創力 (LTRX) 2005 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the 2nd quarter, fiscal 2005 conference call. [OPERATOR INSTRUCTIONS] I would like to remind everyone this conference is being recorded, February 10, 2005. I would now like to turn the conference over to E. E. Wong. Please go ahead ma’am.

Thank you, (indiscernible). Good afternoon, everyone, and welcome to today’s conference call. My name is E.E. Wong with Wong Strategic Communications, investor and corporate communication’s counsel for Lantronix.

Joining us on today’s call are Marc Nussbuam, President and CEO and Jim Kerrigan, CFO. An archived webcast of this call will be available on 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 playback beginning today at 8:00 p.m. Eastern time and running through 7:00 p.m. tomorrow, February 11th. The number to call is 1-800-633-8284, and the access code is 21231811. International callers should dial 1-402-977-9140 and use the same access code 21231811.

Before we begin, I would like to remind you that during the course of this conference call, we will be making forward-looking statements in our comments and in our response to your questions concerning, among other matters: the business environment, market opportunities for Lantronix products and technology, cost-datings from headcount reductions, cash usage, and cash breakeven, gross margins, financial performance, product development, new product introductions, engineering and design activities, manufacturing flexibility, and shareholder value. These forward-looking statements are based on Lantronix’s current expectations and are a subject to a number of risks and uncertainties. Actual results could differ materially as a result of several factors. We encourage you to read the risk factors in our report on Form 10-Q for the period ended December 31, 2004, and our other SEC filings for an understanding of the factors that could cause our actual results to differ and may affect our business end results. We undertake no obligation to update this webcast or any forward-looking statements to reflect new information or events or for any other reason, and you should not assume later in the quarter that the comments we made today are still valid.

Now that we have that housekeeping out of the way, it is my pleasure to introduce Marc Nussbuam, President and CEO of Lantronix.

Thank you E.E, and good afternoon to everyone. Joining Jim and me this afternoon are David Shafer, Senior VP of Worldwide Sales, John Warwick, Senior VP of Operations, Jerry Kornblau, VP of Market Mevelopment, Chris Humphrey, Senior VP of Marketing, Bob Cross VP of R&D, and Kathy McDermott, our VP of Finance and Corporate Secretary.

On our last conference call, we indicated that we were expecting significantly improved revenues for the December quarter and a return to the growth trend that had dominated our core business for the majority of the last 18 months. I am pleased to report that this last quarter was indeed a return to growth and that after 2 ½ years of rebuilding, we are now seeing the results in our top-line revenues.

For the quarter ended December 31, 2004, we achieved $12.9 million in total revenue, up 17% from the prior quarter ended September, an increase of 3.3% compared to the same period last year. Revenue in the quarter was slightly ahead of the earlier guidance we provided in our January 10 press release, which was $12.7 to $12.8 million.

Sales of our core business of device network and IT Management were up significantly, growing 22% over the prior quarter ended September and 11% over the same period last year. Our IT Management business was up sequentially 6% and flat compared to the same period last year. During the period, we saw significant increase in sales of our new IT Management products, which were partially offset by the timing of certain customer programs and mixed shift from our older ITM offerings.

Within the Device Networking machine-to-machine business, we continue to see strong growth indicators. Lantronix huge shipments in this category were up approximately 42% over the first half of fiscal ’05 compared to the first half of last fiscal year. Our Device Networking revenues were a very healthy 16% over the same period last year and 30% over last quarter. We expect the expansion of this market will accelerate as the world continues to bring its devices online. It is important to note that over the last 6 quarters, our Device Networking revenues have demonstrated a compound annual growth rate of about 29%.

In addition, cash flow was consistent with our outlook as we used about $1 million this past quarter. Cash gross margin continued at a healthy level at 52%, and operating expenses have been reduced by about $1.1 million compared to the prior quarter.

We have also completed the actions necessary to implement our new business model. This new model is designed to achieve and maintain cash positive results at the recent growth rates we have been experiencing in our core business lines. We will discuss these actions and the targets of our new business model later in the call.

Finally, on the product front, Lantronix continues to add customers and expand its portfolio of offerings. The export and [Devon line] demonstrated solid growth this last quarter. We have sold an average of over 300 export evaluations kits, and each of the past 4 quarters demonstrating an ongoing high level of design and activity.

Our new wireless family, consisting of embedded and external device servers, continues to be selected by key customers for new applications. Over 500 evaluation kits have been purchased since we began shipping 9 months ago and although revenue is just beginning, it already has contributed incrementally to the top line.

Our SecureLinx server line, the SLC, was selected by “Network Computing Magazine” to receive its Editor’s Choice Award as “the clear winner in the industry’s Best Console Management Solutions category.” Sales of the SLC have more than doubled from the prior quarter and contributed significantly to growth this past period. We expect this line to continue to grow over the next 12 months.

Last quarter, we introduced a new line of power management devices, the SecureLinx SLT. By adding power management to our line of IT Management products, we now offer a complete integrated solution for the enterprise. With our system, from any web browser, a data center manager in New York can securely and easily diagnose a problem in Los Angeles, backup power on any device, and instantly recover.

Next, I will turn the call over to Jim who will cover our financial results in more detail, and then I will come back with some more color.

Thank you, Marc, and good afternoon everyone. As we have indicated in prior calls, some of the financial information we discuss includes non-GAAP measures to provide a more apples-to-apples comparison of our performance over time. We use these metrics in our internal measurements of performance. Reconciliation of these figures to GAAP is in the Investor Relations section of our website at www.lantronix.com.

As we discussed in our news release today, Lantronix recorded revenues of 12.9 million and a net loss of 1.7 million, or 0.03 per share, for the quarter ended December 31, 2004 compared with revenues of 12.5 million and a net loss of 5.3 million, or 0.09 a share for the same period last year, and revenues of 11 million and a net loss of 3.8 million, or 0.07 per share, for the previous quarter.

For the six-month period ended December 31, 2004, Lantronix recorded revenues of $24 million and a net loss of 5.4 million, or 0.09 per share, compared with revenues of 24.7 and a net loss of 8.3 million, or 0.15 per share, for the same period last year.

With respect to the sources of revenues during the quarter, approximately $8.1 million came for our Device Networking category, 3.3 million came from the IT Management category, and 1.5 million from non-core other product lines. For the same period last year, revenues broke down as follows - Approximately 7 million came from the Device Networking, 3.3 million from IT Management, and 2.2 million came from non-core product lines.

For the 2nd fiscal quarter, sales in the Americas accounted for 65.6% of revenues, and International sales were 34.4% of revenues.

Our GAAP gross margins from the 2nd fiscal quarter improved to 48.5% compared to 45.2% for the same period last year and was 50.3% for the prior quarter. 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 useful indicator for cash flow management.

Cash gross margin is a non-GAAP measurement and reflects the gross margin calculated without non-cash expenses caused by adjusting warranty reserves, excess and absolute inventory reserves, and the amortization of intellectual property assets from past acquisitions.

During the quarter ended December 31, 2004, our cash gross margin was 52.0% compared with 54.4% for the same period last year and 52.4% for the September quarter. For the first 6 months of fiscal 2005, our cash gross margin was 52.2% compared with 52.8% for the same period in fiscal 2004.

Our balance sheet remains strong with reasonable balances in our accounts receivable, payable, and inventory accounts. Gross inventory was 12.0 million, and after reserves, net inventory was 6.1 million. Accounts receivable balances showed DSOs were about 25 days, which is consistent with prior quarters. Operating expenses from continuing operations for the quarter ended December 31, 2004, were 8.3 million compared with 7.1 million for the same period last year and 9.4 million for the September quarter. The low operating expenses a year earlier were the result of a large reimbursement of legal expenses from our insurance carrier of $1.3 million during that quarter. Operating expenses for the six-month period were 17.7 million compared with 15.3 million for the same period last year.

Since June 30th last year, we have been eliminating unnecessary expenses through personnel reduction and increased efficiency improvements in our operations. Some of these reductions were masked in our results for the first fiscal quarter ended September 30, because during that quarter, we actually increased our spending in certain marketing and sales programs, and we have had some events that used cash such as paying off the $867,000 note we had on our books from an acquisition.

As Marc has mentioned, we recently took action to reduce on our ongoing operating expenses even further. In January, we eliminated 20 positions. As part of those reductions, we consolidated our European operations, and we are presently relocating distribution operations to Irvine. Our total headcount is now approximately 152, in line with the new business model that Marc will discuss in a few minutes.

On January 17th, Lantronix Audit Committee dismissed Ernst Young as their company’s independent auditors. This decision will result in a reduction of our auditing fees going forward. The nation’s 5th largest accounting firm of McGladrey & Pullen, LLC now serve as our outside independent auditors.

When these actions are combined with our earlier expense reductions, we expect cost savings at the rate of about $3 million per year beginning in the June quarter. This will enable us to achieve cash breakeven at quarterly revenue levels lower than our previously stated guidance of $14 to $15 million.

During the last conference call, we indicated we expected cash usage would return to approximately $1 million in the December quarter, and as usual, we have achieved our cash guidance. Our total cash usage during the quarter came to $957,000. As of December 31, 2004, our cash, cash equivalents, and marketable securities balances were approximately $8.2 million.

Over the next several quarters, we expect continued revenue growth in our core business, and we will realize the benefits from the expense reduction actions I have just discussed. Our goal is to converge to a cash neutral position in the June quarter.

For the March quarter, we expect to use approximately $1.5 million in cash, an increase of a half million over the December quarter, primarily related to the severance office closing and other costs related to our expense actions.

Now, I will turn the call back to Marc.

Thank you, Jim. On our last conference call, we indicated that the December quarter would be a turning point for the company. In the quarter ended December 31, 2004, our net loss was $1.7 million. This represents significant improvement over the loss in the prior quarter of 3.8 million and the loss of 5.3 million in the same period a year ago. Progress is now obvious in our results. As we continue to execute and deliver improved financials, I believe this will translate into enhanced value for our shareholders.

There was no single magic bullet that achieved these results. Over the last 24 months, we have been executing a steady and consistent strategy of tearing down the old and building in its place an efficient, highly-leveraged company with maximum exposure to a market that promises to be one of the hottest plays of the next decade. Specifically, we simplified the business, driving process improvements, streamlining operations, and improving customer satisfaction. With our outside networks established, suppliers and contracted services provide the upside flexibility needed to support growth with minimal incremental expense to Lantronix.

Second, we focus on growing the core business as we reduced dependence on non-core product line. This quarter almost 90% of the electronics revenue came from our core lines and nearly 2/3 of the total came from the Device Networking market.

Third, we invested in the development and delivery of new products and a leading technology to assure the position of strength in our core markets. Also, over the past several quarters we have significantly ramped our activities surrounding the generation of intellectual property by expanding our patents pipeline. As a leader with first to market products, we expect this increased focus on intellectual property could be future source of world income for the corporation.

Finally we invested in marketing and resell initiatives to expand sales coverage and leverage the strength of our many new selling partners. Lantronix today doesn’t have the have the burden of needing to add significant direct headcount to drive increases in sales. The net result of all these activities is that we can now operate the business with a smaller team. Our strategy, simplification, improving processes, building a highly leveled sales network, and de-layering management has reduced expenses to the point that we have been able to establish a new business model that should, on average, deliver cash positive results with approx. 13 million in quarterly sales. The other key assumptions that our new financial model include maintaining cash growth margins around 52% and operating expenses were approx. 7 million per quarter.

It is significant to note that we are already essentially achieving this new model on 2 of the 3 key parameters of margin and revenue. We will reach the full model as our expense reductions flow through to the P&L and associated termination costs are fully absorbed. Our goal continues to be to reach cash neutral position in the June quarter. This new business model not only means we are in better position to achieve positive operating results but more importantly we will be in a much stronger position to maintain these positive results going forward.

This course has not changed our market focus on M-to-M Device Networking and IT Management. Cost development continues aggressively and we tend to continue our time to market leadership by bringing out several new offerings later this year. Our goal is clear, to achieve and consistently deliver positive operating results while continuing to establish Lantronix’s as the leader in the emerging mega trend of machine to machine networking. As our markets accelerate from the early adopter stage we believe the opportunity will best be captured by a company with solid execution discipline, a company obsess with customer service and a company fully exposed with leadership products in key rapid growth segments.

Lantronix’s is the only well established public company with 16+% revenues coming from the M-to-M Device Networking market. This past quarter the team delivered significantly improved results. However, we have plenty of work ahead. As the M-to-M revolution expands, we believe our financials will speak for themselves as we continue on our present course. With that, I would like to open up the session to questions, operator if you could.

[OPERATOR INSTRUCTIONS]. Our first question comes from the line of [Wanda Hughes] with [Hughes] Capital. Please go ahead.

I am on the highway now so if I could have a bottle of champagne to celebrate the profits. That is kind of hard to do right now. Anyway, congratulations all the same of getting turned around and now turned up. I have a handful of questions so I will ask you three and then I will move aside and probably come back. One is for Jim, one is for the gentlemen who is in charge of R&D now, and then ones for Chris, and then one like for Dave. On the operating expenses Jim of 8.3 in December that is going to come down obviously in March to what like mid-sevens or something like that from these recent rationalizations.

In the March quarter, well it would be lower than last quarter but we do have some of the expenses of the severance cost, office closing, and things like that. The exact number will be in the sevens, $7 million range.

So, March will still have OpEx that reflexes the burdon of exiting these things but June quarter will be a clean one with the OpEx number as it stands.

Then we are going to get down to the $7 million range, the lower $7 million range where we have the [inaudible] and this is of course all based on the assumption of, certain assumption for revenues too.

Before we are able to hit our $7 million number, a number of other things have to come down many of which, several things we have already taken action on having to do with outside services. And so we can’t, at this point, project that $7 million number for sure in the June quarter but we are going to try and come as close as we can.

Okay so if the top line starts here like the scale. Let’s say that bargain would take that for June you would do 14 million, 15 million, whatever the number is. What is going to be the OpEx on the difference between say the revenue at $15 and $20 million. Like in other words what is going to be the operating leverage that you could enjoy at this level before you have to start raising the expenses again because you are going to do a higher level of revenue.

Right, we think we have the ability to essentially double our revenue level with not too much of an increment in expenses. There is obviously expense increments that we are going to see in things like shipping and the usual things that are variable. But we believe that we are in really good shape to have a very highly leveraged model over the next 12 months.

So, there is leverage there and then on the gross margin line you would expect that to pretty much hold its own that it won’t be like a whole lot of expansion there. You want to drive volume.

I think that is a fair assessment, yes.

Okay. The next question, this is for product development. I forget the gentlemen’s name. With the X-Port that come out 2 years ago what are the kind of new things that we are doing to either, I doubt that you can make it smaller but what are we going to either improve feature and functionality, or bring the costs down from $30-$20 or is it going to be kind of an X-Port Version 1-30, and X-Port Version 2 for 10 that you would want to get like the Hewlett Packard of the world, so like the printer market and all that kind of stuff. That is 1a and then in b with Y-Port, that came out about a year ago and I have just seen some pictures of it but would be the next thing that you would do to that whether it is making it smaller or making and having some kind of greater range, that kind of thing. So, I know it is kind of a two prong question here.

Before Bob comments I want to add something here. We need to be a little cautious here. We have competitors listening in and our call is available obviously to the public. So, we don’t want to give too much away about our future product plans. But suffice it to say that in both the X-Port and the Y-Port arena we tend to take those aggressively forward. So, Bob can comment but I would like to refrain from specifics if we can.

We have both ongoing investment going on both and X-Port and a Y-Port. As you are aware in the Y-Port area in the radio there is significant adoption starting on that. There are different radio technologies evolved there not just 80211 but other ones. And there are different frequencies and data rates involved there and we are exploring all those options.

The variety would come with different frequencies and data rates. What about like the form factor, is that a big deal or does the market care? Is the size of the device that you have now for Y-Port satisfactory for the mass-market kind of applications that you are looking to address that with.

We have had a tremendous positive acceptance of the current product in its formed factor and concept but we are always exploring new ideas, new opportunities, some bigger, some smaller, some round, some pink, some blue. So, you can expect variations of the product family that will be coming out going forward but we don’t want to get specific again about what those are right now.

Okay.

We are investing and you will see variations of the product line.

To segue then that kind of the massive mass-market with what would seem to be kind of the $100 HP and Lexmark devices, whereby you will learn to the replenishment aspects considering these things just drink the ink. Where does the price point on these things have to be in order for us to have a model that this stuff is going to go in every HP and Lexmark device out there? And they could have their own new business model by having a much more efficient replenishment model for ink colors. It is a huge problem out there. I mean you are doing like your photos or something and all the sudden you are out of these orange and black and you don’t even know about it yet. It is a big problem so I think this would be a mass, mass-market applications, although it has to be a low price point.

Let me take that one. The M10 Device Networking market why there is actually very broad and we are seeing our products being designed into a wide variety of price range, volume to end user, application, it is pretty fascinating. I think you nailed something that is very important, which is part of the extended ethernet that M-to-M market is really changing the way businesses can do service. We are already starting to be able to enable companies to change there service model, enable new forms of revenue. We have some press on Christi Digital recently that describes how they did that. So, you are on to something with the service question but specifically about cost and so forth we are actually seeing a wide range of end product cost for our products being designed to do a wide variety.

Because someone who has an HP though, or like Lexmark where the volume is in the tens of millions. Is that a market that can never migrate down to us or is that always going to be held captive by HP and Lexmark and maybe that is Marc question.

At the embedded level I think all of those opportunities and plus many, many more that has been mentioned are and option before us to get designed into. I think that as the technology progresses we will see more wide spread adoption in products that are perhaps at a lower cost point. And networking will clearly be adopted in some of the markets that you have mentioned. The timing of that’s the questions and we will just have to wait and see.

Last question, for Chris I guess. Cyclades I am told is like a $40 or $50 million business they privately held are in the console server business. We are doing 13 or so million. So, they are doing almost 4 times us or 3 times us. Do we know have the products that channel the distribution in place to catch them, and is the market large enough that will enable us to grow that portion of the business to that size?

Cyclades as you know is a privately held company winder so we don’t have clear visibility into their financials. We do know that a large percentage of their business is not consult servers, it is other products, and they have seen some healthy growth. However, our SecureLinx products have been recognized by the industry as leading with the recent award from “Network Computing”. We have also been recognized in our channel sales execution as a clear leader. So, we are confident and proud of our products and channel strategy today, and, and feel pretty good about where we are going with that.

Let me add something to that. Between fiscal Q1 and fiscal Q2 we more than doubled our sales in the SecureLinx family. The SecureLinx family had significant growth and contributed quite a bit to us, so we are seeing some solid growth. What we have happening at the same time is we are making some transitions within that family away from some older products at the same time. So, the growth that we would have seen in IT Management, which was about 6% from Q1 to Q2, would have been quite a bit larger, and as we flushed through, out through those, the transition issues within that family, just like the Device Networking line, we will eventually start to see higher growth rates on the top line of IT Management. So, I think we have got the right products, I think we have got the right distribution set up for that, and I think we are being successful in that market and it is going to be a little bit longer before you see that clearly emerge in the IT Management line.

Thank you. The next question comes from the line of Mike Sheehan with Empire. Please proceed.

Great quarter. I just have a question on your opportunities outside the U.S. How do you see that shaping up and what opportunities do you see there?

Sure Mike, there are quite a few opportunities outside, Europe in particular, Japan and in Asia. There are opportunities in all of our products in those sectors. I think Europe in particular where we have got some strength in the Device Network side of the business, we are going to try to grow our IT Management presence and that is based out there. If we look to the Far East, we have done very well with the Device Networking platforms. Also in the Far East, particularly in Japan, we will be expanding in those territories. So, we think that, we think there is a lot of opportunity to grow in those areas. In fact, in Europe, if you look at the numbers you will see that quarter to quarter we have had some significant growth in the European market in total.

Did they tend to be more receptive or adoptive of the technology quicker than the U.S., or how do you see that?

I would say that was mixed. There is, originally I thought that there was an argument that said that the European market would be more interested in consumer type products since they do so much building automation today, but that has not borne out. In fact, we are seeing penetration across the board; I do not think there is a regional flavor to it.

Thank you. [OPERATOR INSTRUCTIONS] Our next question comes from the line of Mark Newman (ph) with Atlanta Investments. Please proceed.

Nice quarter. Can you give us some color pertaining to the growth of the M-to-M market and how far away are we in quarters or months until Wall Street begins to take notice of it. And in addition, if you could give us some applications that may be large applications through the M-to-M market just so we can put that in perspective. And, lastly, is the real growth on your end becoming a major component manufacturer, or will you move into the systems integration end of the business?

Let me take those one at a time. It is hard to predict the timing of when the market is going to, you know, grow very rapidly, but as I mentioned, we just saw a 42% increase in unit shipments for the first half of this fiscal year compared to last fiscal year. The year before that we had seen again about a 50% increase in unit shipments. So that says something about the adoption rate starting to accelerate that I think is significant. In terms of areas that we are starting to see penetration, certainly in security applications, medical applications and some now in the telematic (ph) space we are seeing, point of sale, all these areas seem to be in the beginnings of adoption of the technology. I don’t know, Chris, you see anything from an applications perspective to that.

No, I think in fact the wireless is an example where patient point of care and wireless, and it is a very good match.

So what was your other question? There was a second.

Down the road, are you going to be a major component manufacturer or will you move into the systems integration of this business?

Yeah, very good question. Right now we are focused at the component level and at the, at the external component level, multi imbedded I guess I should say and external, and as time goes on, I think it is very important for us to take advantage and help our customers implement the technology and make it as easy as possible for them to implement. So with that in mind, I think over time we will bring more value to the customer in solution set area, and we have some internal plans to move in that direction over time. I can’t tell you today what the mix will wind up being ultimately, but clearly we, if all goes according to plan, will be a dominant player at the component end of this business.

Thank you. [OPERATOR INSTRUCTIONS]. We do have a question from the line of Jason [Schatz] with Hoffman & Sons. Please proceed.

Yes, good afternoon guys. This is actually Bill Maskovitz (ph). Just a, can you comment on pricing then. Tremendous increases in unit shipments here, which is terrific. Congratulations. But, what is happening on the, what happened on the pricing front and what do you foresee here in the next year? Thank you.

Pricing, on the pricing front things have been relatively stable. We have not seen a tremendous amount of pricing pressure. There is some. I came out of the disk drive industry, so my version of some pricing pressure compared to the drive business is that we are not seeing hardly any at all. Pricing will come down on these products over time just naturally, of course, as penetration grows and as volume ramps. But frankly, there are so many customers and opportunities out there right now that we just do not see a tremendous pricing pressure. We are going through as a company some mix issues, and that is what you are seeing in some of the financials. We go from higher, higher cost solutions to lower cost solutions. Once we have an export out there, or whatever, the pricing degradation on those products are reasonable and normal.

Just looking out over the next year, where do you think your biggest opportunity, your most exciting opportunity is?

I am taking a deep breath as I think about that. Just all over the board. The Device Networking piece for us in particular with the growth rates that we are seeing in that space. Lots of different applications. I think the IT Management business and the consult servers, we have got a tremendous opportunity there as well. So, the core areas that we have been focusing on I think both represent significant opportunities for us. We have a chance of growing faster than the market rate on the IT Management side, and certainly at lease with, if not slightly ahead of the market with Device Networking.

Thank you. [OPERATOR INSTRUCTIONS] Mr. Nussbaum we have no more questions at the present time. I will now turn the call back to you.

Thank you operator. Gentlemen, I look forward to reporting to you on our results for the March quarter in early May. In the meantime, I will be presenting at the upcoming Roth Capital Growth Conference on Wednesday, February 23rd and I hope to see some of you there. Thank you for participating in the call today, and have a great evening. Bye, bye.

Thank you. Ladies and gentlemen, thank you for your participation. That concludes the conference call for today. We thank you for your participation and ask that you do disconnect your lines.