovering what value they can extract from this new technology. The good news is we service all these customers, that is our strength, and we will grow as our customers are successful with their products. At some point large customers will come to dominate our business and we will become better at extracting forecasts from our reseller partners.

For now, job one for the Lantronix team is clearly and simply to drive revenue growth. This objective has the undivided attention of our entire organization. With the final elements of the September 2002 restructuring completly behind us, and a new slew of products that provide powerful ROIs to end users in front of us, we are well positioned and expect continued progress towards profitability. With that, I will turn the call over to Susan and open up the session to Q & A.

Thank you. Ladies and gentlemen, if you'd like to register a question, please press the one followed by the four on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered, and you would like to withdraw your registration, please press the one followed by the three. If you are using a speaker phone, please lift your handset before entering your request. One moment please for the first question. Our first question comes from the line of Jeff [inaudible] of Manchester Management please go ahead with your question.

Hi, Jeff, how are you?

I'm fine, thanks. Quick question on WiPort, could you give us some information on the pricing of that product vis a vis XPort and whether or not you're going to break that out as a separate reporting line?

We don't plan on breaking it out as a separate reporting line. It will be part of our device networking total. The price -- the single unit price point is significantly higher on WiPort versus XPort. If you recall, the XPort civilian pricing, it's about $33 its suggested less than $33. And the WiPort is currently priced at $119.

Okay. What -- can you give us any early feedback on, you know, how much capacity you have on the production side for WiPort in the initial couple quarters?

Rather than giving a specific number, which I don't know off the top of my head, it's not a limiting factor for us, our limiting factor is just going to be the design in cycle with our customers. It's going to take a while, if you think about the XPort design in cycle, it was about 9 months from the time that we introduced it to the time that we had, roughly 5% of revenue coming from XPort. I would expect a similar kind of ramp up with the WiPort product line.

How much of your XPort customers do you think are in production now?

I don't want to give that away for competitive reasons, but I can tell you that between last quarter and this quarter we saw an increase of about 25% on the number of customers that are in production. So that was a reasonable increase from quarter to quarter. They are starting to ramp.

So numbers of customers and total revenues from that line?

Both coincidentally at 25% growth rate.

Thank you very much.

Ladies and gentlemen, as a reminder to register for a question, press the one four. Our next question comes from the line of William McLean from Oppenheimer. Please proceed with your question.

Hi, Mark.

Hi, Bill.

Can you talk a little bit about -- you've got two product lines, one's pretty much OEM, the WiPort and XPort, and the other that goes through channels, do you have two separate organizations to do that? And there's probably some overlap because presumably some of the customers that are deploying XPort in some of their designs might have been customers that is were using the device server stand alone products before. Can you talk a little bit about how that whole mix works?

Principally, we've got one organization through the company, however, there are points in the organization where we focus between OEMs and the channel products, certainly in marketing, that's true. We have customers that start out with box level products and then convert over time potentially to embedded products, so that transition effect is there. The main difference probably is in when we actually go to market from a selling standpoint. We have a network of manufacturer reps that do most of our sellings to OEMs on the embedded product. On the box level products, we're talking about the secure links and even the device networking box products. They wind up going through channel partners, and those channel partners will sell both to OEMs as well as system integraters, so there's a very complex mix, I guess, between them. The main focus for us, though, is that at the sales level we've got two different networks, one's a channel reseller network, the other is an OEM representative network.

The manufacture's representative channel -- to the OEMs.

That's correct. To the OEMs for the embedded product.

I got it. What do you expect to happen to your product next from OEM versus reseller mix, as you go forward?

You know what, I used to answer that question with saying that I would expect the OEM business to grow at the expense, if you will, or faster, I should say, than the channel business. Now I'm not all clear that's how its going to happen. We still have a lot of companies experimenting and entering that early phase. So I continue to see the channel business grow as well. I would expect it to be comparable growth, I guess.

Okay. Thanks.

There are no further questions at this time. I will now turn the call back to you. Please continue with your presentation or closing remarks.

I appreciate everybody's attention today. And your continued support. Jim and I look forward to reporting to you -- our 4th quarter results, which will probably happen in September, since its the end of our fiscal year. And thank you very much.

Bye-bye.

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