創力 (LTRX) 2005 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to Lantronix Third Quarter of Fiscal 2005 Conference Call. During this presentation, all lines will be on listen-only mode. Afterwards we will conduct a question and answer session. At that time if you have a question please press "1" followed by the "4". As a reminder, this call is being recorded Thursday, May 5, 2005. I would now like to turn the conference over to E. E. Wong, please go ahead, ma'am.

Thank you Farhim. Good afternoon everyone and welcome to today’s conference call. My name is E. E. Wong with Wong Strategic Communication, strategic investor and corporate communications counsel for Lantronix. Joining us on today’s call are Marc Nussbaum, President and Chief Executive Officer and Jim Kerrigan, Chief Financial Officer. An archived webcast of this call will be available on the Company’s website at www.lantronix.com beginning today at 8.00 PM Eastern Time and thereafter. There will also be an audio playback beginning today at 8.00 PM Eastern Time and running through 7.00 PM tomorrow, May 6th. The number to call is 1-800-633-8284 and the access code is 21245857. International callers should dial 001-402-977-9140 and use the same access code 21245857.

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 response to your questions concerning, among other matters, the business environment, market opportunities for Lantronix products and technology, cost-savings from expense reductions, cash usage, and cash breakeven, gross margins, financial performance, product development, new product introductions, engineering and design activities, manufacturing, and shareholder value. These forward-looking statements are based on Lantronix’s current expectations and are subject to a number of risks and uncertainties. Financial 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 March 31, 2005, and our other SEC filings for an understanding of the factors that could cause our actual results to differ and may affect our business 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 make today are still valid.

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

Thank you E. E. and good afternoon to everyone. Joining Jim and me this afternoon are Bob Cross, Senior Vice President of Research & Development; Jerry Kornblau, Vice President of Market Development; Kathy McDermott, Vice President of Finance; Dave Schafer, Senior Vice President of Worldwide Sales; and John Warwick, Senior Vice President of Operations. In the quarter ended March 31, 2005 Lantronix continued to achieve year-over-year and year-to-date financial and operational improvements despite an industry wide slowdown in the IT market. We believe the company is now on the other side of an inflection point moving towards cash positive. Last quarter, core revenues were up, expenses were reduced, and cash margins remained on target.

Looking forward, the company is currently on track to deliver cash breakeven in fiscal Q4, the current quarter. Our results from operations for the March quarter were improved to a loss of $1.2 million, not quiet cutting in half, our loss from operations of about $2 million in immediately preceding December quarter and a dramatic improvement compared to a loss from operations of $3.9 million in the September quarter of this fiscal year. Total revenues for the company were flat at approximately 12.3 million compared to the same period last year. It is important to recognize that this result was achieved at the same time we continued to manage down our older non-core products. Over the next several quarters we expect year-over-year revenue decline for our non-core lines will be less than 10% compared with decline of 35% in the March quarter.

Although our total revenues were flat, total core revenues which include the device networking business and the IT management business were 10.8 million, up approximately 8% from the same quarter last year. Revenues on our device networking business were 7.8 million representing a very healthy 15% growth over last year. Revenues for this category on a year-to-date basis were 22.1 million up 9% from the same period one year ago. Demand within our key target markets for machine-to-machine connectivity continued to grow. Lantronix device networking leads the industry as demonstrated by consistent double-digit unit shipment growth. We expect the expansion of this market will exhilarate as world brings more devices online. Device networking is the most important category for the company and our key to building long-term shareholder value.

In the quarter ended March device networking represented 64% of our total revenue up from 55% one year ago. Revenues from our core IT management business were disappointing and were impacted by a slowdown in the IT market that also affected several of our competitors and other suppliers of IT equipment. Lantronix revenues from IT management totaled approximately $3 million down 7% from the same period last year. On the year-to-day basis revenues of the IT management business were approximately flat at 9.4 million for the 9 months period ended March 31, 2005. This has turned out to be a challenging market that has not measured up to our growth objective so far this year. We have been successful at expanding our sales channels, refreshing our flagship product family, and introducing new product categories to expand the breath of solutions we offer.

Our consult service have also achieved industry recognition for their features, performance, and interviews. We believes that it was equipment purchasing rebound simply a matter of time for the qualification success of our newer products again to drive growth in our IT management business.

On the operational side first cash gross margin continued at a healthy level of 51.4% in the March quarter as compared to 52% in the immediately preceding December quarter. Second, we achieved our planned expense reductions. As discussed on our last conference call we are operating under a new business model with the cash breakeven point based on total quarterly operating expenses of approximately $7 million. Based on efficiency improvements and actions implemented over the past nine months, we achieved the new model's expense level in the March quarter. This improved position represents an expense reduction of $1.3 million per quarter or 16% over the period ending December 31, 2004 and a 20% reduction over the same period last year after adjusting for the impact of non-cash restructuring reserves. As we drive towards operating at cash positive levels, our intent is to manage expenses in line with our new model. Third, cash flow was consistent with our guidance as we used out $1.6 million in the quarter ended in March. Next, Jim will cover our financial results in more detail after which I will discuss the market outlook and why we believe Lantronix is on track to achieve cash breakeven in the June quarter. Jim.

Thank you Marc and good afternoon to everyone. As we discussed in our new release today, Lantronix recorded revenues of $12.3 million and a net loss of 1.5 million or 3 cents per share for quarter ended March 31, 2005 compared with revenues of 12.3 million and a net loss of 0.6 million or 1 cents per share for the same period last year and revenues of 12.9 million and a net loss of 1.7 million or 3 cents per share for the previous quarter. For the nine month period ended March 31, 2005 Lantronix recorded revenues of 36.3 million for a net loss of 6.9 million or 12 cents per share compared with revenues of 37 million and a net loss of 8.9 million or 16 cents per share for the same period last year. With respect to the sources of revenues during the quarter, approximately 7.8 million came from our device networking category; 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 6.8 million came from the device networking. 3.2 million came from IT management and 2.3 million came from the non-core product lines. For the third fiscal quarter, sales in the Americas accounted for 62% of revenues and international sales were 38% of revenues. A year ago, this split was 67% Americas and 33% international.

Our GAAP gross margins for the third fiscal quarter was 46.2% compared to 56.2% for the same period last year and was 48.5% for the prior quarter. Because non-cash charges, especially those related to inventory reserves can vary significantly from quarter-to-quarter, we believe the metric of cash gross margin is the useful indicator for cash flow management. Cash gross margin is a non GAAP measurement and reflects the gross margin calculated without non-cash expenses called by adjusting warranty reserves, excess and obsolete inventory reserves and the amortization of intellectual property assets from past acquisitions.

During the third fiscal quarter ended March 31, 2005, our cash gross margin was 51.4% compared with 56.6% for the same period last year and 52% for the December quarter. Year-to-date our cash gross margin was 51.9% compared to 54.1% for the same period of fiscal 2004. You may recall that our cash breakeven model calls for cash gross margin of 52%; so we're basically there. The reconciliation of cash gross margin to GAAP accounting is available in Regulation G schedules in the Investor Relation section of our website at www.lantronix.com.

Our balance sheet remains strong with reasonable balances in our accounts receivable, payable and inventory accounts. Gross inventory was $12.3 million, and after reserves net inventory was $6.5 million. Account receivables balances showed DSO's of about 21 days, which is better than our bench mark of maintaining DSO's at less than 30 days. During the quarter, we recorded significantly reduced operating expenses as a result of the actions we took recently. SG&A expenses were down by nearly $1 million in the same period last year and almost all as a result of reduced administrative costs.

Also our R&D expense declined by $749, 000 compared to the same period last year. One could mislead in the thinking that our lower R&D expenses reflect the reduced level of activity in our core product line. On the contrary, over the past year we’ve made significant progress in adding to our technologies capabilities and expanding our patent in intellectual property portfolio. We've gained efficiencies in R&D due to in part of consolidation as well as reduction and support of older non-core product lines.

As Marc discussed earlier, the total operating expenses for the quarter ended March 31 were 6.9 million compared with 6.6 million for the same period last year and $8.3 million for the December quarter. A year ago, we adjusted our restructuring reserves according a credit to operating expenses to $2.1 million in the March 2004 quarter. So the decrease in our operating expenses for the March 2005 quarter, without the restructuring adjustment, is actually about $1.8 million versus the same period last year. Operating expenses for the nine months ended March 31, 2005 were 24.6 million compared to 21.9 million for the same period last year.

For the March quarter, we used approximately $1.6 million in cash primarily because of expenses related to our January costs reduction actions of cleaning up old liabilities. We ended the quarter with a cash balance of $6.6 million. We expect this balance to be near or at a low as we pursue increasing cash from operations going forward.

Now I'll turn the call back to Marc.

Thank you Jim. In our last conference call, we indicated that the December quarter was a turning point for the company, and we reiterated our goal to reach cash neutral position by the end of fiscal 2005. We believe these assertions continue to accurately reflect our situation today as I will now discuss.

Condition to reporting the company's performance, one of the key objectives of these conference calls is to provide a meaningful context for interpreting our quarterly results. Our focus has been to discuss key fundamentals of our business, mainly, revenues, operating expenses, gross margin and cash usage. It is easy to see the progress the team has made on many of these fronts. Most importantly, we have grown our core business and believe this is a long-term trend we can continue.

In terms of the overall device networking market, we believe growth in the number of device and that there will network is inevitable. The long-term direction is clear. To understand and quantify market trends and our ongoing performance as a company, it is important to consider a broader context that includes adjacent quarters with a comparison to year-over-year results. A shift of dollars from one quarter to another may occur without really being a sign of a change in the real trend of our business.

For example; in quarter ended this past September, we experienced a drop in device networking revenues of 3% over the prior year. Then in December quarter it went up 16% over the prior year. And now this past March it was up again, this time 15% over the same period last year. Averaging these numbers give us about a 9% growth rate over the same period last year and from this week we can conclude our demonstrated growth trend in device networking is about 9% year-over-year.

We might also conclude that there is a possibility that our growth in device networking business is accelerating, because over the last two quarters, we experienced 15% to 16% growth, although three quarter average was lower at 9%. To some extent we believe this acceleration is due to internally driven reasons; such as product mix transitions among all the customers which had a larger effect in the beginning of the year.

Another key metric we can use to gage progress the device networking business is unit growth and our ability to turn this units into increased revenues. Unit shipments for the quarter ended March 31, 2005 were up an impressive 50% compared to the same period in 2004. It was already mentioned revenues were up a full 15% year-over-year. This is a substantial improvement from last year at this time, when unit shipments were up 34% compared with same period in 2003 and the revenues were only up 4% year-over-year. We have improved our ability to translate unit growth into revenues.

To summarize, we believe our March results taken into context with our multi-quarter trend, indicates we are succeeding in device networking and that the market itself strong and maybe showing signs of acceleration.

In addition to financial results and market trends, other business drivers include our new products in key marketing and sales activities. On the product marketing front during the quarter, we continue to pursue high profile opportunities to highlight our device networking solutions at industry related trade shows and other similar mindshare events. While these efforts do not necessary yield immediate revenue results, our believe is that this type of seed planting further establishes Lantronix as a brand leader in the end-to-end space, ultimately driving financial results and increasing our value to our customers and to our stockholders.

Our device networking business continues to expand across several fronts. During the March quarter, we announced the partnership with Hitachi to offer device networking capability in their line of LCD projectors. We also announced several strategic alliances that extend our external device server capabilities to include cell based wireless connectivity. In addition, we added more protocols for industrial field equipment and building automation applications.

This past year, we also expanded our reserve market by introducing two new wireless product families; the external 80.11 device server WiBox and embedded 802.11 module WiPort. These products are being designed into application with their incremental to a wired solution and are great example of how we can grow our lines horizontally to accomplish a broader range to end-to-end opportunities.

During the quarter, our wireless family achieved SEC certification for both the external and more importantly for the embedded WiPort. Using WiPort will dramatically reduce the certification effort required by customers as compared to competing components that are less complete then ours. Just recently VARBusiness Magazine named the WiBox wireless device server a mid-market product of the year. While contributions from these lines are now in the single-digits, the adoption of wireless in our markets has not progressed as staff of their wired counterparts but, indicators are that we have won many key designers. This should drive incremental revenue for the company as these end products reach the production stage.

With addition to our new wireless products this week we announce the launch of the UBox family of external USP device servers in another move to expand our served market in [inaudible]. With its multiple USP, the Ethernet, the UBox from Lantronix makes it possible for users to remotely connect and share devices previously not available for long distance networking. This line extends our industrial, commercial, and office system solutions to USP capable devices in applications such as retail point of sale, professional audio-video, healthcare, and security.

On the IT management front over the last several quarters, our secured link SLC console server line captured design wins with several large customers. In addition we continue to receive important product and channel awards. As you may recall last October the SLC was selected by Network Computing Magazine to receive its Editor’s Choice Award and the industry accolades have continued. This week, Network Computing Magazine awarded Lantronix, the 2005 well connected award for best console server for the secure links SLC 16. The well connected awards are industry awards given by technologists based on real world product testing and evaluation. Preceding this award reaffirms our reputation as a long standing provider of best in class solutions in this category.

For the second year in a row we won the highest rating possible from VARBusiness Magazine for the quality and depth of our reseller program. Also I am pleased to able to acknowledge that Brad Painter who joined Lantronix last year as VP of Worldwide Channel Sales was named one of the top 75 Channel Executives this year.

While we did not expect March revenues to grow at the same levels experienced in the December quarter due to seasonality we did expect both the device networking business and the IT management business to grow individually on a year-over-year basis. We are pleased with this past periods result in the device networking and disappointed with IT management. In both cases we believe results reflect the market situation and that our execution continues to be on track. Also our long term pattern of device networking growth, its validation that the strategy we are pursuing is sound, we have succeeded in increasing penetration in traditional M2M applications and we have also expanded the applications we can serve by introducing whole new families of products. Based on the progress we have made our intent is to continue doing more of what we are doing right. The IT management business will hopefully begin contributing to top line growth and we are committed to ensuring that Lantronix grows with or ahead of the device networking market. We intend to drive for maximum exposure in the M2M opportunity so that we are well position to leverage market acceleration and create long term value for our customers, stakeholders, and employees. With that I would like to turn the call back over to Farhim our operator to open up the call for questions.

Thank you. Ladies and gentlemen, if you would like to register a question please press the "1" followed by the "4". If you wish to withdraw your registration please press the "1" followed by the "3". If you are using the speaker phone we will ask you to please lift your handset before pressing the request. One moment please for the first question. Ladies and gentlemen as a reminder if you would like to register a question please press the "1" followed by the "4". And we do have a quarter coming from the line of Windart Hughes (phonetic) with Hughes Capital (phonetic), please proceed.

Good afternoon.

Hi [Windart], how are you?

Okay. Have a couple of house cleaning questions and then some more strategic questions. For Q2, what was the device IT in legacy breakdown again?

Jim you got that handy?

Q2 or --

And while you put that together, Marc, what was the unit growth in device in Q2 year-to-year?

EBIT growth of Q2 year-to-year?

Yeah, because you have it at 50% in the third quarter that you just reported.

Right.

Good. Okay, for the year ended December.

Yeah, just run that down a little bit.

Through 2004, for that quarter, device networking was 62.6%.

What was the net revenue number, I just want that?

I'm sorry. Okay, 8.79 million, IT management was 3.299 million or 25.6%, non-core was $1.530 million or 11.8%.

Okay.

So the total was $12.908 million.

Got it, okay. And the unit growth in Device in Q2?

It's strong a measure where we are today versus where we were.

And why you pull that, Marc, how -- in the 7.8 [inaudible] of March quarter, how much of the installed base is still not moved down yet, so what I am asking is that you are showing these big year-to-year increases in unit growth yet it is being profited by guys that have like $100 boxes that are now buying $30 with it, is that now behind you where now you are at the precipice where your revenue growth should start matching your unit growth, because that's a big deal, I mean if you are growing your unit at 30% and you are 90% through the transfusion of the guys who are moving down from $100 box to $30 box then you are really at a true inflection point where the top line does start to grow at 50%?

Sure.

And by the way and that's a prelude to where you are with WiPort which I am assuming right now is still kind of zero revenues?

It's in the low single-digit in terms of revenue as a percent. The way to think of this -- we are not -- I don't think we are going to ever hit revenue growth the same as our unit growth. Okay, let me answer your first question about the percent increase so to be clear the percent increase in the December quarter in terms of units compared to the same period a year earlier was about 41%, device networking. So it's accelerated, as we mentioned, it's a little bit higher this quarter at 50%. So that would indicate some acceleration in the market. But we are not going to -- I don’t think we are ever going to see revenue growth on the order of these kinds of unit growth numbers. We are going to see movement and improvement overtime, where that tops out -- we are seeing 15% growth here, 15% unit growth, compared to say a year ago when it was substantially less. I am not sure where that's going to top out, but as our --there's couple of factors happening here, one, is the transitions within the company from higher ISP to lower ISP products; we have gotten a lot of benefit from that we will to continue to benefit from some of that over the next several quarters.

The bigger factor that will start coming in here though will we how elastic the market is and how much we want to drive into lower priced applications with lower cost solutions. So the product mix itself on a long-term base overtime, it's hard to predict to this point, but I wouldn't expect to ever be able to grow at the same rate as our unit sales.

But that number just by doing like the simple math, would certainly have to converge, because I mean like a less -- like $30 units or dropping down like to $10 and then yes then your top-line you know, it's only going to grow like a 15% but I can't imagine that kind of price degradation at this level impacting the numbers over a next year. So, at some point when you start compounding at a 30% unit growth rate, the top-lines certainly have pick up fairly dramatically from a 15% level, just because at some point in the year, the installed base of those who have to buy these $100 widgets have to move they’re already moved out. So where you are on the curve with the installed base not having converted over yet, I mean it would seem here to me that it is pretty much done.

Well there is more then that happening as well, you have to keep in mind in addition as volumes ramp we have obligations to reduce costs, above our obligation to reduced costs pricing some of these products as well. In other words right now, while we have a customer buying in low quantities, we enjoy a pretty nice comfortable price point and that will come down to they ramp their volumes as well. So it’s too soon to tell anything what that cross-over point or what that bounce links going to be? I would expect it to certainly be north of kind of 15% growth at 50% units’ conversion that we talked about and I believe we will improve from there but I think it’s too early to tell what the targets really are and when that’s going to you know how close we’re going to get to our unit growth number.

Two more questions so if WiPort right now is still extremely nascent -- here again so lets assume that the revenue growth isn’t much as the unit growth, then if your doing 50% unit growth, I’m assuming that most of the unit growth is being driven by Xport when WiPort kicks in, would you expect to see the unit growth even kind of move to a higher platter just because it's coming from a zero level and has a zero comparison from the previous year.

Yes we absolutely believe that, and in addition keep in mind that wireless solutions command a higher price point, so how that all winds up mixings out going forward is yet to be determined.

Okay last question. The IT management and the legacy side it seems now that they kind of be more of an aggravation and for those who want to really value the company, right now it seems to be running at lets just call it its an $18 million or say like a $20 million run rate and if you pick up 0.5 million one quarter from IT, let's say that you lose the 0.5 million or something have from legacy. So if the street is going to values this thing, they are going to value with the company basically for device networking. So should we just assume flat line those two segments out say $20 million rate form here to eternity and just leave it at that and so the delta between today' revenue and whatever number that you get to in '06, '07, '08 its all going to be like device networking, so we are not aggravated by the fact that well revenues you know we are $0.5 million here in IT and so that’s an aggravation point. So how should we look at this going forward and lets just put this on the table right now so we don't have to deal with it next call the call after.

Yeah I wouldn't quite approach this and dismiss it in that way our WiBox because of couple of things. First of all, the IT business tends to be cyclical. So, we're going to see ups and downs in that, but have got nothing to do with our product offerings but -- or what the market does. Right now I think we're in a bit of a low. The other thing to keep in mind is the IT management business in many ways is part of a large picture for M2M and we were growing as a corporation. The first thing that's maturing in the M2M space is in fact all of the edge devices. The next thing that will take place is we have to connect all of those inch devices up to the enterprise. So strategically that part of the business is very important and I think we'll start to see on a long-term basis, very significant potential for the company in the ITM side if the business as that enterprise connection starts to play out, we're very early in that cycle though. So I hate to say it again, but it is too early to tell, but I certainly wouldn’t just forecast a flat line on ITM at this point.

Alright, so fair enough. So, we should not then just assume that that's a $20 million book from here until like eternity that it will be upside like to that of piece.

That's correct.

Yet lumpy.

Correct.

Okay.

Thank you.

Thank you. Ladies and gentlemen, if you would like to register for a question, please press the "1" followed by the "4". Mr. Nussbaum we have no more questions at this time. Wait, we do have a question that just came in. And that's from the line of Bill Maskovitz with Hoffman Advisors. Please go ahead.

Yes, hi guys. I am sorry I missed the first part so I hope this isn't redundant, but are you taking, in your various markets are you taking share. Could you elaborate on that at all, where your share is going in your belief?

Sure Bill, Marc here. I think it's difficult for us to respond to that. There isn't really good solid data that comes our way in this particular industry right now that tells us what's happening. So anything that I would say about share on either of businesses will be speculation.

Okay as public investor what should be we looking outside of adds other than Digi international?

From a public company stand point, other companies that compete with us closely tin our space would be Avocent, there is a company call [DeePac] that focuses on the voice networking. Any body else Jim, you can think of?

Echelon.

Echelon --

I am sorry, was there another?

Avocent Echelon [DeePac] and of course Digi.

Okay thank you.

Thank you. Ladies and gentleman, as a reminder, if you have a question please press "1" followed by "4". Mr. Nussbaum we have no more questions at the present time. I would now turn the call back to you.

Thank you Farhim. Jim and I look forward to reporting to you on our results for fiscal 2005 in early September. In the meantime, we hope you will join us at the upcoming AEA Conference on May 17, and I hope you see you there. Thank you for participating today's call. And have a good evening. Bye.

Thank you ladies and gentleman that does conclude the call for today. We thank you for your participation and that's you please disconnect your line.