創力 (LTRX) 2004 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Lantronix, Inc. fourth-quarter and fiscal 2004 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 Thursday, September 9, 2004.

I would now like to turn the conference over to Ms. E.E. Wong (ph). Please go ahead, ma'am.

Thanks, John. Good afternoon, everyone, and welcome to today's conference call. My name is E.E. Wong with Furlough Wong Communications (ph), 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 website at www.Lantronix.com, beginning today at 8 PM Eastern Time and thereafter. There will also be an audio playback beginning today at 8PM Eastern Time and running through 7PM tomorrow, September 10th. The number to call is 1-800-633-8284, and the access code is 21207290. International callers should dial 001-402-977-9140 and use the same access code, 21207290.

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 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 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 this webcast or any forward-looking statements, whether as a result of new information, future events or otherwise.

Now that we have all that housekeeping out of the way, it's my pleasure to introduce Marc Nussbaum, President and Chief Executive Officer of Lantronix. Marc?

Thanks, E.E., and good afternoon to everyone. Joining Jim and me this afternoon are David Schafer, Senior Vice President of Worldwide Sales; John Warwick, Senior Vice President of Operations; Geoff Boyce, Vice President of EMEA Sales; Chris Humphrey, Vice President of Marketing; and Kathy McDermott, Vice President of Finance.

Last year at this time, I summed up fiscal 2003 as a year of restructuring and refocusing. We brought in new management and completely revamped the Company. In fiscal 2003, we integrated four disparate acquisitions into one cohesive organization. We tore down and virtually rebuilt the engineering team from scratch, while consolidating R&D into a single site. We simplified our operations, exiting non-growth, money-losing products. We reduced our uses of cash from 9 million a quarter in early fiscal 2003 to $500,000 a quarter by the start of fiscal 2004.

While fiscal 2003 was the year of reinventing Lantronix, fiscal 2004 was the year in which we laid a solid foundation for future growth. Over the past 12 months, we have accomplished much.

First, we improved cash gross margins by 4.1 percentage points, from 49.4 percent in fiscal 2003 to 53.5 percent in 2004.

Second, we reduced our cash burn for the entire year to approximately $2 million, ahead of our estimated range of up to $4 million for the year, and representing a drastic reduction from our previous year's cash usage of $19.4 million.

Third, our expense levels remain on target, with SG&A being reduced 19 percent compared to last year.

Fourth, our new engineering team launched 11 new products, including four new product lines.

Fifth, our operations team improved product availability and achieved corporate-wide ISO certification, including ISO 14001, the environmental certification, a growing requirement with several international customers.

Sixth, our OEM sales and marketing team sowed many seeds, closing hundreds of XPort design-ins and growing sales in our device networking business from 5.5 million a year ago to $7.2 million in the fourth quarter of fiscal 2004.

Seventh, the new channel team added 40 new resellers to promote our IT management product lines.

And finally, we eliminated the carrying costs of the Premise business, and reinvested these dollars to expand the market presence of our core products in both the Americas and abroad.

Today, Lantronix has the highest percentage of competitively positioned products aligned with growing markets in the history of the Company. In the final quarter of fiscal 2004, 86 percent of our revenue came from products that we consider both highly competitive and aligned with our targeted growth markets of IT management and device networking, representing a substantial increase from our position of a year ago.

We accomplished this repositioning by both increasing revenue coming from core growth markets and by updating our IT management product line with new, highly competitive product offerings. Revenue from products less than two years old increased from 25 percent in Q4 of fiscal '03 to 30 percent in Q4 of fiscal '04. Also, many of our new products were not introduced until the second half of fiscal 2004. Customer acceptance of these new offerings is proving strong, and our annual operating plan for fiscal 2005 forecasts almost 40 percent of our revenue coming from new products by the end of the fiscal year.

While we delivered overall flat performance at the top line, this result was not indicative of what was happening in our core businesses. On an absolute basis for the year, we experienced an increase in the core of $2.5 million, offset by a decrease in non-core of $3 million. Over this past year, we validated our strategy and demonstrated our execution capabilities in the core segment of device networking. Lantronix embedded and external device networking lines demonstrated solid 12 percent growth this past year. On a quarter-to-quarter basis, revenue from device networking was up 31 percent in the June quarter, compared to the same period one year ago. Our IT management business remained approximately neutral last fiscal year. However, with our reseller expansion and the introduction of new products that occurred in late fiscal 2004, we expect to begin demonstrating growth in our IT management business line in the first half of fiscal 2005. By focusing on strengthening and expanding our competencies, we've positioned Lantronix for continued growth in our core, and we believe this will translate into topline revenue growth during fiscal '05.

Before I describe the conditions of key target markets and discuss our outlook, Jim will cover our financial results for the fiscal quarter and year ended June 30, 2004. Jim?

Thank you, Marc, and good afternoon to everyone. As we've indicated in prior calls, some of the financial information we discuss include non-GAAP measures, 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 metrics to GAAP is in the investor relations section of our website at www.Lantronix.com. 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.

As we discussed in our news release today, Lantronix recorded revenues from continuing operations of $48.9 million, and a net loss of $15.7 million or 28 cents per share for the fiscal year ended June 30, 2004, compared with revenues of $49.4 million and a net loss of $47.5 million or 88 cents per share for the same period last year.

For the fourth quarter, ended June 30, 2004, Lantronix recorded revenues of $11.9 million and a net loss of $6.8 million or 12 cents per share, compared with revenues of $11.8 million and a net loss of 19.1 million or 35 cents per share for the same period last year.

With respect to the sources of revenues during the year, approximately $27.5 million came from our device networking category, $12.6 million came from the IT management category and 8.9 million from the non-core product category.

For the year, sales in the Americas accounted for 69.2 percent of revenues, and international sales were 30.7 percent of revenues, up from 24.3 percent of fiscal 2003 sales, reflecting our increased traction in the international markets.

Our GAAP gross margin for fiscal 2004 was 48.8 percent, compared with 26.6 percent for fiscal 2003. Because our non-cash charges -- especially those related to our inventory and other reserves -- can vary significantly from quarter to quarter, we believe the metric of cash gross margin is a key indicator in our cash flow management. Cash gross margin is a non-GAAP measurement, and reflects the gross margin calculated without non-cash expenses that can be caused by adjusting warranty reserves, excess and obsolete inventory reserves and the amortization of intellectual property assets 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 cost improvements.

During fiscal 2004, our cash gross margin improved by 4.1 percent, to 53.5 percent from 49.4 percent in fiscal 2003. On a quarter-to-quarter basis, our cash gross margin for the fourth quarter ended June 30, 2004 was 51.8 percent, up from 46.7 percent for the same quarter last year. Moving forward, we expect our cash gross margin to return back to our target of 54 percent.

We incurred a charge of $5 million in the fourth quarter, representing a write-off of our remaining investment in Xanboo, Inc. You may recall that Xanboo is a development stage company that has been developing a gateway product for the consumer home management market. Because of Xanboo's continued losses and the slow maturation of this market, we have recorded a re-valuation of our investment, reducing our carrying value to zero. We expect this to be our last significant asset write-down for the foreseeable future.

Our balance sheet is strong, with reasonable balances in our accounts receivable, payable and inventory accounts. Gross inventory was down year to year, from $14 million in June 2003 to $12.7 million in June 2004. Accounts receivable balances showed DSOs of about 24 days, and have been under 30 days for the past five quarters.

We continue to make significant progress in controlling and managing our operating expenses. Total operating expenses for the year were $29.5 million, compared with 49.6 million for fiscal 2003. SG&A expenses for fiscal 2004 were 23.3 million, down from 28.7 million for fiscal 2003. This 19 percent decline was driven primarily by our aggressive control of G&A expense, even as we expanded our investments in sales and marketing.

Marc reviewed our progress of the just-completed fiscal year. We continue to closely monitor and adjust our operations, watching cash carefully. Our quarterly cash breakeven level continues to be in the $14 to $15 million range of revenues. During fiscal 2004, we used a total of $1.9 million of cash, better than our guidance of 4 million and down from 19.4 million in fiscal 2003. During the quarter ended June 30, 2004, we used approximately $685,000 of cash, in line with our guidance of $1 million. As of June 30, 2004 our cash, cash equivalents and marketable security balances were approximately $12.2 million.

Cash outflow for the current quarter will represent an exception to past year's trend, because we expect to use approximately $2.2 to $2.8 million of cash in the current fiscal Q1. This increase is primarily the result of the payment of notes incurred in connection with the Stallion acquisition two years ago, payments related to prior years' tax audits and temporarily higher expenses for this quarter in marketing, sales and R&D that were related to new product launches. We expect to return to a more normal range of cash usage of approximately $1 million in fiscal Q2.

Now, I'll turn to call back to Marc to provide more insight into our plans moving forward. Marc?

Thank you, Jim. Our topline performance for fiscal 2004 reflects the realities of the Company reenergizing its product lines. This has been a little like growing a forest. Two years ago, the land was bulldozed over, and all that was left were some weeds and a few trees. We brought in new equipment, cleared the debris and planted seeds. Last year, samplings began to sprout, and this year we will see the new trees stand out clearly, indicating a new tall forest is on the way. A large part of this repositioning strategy has been the introduction of fresh, competitive products better aligned to take advantage of organic market growth. We expect the positive effect of this repositioning to be reflected in fiscal 2005.

As I've already mentioned, revenue from our core device networking lines were up 31 percent this past June quarter, compared to the same period one year ago. What is striking about this growth is that during the same period, our unit shipments of these products lead to (ph) more than 80 percent. In fact, Lantronix's unit shipments of device networking products for the full year, ended June 2004, increased 50 percent compared to the prior fiscal year.

I believe this indicates that the market for device networking is indeed beginning to move forward and build momentum. During this robust growth in units, we experienced a decline in average selling price, as customers moved from our older embedded and external products to our newer, more cost-effective solutions. We believe that new price points, represented by products such as XPort, establish a sweet spot, encouraging wider adoption of our technology. Many seeds have been planted. Last year, I mentioned that XPort revenue growth was approximately 25 percent sequentially. In the June quarter, XPort sales increased again, this time by greater than 25 percent. Our customers continue to ramp production devices that use XPort, and we expect continued double-digit growth in XPort sales throughout fiscal 2005.

In the fourth quarter, we also launched and began initial production of XPort's sister product, the WiPort. WiPort is the world's first 802.11 wireless and wire device server. It carries an average selling price about two times that of XPort. Early adoption of the WiPort has been strong, although we expect the design-in cycle to be between 6 and 18 months, similar to what we experienced with the XPort.

On the heels of WiPort, we introduced the WiBox, our external wireless web server, which is now transitioning to volume production. During this last year, the device networking market began to recover and showed signs of strength. The Lantronix product offerings in this space are among the strongest in the industry, and there is little doubt that these lines will grow as the expansion continues. While we expect the growth rate of this market may be substantial going forward, keep in mind that we're still in the early stages of market adoption, and large percent gains will translate into modest dollar growth, accelerating later as the market builds momentum and begins to scale. We expect this strength in device networking to continue through fiscal 2005, and estimate the growth of the market next year to be in the range of 15 to 20 percent.

Moving to the IT management segment, over the past 12 months, we have put in place the key operational elements needed to grow this business. First, Lantronix introduced new products to both strengthen position and expand the portion of the market we serve. These products include ActiveLinx, a line of NEBS-hardened, ultra-reliable console servers for the telecommunications and service carrier market. Also in May, we introduced the SecureLinx RemoteKVM family, moving Lantronix into a new market adjacent to our core line of console servers. This strategy expands our leverage by utilizing the existing sales and marketing network to move a second related product line. Lastly, in July, we introduced our next-generation console server offering, the SecureLinx console server line. SecureLinx is our brand name for a broad set of products that represent the first complete and integrated remote management systems solutions. You'll see other product lines added to the SecureLinx remote management family later this year. As evidenced by early design win activity, indicators are that SecureLinx is being well-received.

The second key element we put in place to drive IT management growth was an expansion of our reseller channel. Although we will continue to add more partners, our emphasis for fiscal 2005 has shifted to improving the effectiveness of these partners through an increase in training, co-op advertising and lead management.

The third initiative intended to drive our penetration in the IT management market began last year, as we recruited new experienced channel marketing and channel sales leadership. This year, we have tripled our marketing budget for print and online advertising, direct marketing campaigns, trade shows and other channel marketing activities. These investments play a crucial role in driving sales to our network of resellers. In fiscal 2005, we will continue to scale up and bring online the output of our IT management sales engine.

Combined with our new, highly competitive products and our channel expansion initiatives, this business will contribute to topline revenue growth in fiscal 2005. Last year, our decline in revenues from noncore lines offset our growth in the core. In fiscal '05, we anticipate our noncore to average about 10 percent of revenue, down from 20 percent in fiscal 2004. This shift will help us transfer revenue growth in the core to the top line. Our focus in fiscal 2005 will be to grow sales in our existing and recently launched core product lines, to scale up our sales channel and to continue investment in new solutions for FY '06 and beyond.

In short, our objective for this year is across-the-board execution. Armed with increased product strength, expanded market exposure, growth in our target core markets and a significant reduction in our legacy lines, we believe Lantronix will demonstrate accelerating growth this fiscal year. We expect revenues to be relatively flat in fiscal Q1, with topline growth expected in the December quarter. Our full-year fiscal '05 outlook includes overall topline revenue growth, and we reiterate our expectation of reaching positive cash flow from operations at $14 to $15 million in quarterly sales.

Now, I'd like to turn the call over to the operator to open up the session for Q&A.

(OPERATOR INSTRUCTIONS). Winder Hughes, Hughes Capital.

I have a question here for Jim and then Marc. For fiscal 2003, the device revenues were what, IT management was what and noncore was what -- for comparative purposes?

Let me get that for you. Just a minute.

Because for '04, you have 27.5, 12.6 and 8.9, respectively. And also, do you have those figures for the June quarter, too?

Let's see. You wanted it -- Winder, I'll do the first thing -- for 2003?

Yes, like device, IT and noncore.

IT management was 13 million, 13.0 million. Device networking was 24.5 million, and other was 12.0 million.

Okay. So then, from '04 to '03, the 24.5 that went to 27, that included the 50 percent unit growth, right?

That's correct.

So obviously, if the prices per unit went from $150 like to $30, then we'll just run the math, but all that kind of --

Correct. And, Winder, that was due to mix, not really pricing degradation in the market on particular products. So we have a mix change from our embedded board-level products, for instance, to the XPort. And also, on the box products we had some more expensive, $500-plus boxes that were replaced with our UDS family, which was a lower ASP product, as well.

Okay. Then the noncore, you did 8.9 in. What is left in that, and how much of that do you expect that it's going to go down this year, like 10 percent or 20 percent off the 9 million?

We have an internal projection that's pretty steep for that. I'm not going to give out the number, but it's a worst-case scenario. It has us still generating topline growth because of growth in the core in the fiscal year. So we just won't know until we see what actually happens there, but my assumptions are a worst-case decline actually steeper than we have experienced this past year, just from a modeling standpoint. I really don't think it's going to happen quite that steeply, but that's what we've got baked into our model for conservativism.

So what is in that category? The (multiple speakers) products, or what is in that?

The bulk of that is our visualization product, so roughly 3 million of the roughly 4 million -- I'm sorry, 3 million of the 8.9 is in visualization. And we also have some leftover product out there in what we call the Stallion product line, which was from the Stallion acquisition we did two years ago.

Not you, but the prior regime, right?

Actually, it was half-and-half.

And then, for the device networking business, like you read all of these big studies out there that say that device networking is the next big wave. So, without going through maybe like the name of the customers, but what are some case studies from both WiPort and XPort that may be in some modest volumes today, that are rolling out, that you can see some momentous volumes six to nine months out?

Sure. Well, let me start out with we've been extremely strong in anything related to security -- in particular, alarm panels and related kinds of things along those lines. And we've mentioned -- we've had a few press releases about those products, as well. So that's beginning to build momentum. We are finding ourselves in lower-priced alarm panels as we go forward, and there's a large opportunity there as that market grows.

And, by the way, that is driven by a number of different things, not just better connectivity, but also replacing modems and telephone lines, which are pretty expensive in the commercial environment. And we can eliminate those and reduce the ongoing costs to provide the service, as well as monitoring the alarm panels themselves, et cetera.

And let me turn the phone call over to Chris Humphrey and Geoff Boyce, and see if they have any comments about some of the applications they are seeing.

Let me tell you a little bit about the wireless device networking market that's beginning to emerge today. A couple key segments we are serving in clients (ph) today and working with some companies and getting some designs in are medical point of care. This is an industry that has adopted wired device networking in the past. But now with wireless and the freedom of not having to have cabling, you have -- we're seeing applications and playing in applications like tracking medical device units through a hospital and nurses pushing a cart from patient to patient, collecting data. That data, that medical diagnostic data, is then available instantaneously to physicians over a wireless network. Some of our research, some interesting statistics, has told us that maybe about 100,000 people a year in the US die from errors. So we get a lot of interest in reducing medical errors by providing real-time data in this kind of environment.

Another one is telematics. This is things like rental car or municipal or government automobile and truck fleets. We are getting designs in those kind of environments. One example could be a rental car agency. You drive your rental car back to return it. It's a WiPort -- the car is WiPort-enabled, and as you drive in, it signals to a pedestal and downloads your mileage information, your gas meter information, all kinds of diagnostic information about the rental car. It makes it very quick and efficient for those agencies. The same kind of applications in things like commercial fleet management, where you have got cameras or data collection devices and taxis or commercial vehicles.

So there's a lot of exciting things going on. We are playing in a lot of new device networking segments with wireless.

That space that Chris mentioned is interesting. There are black boxes being pretty put in taxis and buses. We see a lot of that because of the homeland security activity, and people are starting to record what's happening in those public transport environments. And again, they've got to get that data linked out from the vehicle to the base station. So there's a couple of projects like that that I'm aware of.

On some of the other wired applications that we are actually quite involved with, as you'd expect, remote monitoring of field equipment -- an example of that that you wouldn't normally think of is we are starting to work with companies that are deploying defibrillators into nonhospital environments -- for example, airports, bus stations, rail stations, that sort of thing. By networking those and having an XPort in that, they can now monitor the equipment. So the equipment manufacturer -- who's required to ensure that batteries are charged at certain levels, that certain diagnostics are working all the time -- can now monitor that from one remote locations throughout the entire nation or internationally, if they happen to be located overseas. That's a pretty exciting example of field equipment.

The other one that we are working with a couple of companies is you might have heard about RFID readers. And we are doing some work there with supplying product for some of the larger retail stores to take real-time inventory management of shelf items. So, for example, besides the warehouse piece of it, we are also working now with companies that are looking at when a product is actually removed from a shelf that that would then be recorded and sent to the back office so that they can do billing and reordering and that sort of thing.

In fact, we are even doing some RFID readers with some companies in some very non-traditional areas that you absolutely would not normally think of. And one of them is the dairy industry, where it's kind of an interesting application. For the dairy industry, they have RFID readers on the dairy cows to track them when they come into the barn. They then track exactly the milk production of every single individual cow, and then they can record that sort of data. So there's a variety of new and different applications, both what you would think traditional and then some very non-traditional ones that are going to markets you would never even expect to start expanding.

I was hoping Geoff wasn't going to go down the cow path there.

I love the (multiple speakers).

But the RFID space, in particular, we have targeted and we are having very good (ph) success in, because those designs are fresh right now, and their networking problems are -- they don't want to have to bother with networking problems, a lot of wireless applications and RFID.

One more question, then. So recently, the venture capitalists have been making a lot of investments in this new category called ZigBee, which I guess are these kind of wireless sensors, and I'm sure that the valuations of the startups are probably higher than your market cap. But is that something that a successor to your opportunities, and therefore that won't happen until '08/'09? Or is that something that will happen in '05/'06/'07, and you have like the wherewithal to also be in that space, if it's as big as what they claim it's going to be?

ZigBee for us -- it's more of an adjacent area to some things that we are currently in. With our wireless connecting technology, we are actually -- we are compatible with 802.11 technology, and that's what is very important. But we continue to watch what's happening in ZigBee. I don't believe that ZigBee is going to be a significant impact in the industry over the next couple of years. I think it will start to be introduced, and we'll see how it goes. But this is a very low-cost technology that will be a feeder to many of the products that we have today. At some point in time, we may choose to be involved in the ZigBee market in a more direct way, and we continue to watch that and continue to investigate. But we are well-positioned to go off and do that, because we're bringing products to market that actually are shipping today to those same customers that are interested in ZigBee.

So maybe, then, about a year and a half out, you'll be buying a Xanboo lookalike, maybe?

I don't want to go that far, but I'm always looking.

Thank you, and congratulations. I think '05 will be a good year for us.

Mark Namin (ph), Atlanta Investors (ph).

A couple of questions -- easy ones. The first is, could you give us some guidance on which quarter you think you can break even the 14-15 million? And once you do break even, and you record that quarter, will there be continuity to that quarter, in terms of staying flat or increasing from there?

Mark, it's difficult -- let me answer the second part of your question first. It's difficult to say. Our intention certainly would be that once we reached it we maintained that. It's going to depend on how we reach it. If we reach it as a result of organic growth in our core markets, which is one scenario, then certainly I would think that, once we've reached it, it will be an ongoing situation.

Because of our visualization product line, I could have a spike in any one quarter of $750,000 all of a sudden in one order from one major customer, in which case that may throw us into this $14 to $15 million range sooner rather than later. Beyond that, I haven't delineated a timeframe for that to happen, and it's very difficult for us to forecast that. I can say that I don't expect that to happen in the current quarter, the Q1 timeframe. And, while we expect topline revenue growth in the December quarter timeframe, I would not expect us to reach into that cash-positive range until later in the fiscal year.

And in line with that, can you give me comfort that by the fourth quarter Q4 that we could be at breakeven and have continuity from there?

It's certainly possible, but we are not forecasting a timeframe at this point.

But you did say that one of the quarters would be breakeven? That you said in your presentation, I think. Is that right?

I'm thinking about how I actually said it. I think I talked about being cash-positive upon reaching $14 to $15 million in revenue.

In the next question is, given what you just said, do we feel comfortable with the cash balances we're going to have at the end of '05?

We've looked at our current situation, and with our projections, the position we are in right now, we have cash adequate for our needs this fiscal year.

And this, Marc, is for you. Given basically the device network, in many of these companies that move into new industries and all of a sudden become superstars -- Cisco or any of these -- there's a ramp-up at some particular time. And what I'm trying to do is get a flavor for the business, in the sense that, if you go out -- and you can guess on this or whatever your projections are; I'm not going to hold you to it. But if you go out 18 months, 3 years, 4 years, whenever you think that this business is going to fully develop, is the Company situated in such a way, and is the industry situated in such a way that all of a sudden we can get major ramp for a two-, three-, four-year period? By major ramp, I mean revenue increases of 30, 40, 50 percent a year.

Of course, the timing that that's going to happen we don't really know; no one knows. However, based on our understanding of the market and adoption rates, we do expect at some point in the future for their to be an uptick in growth rate. That will depend on a number of different things. But keep in mind that you get a very heterogeneous market. We have got a lot of different applications we are designed into, and if some application all of a sudden takes off in its networking applications connectivity, we will see that and it will be reflected in our numbers. But we are also addressing a very, very wide market, which, one, exposes us to lots of opportunity like that, but at the same time, if all of a sudden half of our business grows at 50 percent and the other half continues at 20 percent, you are going to see a blended result. But we do believe that it's virtually impossible to not have an aggressive inflection point of market adoption at some point in device networking.

And in line with that, when -- these are, obviously, difficult questions. I'm just trying to get a feel. At what point do you feel, over the next two, three, four, five quarters -- whatever it is -- that prices will probably get close to where they are declining or bottoming out, in other words?

Well, let's see. I believe that right now, the market adoption rate is not affected by pricing directly. That is, it really is a market adoption issue with how well connectivity is adopted in actual applications in the real world. So I don't think we're sensitive right now to pricing changes. And we haven't seen a tremendous amount of degradation in average selling prices of, really, any of the products that we bring to market. We've just gone through a mix change as a result of having products that have been around for three or four years or more into this next generation, but I don't really anticipate a significant change in pricing outlook.

Okay. Then let me, as my last question, which I just said was my last -- the price points that are now -- that you envision over the next 12-month period -- is that conducive enough to build a major market, or is price point a critical variable, in terms of industry growth?

No; I think right now we are at the correct price point. And a further reduction in prices is not going to make a material change in adoption rates.

So it's not an elasticity curve as it relates to that?

Not at this point in time. It really is an adoption. We are not seeing any barriers to getting our products designed in, based on our prices.

(OPERATOR INSTRUCTIONS). William MacLean (ph), Oppenheimer & Co.

A lot of these applications you talk about are really interesting, but a lot of them are very heavily reliant on the back-end software to support them, and in many cases it strikes me that's the limiting factor, rather than the ability to build the hardware at the front end. So are you doing anything? Are you working with any people in the software area, or are you relying totally on your OEMs to do that? And you doing anything to try and support the back-end software for some of these applications?

That's a good question, Bill. We continue to offer DeviceView as a service, which really addresses that directly. And what we're seeing is in the embedded world, that is an impact -- we are seeing the impact of software systems and the adoption of those or an impact from a lot of embedded applications. But there's a lot of external, box-level applications that seem to be already there and don't really need additional software added.

So, while we are bringing DeviceView and trying to partner with other software vendors, our current outlook for growth in the market is not aggressive about assuming that these systems come online. What we are finding is we're being installed in a lot of applications were the level of sophistication of the software that's expected is pretty low, and in many cases already exists.

One second, Bill. Maybe Geoff can add a little further.

We are working with some software houses. We've found, in a variety of different applications where some of these back ends specific application software houses have been building or using their own devices and are now finding that's too expensive for them to be competitive. They are now working with us in order to port their already existing software over to a Lantronix box, both embedded and in a lot of cases the external boxes for the legacy market.

Bill, I'll also add something to this. We've got customers -- Christie Digital is one that's a good example that we've announced in the past. Christie supplies monitoring for large-scale movie screen projectors, and they also sell the equipment itself, the projectors themselves, both digital and regular old film projectors. And they were able to bring up a network operating center and software to run that in a pretty remarkably short period of time, to add some basic functionality of monitoring, and they then started offering a service based around that functionality, and they've since now layered additional service offerings on top of that. But I think there are early movers out there in different industries that are finding it relatively easy to go off and implement these back-end systems to take advantage of device networking. And frankly, the ones that are moving earlier are going to have an advantage in the short term, and for every industry you can name, I can probably identify for you the company that's leading-edge there, that's already adopted some back-end software of their own or a third party.

There are no further questions at this time. I'll now turn the call back over to you.

Thank you very much, everybody. To our shareholders, I appreciate your confidence in our team and your patience as we transition Lantronix. And as our markets begin their transition to the early growth phase, I'd also like to extend my appreciation for the continued support of our customers, our employees and for the investments made by our worldwide sales partners and our suppliers, who share the vision of the opportunity before us. Jim and I look forward to reporting to you on our fiscal 2005 first-quarter results in November, and thank you very much.

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