創力 (LTRX) 2005 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the first quarter 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 Monday, November 8, 2004. I will now turn the conference over to Ms. E. E. Wong. Please go ahead, ma'am.

Good afternoon everyone. Welcome to today's conference call. My name is E. E. Wong with (indiscernible) Wong Communications, 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 on the Company's Web site at www.lantronix.com beginning today at 8 PM Eastern Time and thereafter. There also been audio playback beginning today at 8 PM Eastern Time and running through 7 PM tomorrow, November 9. The number to call is 1-800-633-8284 and the access code is 21212910. International callers should dial 001.402.977.9140 and use the same access code 21212910.

Before we begin the call, I would now 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; cash usage; 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 introduction; 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 update this Web cast or any forward-looking statements, whether as a result of new information, future events or otherwise.

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

Thank you E.E. and good afternoon to everyone. Joining Jim and me this afternoon are David Schafer, Vice President of worldwide sales; John Warwick, Vice President of Operations; Chris Humphrey, Vice President of Marketing; Bob Cross, Vice President of Research and Development; and Kathy McDermott, RVP of Finance.

You'll recall that on our last conference call, I indicated that we expected first quarter fiscal 2005 to be relatively flat in revenue and that we would see top line growth in the December quarter. By now, you have seen the press release announcing our results and indicating that we did not achieve our flat revenue outlook. Instead, we declined 7 percent sequentially from the prior quarter.

Needless to say, this is not how we wanted to start the fiscal year. While I am disappointed with our results this past period, there are strong indicators that we will deliver significantly improved results in the December quarter consistent with our earlier forward-looking guidance, and further that we will be able to achieve our fiscal 2005 growth objectives.

Our intent on this conference call is to describe what happened, explain what we're doing about it, and why we still believe the December quarter will prove to be the turning point.

We recorded 11 million in revenues for the September quarter, down 9.7 percent or 1.2 million from the same period 1 year ago. The decline was primarily due to an expected 35 percent decrease in non-core business of about $900,000 year-over-year.

While the size of the non-core decline was anticipated, we were disappointed with performance of the core business this past period. The core was down approximately 2.5 percent compared to 1 year ago, and down sequentially by about 9 percent.

This stall in growth of the core comes after 4 consecutive quarters of year-over-year growth. For instance, core revenues in the immediate preceding quarter ended June 30, 2004 were up 14 percent. This was led by 31 percent year-over-year increase in the device networking business line.

Looking forward, order levels did begin to recover late in September and continue to improve throughout all of October, indicating that the summer slowdown was temporary.

Fiscal Q1 core sales were affected most significantly by a decline in orders for external device networking solutions. During the period, 3 issues impacted the device networking business. First, we continued to experience the effects of several large customers transitioning from higher price device networking products to our newer lower-priced solutions, including transitions from external device networking products embedded solutions such as XPort.

Typically, customers build a safety stock of inventory prior to beginning production using the newer product. During the early production phase, we note erratic purchasing patterns -- initial orders followed by delays in placing new orders. In addition, the newer technology we provide is often at a lower average selling price, resulting in a temporary decline in revenue sold to that customer.

We believe that over time the demand in these transition accounts will accelerate, partially or fully offsetting this decline.

Second, during the quarter we also experienced lower order rates from several OEM customers for external device servers as compared to the original forecasts, or past order (ph) rates. While device networking functionality continues to be a growing requirement for these customers, and Lantronix continues to be the supplier of choice, it is difficult to tell if the slowdown was due to their own market conditions or actions designed to simply reduce their inventory costs.

Again, there have been positive indicators throughout this past month which lead us to believe that the low orders for external device networking products were more likely temporary.

Third, we experienced a delay in availability of a small portion of our planned XPort shipments during the quarter that was associated with our transition to a new core processor (technical difficulty). We were able to keep our customers' lines up and running, but were unable to fulfill the orders required to fully replenish inventory levels at all of our accounts.

At the end of September, our past due backlog for XPort was several hundred thousand dollars greater than at any other time in the past year. We have now caught up, and supply logistics have returned to normal. XPort continues to grow at a healthy rate. And we expect to benefit from increased XPort shipments in December, due to both incremental demand as well as shipments to replenish the depleted inventories.

Before I turn the call over to Jim, I want to emphasize that we're not excusing or dismissing the stalled growth of the core business this past period. As you are aware, we've been operating towards a model that delivers cash breakeven at around 14 to 15 million in revenue.

Based on our desire to begin generating cash as soon as practical, we have recently taken actions to reduce expenses. And as necessary, we'll continue to move in this direction to achieve a positive cash position.

While I will not commit to a new model today, over the next few quarters we plan to reduce our cash breakeven point below the $14 to $15 million mark and parallel with our ongoing drive for top line revenue growth. We continued driving to reach this point during the fiscal year.

We have recently begun to see a pickup in orders, which indicates that our accelerated sales and marketing efforts over the past several quarters are paying off.

Based on these indicators and increased traction of our recently introduced new products, we reiterate guidance that fiscal 2005 will be a year of revenue growth. Orders for October have been particularly strong. And our outlook for the December quarter is for significant growth in the core business.

Later in the call, I will elaborate further on the market's response to our new products and will provide additional insights as a response our accelerated sales and marketing programs. Next, Jim will discuss our financial results in detail, and also describe the recent expense reduction actions we have taken. Jim?

Thank you Marc. Good afternoon to everyone. As we have indicated in prior calls, some of the information we discuss includes non-GAAP financial 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 figures to GAAP is in the Investor Relations section of our Web site at www.Lantronix.com.

I would also note that the financial information being discussed has been adjusted to reflect Premise as the discontinued operation for all periods, with the rest of our business as continuing operations.

As we described in our news release today, Lantronix recorded revenues from continuing operations of 11.0 million and a net loss of 3.8 million or 7 cents per share for the fiscal 2005 quarter ended September 30, 2004, compared with revenues of 12.2 million and a net loss of 2.3 million or 4 cents per share for the same period last year.

With respect to the sources of revenues, during the quarter approximately 6.2 million came from our device networking category; 3.1 million came from the IT management category; and 1.7 million from non-core other product lines.

For the same period last year, revenues from our continuing operations broke down as follows -- approximately 6.5 million came from device networking; 3.1 million came from IT management; and 2.6 million came from non-core product lines.

For the first fiscal quarter, sales in the Americas accounted for 68 percent of revenues and international sales were 32 percent of revenues. Our GAAP gross margin for the first fiscal quarter of 2005 was 50.3 percent compared to 50.5 percent for the same period last year.

Because non-cash 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 key indicator in cash flow management.

Cash gross margin is a non-GAAP measurement and reflects the gross margin calculated without non-cash expenses such as warrantee reserves, excess and obsolete inventory reserves, and the amortization of intellectual property assets from past acquisitions.

During the quarter ended September 30, 2004, our cash gross margin improved to 52.4 percent compared with 51.2 percent for the same period last year and 51.8 percent in the June quarter.

Our balance sheet remains strong with reasonable balances in our accounts receivable, payable, and inventory accounts. Gross inventory was 12.2 million. Accounts receivables’ balances showed DSOs of about 26 days, which marks the seventh quarter that our DSO levels have been under 30 days.

Operating expenses from continued and discontinued operations for the quarter ended September 30, 2004 were 9.4 million, compared with 9.0 million for the same period last year. As we stated in our press release today, we made the decision to reinvest the savings realized from the sale of our discontinued Premise business into marketing and R&D activities related to new products.

As reported, our operating expenses from continuing operations totaled $9.4 million in Q1 compared to $7.4 million in the June quarter. We really didn't increase our operating expenses by $2 million from quarter to quarter. The expenses in the June quarter included the benefit of $1.3 million in insurance reimbursement from our carriers. Also, you will recall that in our last call, we announced we were going to make a temporary investment of $600,000 for marketing expenses in Q1 to kick off our new products.

As Marc has mentioned, we recently took actions to significantly reduce our ongoing operating expenses going forward. These reductions were spread across practically every operation of the Company.

As a result of improved efficiencies and streamlined internal communications, we were able to trim the number of senior executives required to run the business by 20 percent. We also achieved a significant reduction in key general administrative expense categories, including a savings in costs for certain outside services.

Currently, our headcount compared to the June 30 end of fiscal year level has decreased by 11 percent. We expect these actions will reduce our quarterly operating expenses by about $1 million going forward. Based on our aggressive implementation of these actions, we'll benefit from these reductions beginning in the December quarter.

During the last conference call, we indicated that our cash usage for the first fiscal quarter would be significantly higher due to payments from the Stallion acquisition 2 years earlier, audit payments, and higher expenses related to the launch of marketing programs and new products.

Our total cash usage for the quarter was approximately $3 million, higher than our original guidance of $2.2 to $2.8 million, due primarily to the revenue shortfall we experienced in the September quarter.

As of September 30, 2004 our cash, cash equivalents and marketable securities balances were approximately $9.2 million. We intend a return to cash usage in the range of $1 million in fiscal Q2. Now I will turn the call back to Marc.

That is Jim's favorite part of the conference script, by the way. Thank you, Jim. As I discussed on the last conference call in the beginning of September, our growth plans for this fiscal year are based on 2 primary thrusts -- incremental sales from new products and improvement in our sales and marketing effectiveness.

Next, I will discuss the traction we are seeing with new products, followed by an update on our marketing and sales initiatives. As many of you are aware, in the last half of fiscal 2004 we introduced a record 11 new products, most of which were launched in the June quarter.

We reported on the last call that revenue from sales of XPort grew at more than 25 percent sequentially in the June period. While we did experience a stall in XPort sales in the quarter ended September, shipments have now caught up with demand. And we should see a return to healthy double-digit growth this quarter.

We continue to ship hundreds of evaluation kits, an indication of ongoing design and activity. XPort's sister wireless product, the WiPort, began shipping in June. While the revenues from WiPort are still small, we are excited by our initial design wins and the opportunities that we're finding.

We have shipped an average of 200 WiPort evaluation kits in each of the last 2 quarters, and continue to find new applications for our wireless solution that are incremental to our existing embedded device networking business.

As I mentioned earlier, device networking revenue was lower than the same period 1 year ago, entirely due to a decrease in sales of our external products. These small box products are sold to hundreds of customers through our reseller partners and to key device OEMs who often ship them bundled or as an option alongside their own offerings.

While we believe that orders from these customers will turn to a pattern of growth, we've also been expanding into new geographic and specialty markets, which should result in incremental sales later in the year.

More than half of the products introduced in late fiscal 2004 were new IT management solutions. And we began to see early signs of growth in this area this past period. For the quarter ended September 30, 2004, revenue for this segment increased 3 percent compared to the prior period. IT management bookings continue to show signs of acceleration. And we expect growth from these product lines to accelerate in the December quarter.

One of the products leading this businesses our new flagship, the SecureLinx console server family. Last month, this product line was elected by Network Computing magazine to receive its Editor's Choice award as the clear winner in the industry's best console management solutions category. The award was particularly significant, especially among our buying base as we beat out several entrenched competitors in a head-to-head product showdown.

Response to the new line has been strong. And although we've just started shipping, qualification is well along at several new accounts, including about half a dozen or so Fortune 500 companies.

During the September quarter, we also began production and shipment of our NIS-certified console server families, the SecureLinx console managers and ActiveLinx console servers. These products are the first of their kind to incorporate the government's stringent advanced encryption standards as specified by the Federal Information Processing Standard, or FIPS 197.

These products open up additional opportunities for us in high security applications.

Also adding to growth in the IT management business was our remote KVM product line, SecureLinx KVM. Sales of this product are still modest. But we expect revenues from this family line to continue to grow throughout fiscal 2005.

I will now shift from a discussion about new products to an update on our sales and marketing initiatives. In the September quarter, we tripled our online and print advertising budget. This is just one of many marketing and sales initiatives we have deployed over the last 3 to 6 months.

Of course, there will be a natural lag between the time we launch these programs and when they continue to contribute significant growth.

The best early indicator we can offer to gauge our progress is that since deploying our accelerated sales and marketing activities, we have seen a more than 500 percent increase in a number of customer leads generated. Many of these leads are now working their way through our pipeline, and will no doubt contribute to increased sales.

In fiscal Q1, we also launched a brand new Web site that not only significantly improves ease of use, but was designed specifically to help increase our ability to turn site visits into leads, and ultimately, purchases.

In addition, we're extremely pleased with the sales team's success in continuing to expand our worldwide distribution and reseller network. During fiscal Q1 alone, we handled (ph) more than 20 new sales partners, bringing our total number of distributors and resellers to more than 110 by the end of September.

Before I turn the call over to the operator, I would like to take a moment to acknowledge the contributions of every single member of the Lantronix team. This turnaround has proven to be slower than we all would have liked. Progress has come in fits and starts, and significant sacrifices have been made by many.

Building a new engineering team, a new supply chain, a new sales network, a new financial and IT process, and a new marketing engine are no small tasks. For the management team, I would like to say that although success is not yet apparent in our financial results, each of you deserves to be proud in the rebuilding, the repositioning, the clean up, and the new processes you have each put in place over the past 2 years.

It takes a great deal of faith and personal fortitude to sustain an effort of this magnitude. I have seen this before, and I know that the skills and experience you have each brought to this $50 million turnaround will soon flow through to our results and to the benefit of all of our shareholders.

The Company continues to deliver industry-leading products in growth segments of the market, continued expansion of its reseller network and improved progress in our core business lines.

The turnaround at Lantronix has proven to be a challenging road, with a starting point further away than the operating to originally thought 2 years ago. While the team is doing everything humanly possible to deliver consistent sequential and incremental improvement, it is not surprising that we had a few bumps along the way.

Last fiscal year, our core business grew each and every quarter despite the challenges. While we cannot control our customers' fluctuations in demand, we continue to believe that the world of M2M and device networking will emerge as a huge industry.

Lantronix is ideally positioned in this exciting market. And we will eventually grow as the adoption moves ahead and as the industries growth rate accelerates. I'm excited about the growth we have seen so far this current quarter -- the bookings up solidly through October. (indiscernible) Looking back from your next vantage point on our February conference call, the December quarter will prove to be a return to growth and a turning point for the Company.

With that, I would like to now turn the call over to the operator and open this up for questions and answers.

(Operator Instructions) William Becklean, Oppenheimer.

I apologize. Jim, can I ask you to repeat the revenue breakdown?

Sure. I will go right through it. 6.2 million came from our device networking category, 3.1 million from IT management category, and 1.7 from non-core or our other product lines.

And the comparables 1 year ago?

IT -- I'm sorry, device networking 6.5; 3.1 for IT management; and 2.6 for non-core.

Okay. Thank you very much. With regard to the new product sales, as opposed to the conversion from external to internal solutions, where are getting -- where are you seeing the traction? And what kind of market verticals -- are you getting your new commitments to networking solutions for Lantronix?

Bill, this is Marc. I think we have a significantly strong position, in that we continue to grow penetration particularly in the security vertical. We see that's been heating up recently. Also, the medical vertical has been very strong for us. Chris, others, you want to add to that?

Security -- we're still very strong. Medical is on an ongoing focus for us. Industrial automation and building automation are other verticals that we're beginning to get some significant penetration with our embedded products. Also, retail point-of-sale is another vertical we're focused on and have some of our marketing efforts directed at today.

Are there any external factors that are slowing this down that you do not have any control over? And what I am thinking about is the software required to manage online devices.

I think that continues to be challenge. If in fact all of the infrastructure pieces were there to actually allow our customers to get the most return out of this investment, it would certainly help. And that continues to be a challenge, I think, for the industry and will throttle its growth to some extent.

Do you see anybody -- you are working to resolve that problem? At one point, Lantronix tried it. But it was a little bit of a morass. Is anyone really trying to address that problem?

A lot of players out there, a lot of startups are trying to do that, Bill. As you are aware, we attempted to do that and we continue to offer for sale a service based on the device view (ph) technology, although that has been kind of slow going. I think the problem right now is these solutions are very cumbersome to deploy, and expensive to deploy in a lot of cases.

(Operator Instructions). There are no audio questions at this time.

Thank you operator. While today's conference call was not chock full of impressive results, we have acted swiftly to reduce expenses. And under the covers, progress continues to be made. Our outlook for the December quarter is positive. And Jim and I are truly looking forward to reporting our results in February.

The entire Lantronix executive team realizes that all of you place your confidence in us. We'll not let you down. And we thank you for your continued support and continued patience. Thank you again for participating in today's conference call and have a great day. Bye-bye.

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