創力 (LTRX) 2006 Q2 法說會逐字稿

Good day ladies and gentlemen and welcome to the fiscal second quarter 2006 Lantronix Inc. earnings conference call. My name is Shanika and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will conduct a question and answer session toward the end of this conference. (Operator Instructions).

I would now like to turn the call over to Ms. Brandi Piacente, Investor Relations for Lantronix.

Good afternoon everyone and welcome to today's conference call. Before we begin, I would like to highlight that an archived webcast of this call will be available on the Company's web site at www.Lantronix.com, beginning today at 7:00 PM Eastern time and thereafter. There will also be an audio playback available for two weeks beginning today at 7:00 PM Eastern time. The number to call is 888-286-8010 and the passcode is 99955938. International callers should dial 001-617-801-6888.

Please be reminded 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 flexibility, the stock market and shareholder value. These forward-looking statements are based on Lantronix's current expectations and are 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 disk factors in our report on Form 10-Q for the period ended December 31, 2005 and our other SEC filings for an understanding of the factors that may affect our business and results or actual results to differ materially. We undertake no obligation to update this webcast or any forward-looking statements to reflect new information or events for any other reason and should not assume later in the quarter that the comments we make today are still valid.

Now I would like to introduce members of the Lantronix management team who will be present during today's call. Marc Nussbaum, Chief Executive Officer and Jim Kerrigan, Chief Financial Officer, will begin the call with an overview of Lantronix's financial and operating results. Bob Cross, Senior Vice President of R&D; David Schaefer, Senior Vice President of Worldwide Sales, John Warwick, Senior Vice President of operations and Chris Humphrey, Senior Vice President of Marketing, will be available with Marc and Jim during the Q&A session. Marc will now start the call with an overview of the quarter. Marc?

Thank you, Brandi, and good afternoon everyone. For the Company's second quarter of fiscal 2006, execution continued as planned and we're pleased with both the financial results and the general uptick we've experienced in our core markets. With two solid quarters now under our belt for the fiscal year, it is apparent that the strategy in focusing on device networking while transitioning away from no growth product lines has proven successful. Revenues from the device networking category have now reached almost 70% of total sales, further increasing our concentration in this fast-growing market.

As indicated in today's news release, Lantronix achieved $13 million in revenues during the fiscal Q2, our highest quarterly in four years. Sequentially revenues increased 6% from the prior quarter. Device networking revenues increased a solid 9% sequentially, almost two times the 5% sequential growth we experienced the quarter before. This 9% growth was accompanied by an increase in unit sales of about 10% during the period, indicating we converted almost all of the unit shipment increase into revenue.

Looking at year-to-date performance for fiscal 2006, revenues for our device networking products increased 21% compared to the same six-month period last year. This result is in line with management's expectations and is also significantly ahead of our primarily competitor's results, demonstrating the success of our approach to the market. Revenues in our core product lines, which combine device networking and IT management, were up 10% in the first six months of fiscal 2006 compared to the same period last year.

While we did expect stronger year-over-year performance in the IT management category, the good news is that we are beginning to experience a turnaround in this business. I am pleased to report that IT management grew modestly by 2% this past quarter compared to fiscal Q1. This is the first time in a year that we posted sequential gains in IT management. We believe this momentum will continue to build throughout the remainder of the fiscal year.

Our noncore category continued to decline as expected and was down 6% quarter-over-quarter and 26% year-over-year. Total revenues from noncore sales are now about 1.1 million and contributed about 9% of our total revenues. We continue to deemphasize these product lines and focus our efforts on growing our core business made up of device networking and IT management.

The quarter ended December 31, 2005 represents our third consecutive quarter of positive cash flow from operations. With cash balances increasing by $346,000 in the period and a quarter ending balance of $7.3 million. For the first two quarters of fiscal 2006, our cash balances have increased a total of about $500 (technical difficulty) thousand dollars.

Excluding the litigation settlement charge, which Jim will address in a moment, the Company also continued to narrow its net loss in fiscal Q2. Gross margin and expenses were in line with our operating model which is designed to deliver GAAP profitability with revenues in the range of 14 to (technical difficulty) dollars per quarter. With healthy results for both the first and second quarter, we remain positive on our outlook for the second half of the fiscal year. As we have mentioned on earlier conference calls, the market for device networking products is growing and remains virtually untapped. We estimate the target market size to be in the range of about $12 billion with less than 3% of these devices currently attached to the network. Device networking has demonstrated a solid growth trend throughout this early adoption stage and Lantronix is well positioned to benefit from the coming buildout as end-to-end continues to accelerate.

I will now turn the call over to Jim who will review our financial results in greater detail. Jim?

Thank you, Marc, and good afternoon to everyone. For the second quarter of fiscal 2006, Lantronix recorded revenues of $13.0 million and a net loss of $3.6 million, or $0.06 per share compared with revenues of 12.9 million and a net loss of 1.5 million or $0.03 per share for the same period last year. The higher loss of 3.6 million for the December quarter included a charge of $2.6 million related to the potential settlement of our shareholder lawsuits that I will discuss separately in a moment. You will note that without the litigation settlement, our loss for the period would've been reduced to $1.0 million, or $0.02 per share, compared with a loss of $1.5 million, $0.03 per share a year ago. The reconciliation of these non-GAAP numbers without settlement expenses is reconciled to GAAP in the Regulation G financial data section of the investor relations portion of our website.

Including the settlement charge, year-to-date Lantronix has recorded revenues of $25.2 million and a net loss of $4.9 million, or $0.08 per share compared to revenues of $23.9 million and a net loss of 5.1 million, or $0.09 per share for the first half of fiscal 2005. With respect to the sources of revenues, approximately 9.0 million came from monitor device networking category, 2.8 million came from the IT management category and 1.1 million from noncore other product lines. This compares the second fiscal quarter a year earlier when 8.1 million came from device networking, 3.3 million came from IT management and 1.5 million came from noncore product lines.

Sales in the Americas accounted for 61% of revenues and international sales were 39% of revenues compared to 66 and 34%, respectively, for the same period last year. Our GAAP gross margin for the quarter ended December 31 was on target at 50.9% compared to 48.5% for the quarter ended December 31, 2004 and 50.0% compared to the prior quarter. Excluding the $2.6 million charge relating to the potential settlement, operating expenses for the December quarter were on target at 7.5 million compared with 8.2 million for the same quarter a year earlier and $7.5 million in the prior quarter. SG&A expenses for the quarter were $6.2 million compared to 6.7 million for the same period a year ago and 6.1 million compared to the prior quarter. R&D expenses were $1.3 million for the quarter compared to $1.4 million a year earlier and $1.4 million in the prior quarter.

Our balance sheet remains strong with reasonable balances in our accounts receivable, payable and inventory accounts. Net inventories were $6.6 million compared to $6.1 million a year earlier. Accounts receivable balances showed DSOs of about 19 days versus 20 days last quarter. As Marc indicated, we ended the December quarter with $7.3 million in cash, cash equivalents and marketable securities, a positive gain of about $346,000 from the September quarter when we reported $6.9 million.

As a final subject to cover, another financial at end of the quarter was our recording of reserve of $2.6 million related to the settlement of our two remaining shareholder lawsuits from 2002. Two things are important with regard to our discussion today. First, our attorneys and insurance companies have worked with the plaintiffs to a point what we (technical difficulty) able to respond to questions with regard to the settlement in our Q&A session later in this call.

D&O, or directors and officers insurance, is typically purchased as a policy with multiple carriers each filling later in a layer in the structure. This approach obligates each insurer to insure a portion of the claims up to their layer policy level and then the next underwriter in the tier covers the next portion of the claim, and so on. Since the suits were first filed in 2002, we have believed there was more than adequate insurance in place to satisfy potential settlements. This did not turn out to be the case. As we began to close in on an arrangement, one of the insurers refused to participate according to its policy obligations. We are therefore planning to proceed with these settlements if need be without the participation of this carrier.

Under the proposed settlement structure, if Lantronix is unsuccessful in obtaining funds from the uncooperative insurer, we would be obligated to issue the plaintiff's warrants for Lantronix's stock to make up all or a portion of the shortfall. It's important to note that under the terms of the possible settlement, Lantronix will not be required to provide and all cash provided in the settlements would be from the Company's insurance carriers.

The $2.6 million reserve we established represents our best estimate for the likely liability with settlements that is currently contemplated. While there is no guarantee that these possible settlements will be finalized or approved by the courts, we look forward to formally concluding these two remaining securities lawsuits in the near future. It is expected that we will be able to share further details with you when the actual settlement is concluded.

With that, I will turn the call back to Marc and comments about our business.

Thank you, Jim. Lantronix is a company built on a long history providing innovative networking solutions with commercial, industrial and business customers. The great buildout of the global device network is now underway and focused, well-managed companies should grow rapidly as M2M applications scale into high-volume. Lantronix created the device server product category and defined the term 'device networking' for the industry long before these concepts and the phrase 'machine-to-machine' became popular. The Company also invented the embedded Web server module category with the introduction of XPort in 2003 and continues to dominate this space today. We're committed to maintaining this leadership position as OEMs and integrators move to the next phase and roll out M2M on a broader scale.

Over the past several years, we have rebuilt the Company's portfolio and drove our revenue mix away from declining products towards our new high-growth offerings. In the quarter ended December 31, 2005, revenues from new products we actively invested in over the last three years was 61%, up from only 33% two years ago. The Company's core growth engine continues to be its device networking business. About half of the revenues in this category come from our embedded offerings and half from our external box-level device servers. Both of these product lines delivered solid growth on a fiscal year-to-date basis and the embedded business grew faster both in terms of percent and absolute dollars.

Roughly three years ago, Lantronix introduced the industry's first integrated device server module, the XPort. By any measure, its market acceptance has been spectacular. Within the embedded product category, the XPort and WiPort families delivered strong performance on a trend that has continued to essentially unabated for over eight quarters in a row. Fiscal year-to-date sales of XPort and WiPort increased approximately 100%, a doubling of revenues compared to the same period last year. The number of customers that bought more than 1000 XPorts in the first six months of fiscal 2006 also approximately doubled compared to the same period last year.

Our wireless embedded product, the WiPort, is still a relatively small portion of our total revenues. However, sequentially, sales more than doubled from fiscal Q1 to fiscal Q2. We believe our wireless product lines will be a core growth engine going forward and we are enthusiastic about the design-ins we're currently winning.

Sales of XPort and WiPort evaluation kits continues to be strong with units increasing sequentially each of the last two quarters to approximately 470 units sold to date in the first half of fiscal 2006. The Company has delivered well over 1000 evaluation kits during the past 12 months. We are excited by this continued high level of interest. The embedded device networking products are growing steadily and should continue to ramp as new design wins transition to production and as existing customers scale to their full volume potential.

To use our XPort and WiPort embedded products, engineers solder our modules directly on their electronics board. Recently, I have been asked the question, if customers are rapidly embedding connectivity inside their products, how will this affect the market for external box-level device networking gear? We believe sales of external box-level products will accelerate as the overall M2M market develops for the following reasons.

First, customers may select to offer conductivity as an optional add-on. This usually makes external solutions more cost-effective or more profitable than going embedded. Also, customers may want the flexibility to decide what type of networking to provide to the end-user either at the time of sale or at the time of installation. They may want to choose, for example, between wire or wireless, or perhaps even between cellular wireless and Wi-Fi wireless. Time to market and development complexity is much less with an external solution, particularly with the frequently changing technology standards within networking. Customers can find complexity of an embedded project inconsistent with their capabilities, a poor fit for their product volumes or just not supportable by their business model.

There is also a need for box-level products to act as site-level concentrators or converters or to service single points of management to create a complete working M2M solution. Finally, there is a huge market of legacy devices already out in the field that can benefit from being networked. This is particularly the case for industrial and commercial products that are typically characterized by long product lifecycles. The more devices we network, the more important it becomes to incrementally add the next device to the network. This phenomena was popularized by the inventor of ethernet and founder of 3Com, Robert Metcalf, and is known as Metcalf's Law. What we're seeing in the device networking market is that as customers introduce new services based on an embedded device server, they often become interested in purchasing box-level products so they can also bring existing legacy equipment up on the new service.

Over the past year, successful deployments and the acceptance of device networking as a required product feature has caused demand to accelerate. Many customers are currently developing plans to expand use of the technology across a broader array of products. We believe the market will follow a pattern similar to other networking revolutions, such as the spread of corporate LANs, the buildout of the Internet infrastructure, the adoption of storage area networks and the spread of wireless technology.

With that, I will now discuss the opportunity for the remainder of fiscal 2006. The year-over-year growth for the first half of the fiscal year in networking was 20%. The noncore lines declined to 28% and the IT management products trailed last year's revenues by about 12%. This resulted in the Company delivering year-over-year growth in the first half of 5.2% for the Company overall and 10.3% for the core business. For the rest of fiscal 2006, the Company should benefit from the ongoing mix shift away from sales of our declining non-core product category, it should also continue to benefit as older products within the core business complete their lifecycles. Based on our improving strength in data-centered products, we expect the IT management category to continue to turn around stronger than Q2. This category should deliver incrementally to our top line in the second half.

The major driver of growth in the second half will continue to be our device networking products. As I mentioned earlier, device networking demonstrated 5% sequential growth in fiscal Q1 and then accelerated to 9% sequential growth in fiscal Q2. For the second half of fiscal 2006, we expect device networking to deliver both sequential and year-over-year growth.

We believe the combined outlook for these two businesses will keep us on track to meet our full year guidance of 10 to 15% growth fiscal year-over-year. With this outlook, we are forecasting that underlying sequential growth within the core will be larger than any offsets from seasonality. This would drive revenues to grow sequentially in the second half, a reversal of last year's performance and a momentum indicator for the business.

We also continue to anticipate reaching quarterly profitability in the second half of this fiscal year.

Before opening to call to questions, I would like to provide a brief update on our investor relations activity. Since the last earnings call, we've fully transitioned to our new IR firm, the Piacente Group, and we remain extremely active in expanding our investor relations efforts. This includes a heavy emphasis on investor conference participation and road shows. We are starting 2006 strong. In January, we presented at the Needham conference in New York; later this month, we will be attending the Roth conference in Southern California and in May, we will be attending the AEA conference in Monterey.

We're extremely excited about the progress Lantronix has made. We now have financial results that begin to demonstrate the strength of our vision and our ability as a management team to execute to our plan. Looking forward to the remainder fiscal year 2006 and into 2007, we see a wide array of opportunities within our markets. The management team is fully committed to achieving the next milestones, making our financial success and continuing that as we increase value for our shareholders.

Thank you all for your ongoing support, and with that, I would like to open up the call for questions.

(Operator Instructions). [James Weber].

Question for you on XPort WiPort. Can you give us some sense as to what percentage of the device networking revenues that segment was or of the overall revenues?

Jim, we have not broken that out this quarter. What we said in the September quarter, that it was about 20% of total revenues. It did in fact grow this quarter, but we have not broken that out specifically.

So it grew sequentially, but you're not going to give us any sense as to where as to an absolute number?

Yes. It grew both sequentially, and it also grew of course year-over-year. And it's a little too sensitive for us of be discussing that level of detail every single quarter for competitive reasons.

Okay, thank you.

David Soetebier, JM Dutton.

Just a little bit on the inventories; they ramped up just a little bit. Just wondering, since you use -- you outsource that, how that's all put together versus demand, and if your estimates on demand were in line or what changed there?

Our estimates were in fact in line. What you're seeing in the inventory buildup is, we signed a number of new distributors and integrators over the last six months or so and so we're building inventory to supply them with products. In addition, the company going forward over the next six months, as every company in the electronics business is doing, will go through a transition where we have to developed products known as RoHS, which are basically green products according to certain laws for green products required in the European markets. Because of that, we're having a little bit of building up of inventory going on right now to make sure we can smoothly transition from the existing products to our RoHS versions without having a shortfall.

All right, thank you.

Rick Serafini, Elmwood Capital.

You mentioned WiPort doubled sequentially. Can you give us an idea of what applications WiPort is being put into?

Sure, I'll ask Chris to handle that.

Sure. WiPort is finding a home in many of the verticals that Lantronix participated in previously with XPort. These include security, building automation, medical and industrial applications. In fact, several quarters ago, a couple of quarters ago, there was a security conference where Lantronix participates and several of the companies integrated WiPort into their alarm panels and so forth and won awards for their product that included WiPort.

Is it replacing XPort, or is it an adjunct?

No, it's not replacing XPort.

For the most part, we're it is an incremental opportunity. In the medical market, for instance, when you go into a hospital, they often require that you shut off your cell phone. One of the reasons for that is there's a lot of wireless devices that are being connected in that environment. The other thing that I would add to Chris' comment is in the mobile application space, we are seeing some adoption as well where, for instance, cellular conductivity may be used over long distances, but there are a lot of applications when you bring the product, the vehicle back to the depot, that you want to have a higher bandwidth and free transfer to the local network. And we're seeing our wireless applications be adopted in those environments as well.

How many distributors do you have at this point in time, and how has that increased over the last six months?

A number of distributors -- in the U.S., we have five distributors, two of them focus on our high-end ITM product line, three of them are more of our industrial distributors that focus on our embedded products. In Europe, we just recently went to a master distribution program where in Europe, traditionally, every country has one or two small distributors. What we have done recently is gone to five major master distributors in Europe and they would then service many of those smaller distributors, and that allows us to manage our inventory better and service those smaller distributors -- just service them better by having local inventory from the master distributors.

In Japan, we have two major distributors, master distributors and several sub distributors, which is typical in Japan. We have a similar structure in China with two major master distributors and several smaller distributors.

Actually, the question that you asked the way Dave responded to it specifically addressed distributors. Underneath the distributor network is a very large number of resellers that sell our product. And our concentration really is in growing that reseller base, and then we focus then at procuring product from that handle of distributors that David mentioned. This last quarter, we've initiated a major expansion in our European reseller recruiting campaign and we've had very good results with that so far. And, David, total number of resellers worldwide, or Chris, is roughly --?

It's over 100 now, as far as -- in our program where we actually maintain a direct relationship with these resellers, the (indiscernible) distribution, our reseller program is well over 100 partners so far.

And actually, that is the main job of our channel marketing team, is growing that distributor base and getting more share within each of the resellers that we currently have.

On the embedded side, we have 12 manufacturers reps throughout North America, and each one of those manufacturers reps may have anywhere from 10 to 20 outside salespeople with noncompeting lines. And so they do, they work with our direct sales force on our FAEs to call on the OEM accounts.

Okay, thanks. Great.

[Lenny Bracken, Bracken] Capital.

That's [Bracken], thank you. Guys, can you just describe if you have any significant channel inventory at all at this point, how you track that?

Well, yes, we do have channel inventory. Basically, all of our business is, in all of our distributors, we basically sell to distributors and we don't record our revenues for those distributors until they actually sell through. So the inventory of our products that is located at a distributor is actually carried on our books as inventory until those are sold. And the inventory at distributors runs typically between $1 million and $1.5 million at any given time.

Okay, and that's true for international sales as well?

That's worldwide.

Okay. And the second question is, I think you mentioned the XPort WiPort being 20% of sales?

At the September quarter, it was about 20% of sales and we did not get specific about it this quarter for competitive reasons.

Okay and can you give the some semblance of an idea what the wireless is of that mix, or was or is? I don't know what you're going to disclose.

Sure. As I mentioned, revenues in our wireless category, the embedded category, actually doubled from fiscal Q1 to fiscal Q2. The total there is still under 5% of our total revenues. And as it approaches 5%, we will start talking some more about it because it will have a significant impact on going forward revenues. We're still in the early stages of the securing design-ins. So you should be thinking several hundreds of thousands of dollars a quarter, but still not at the 5% level.

Okay. I'm going to say something, and I guess (indiscernible) gets asked another questioner is probably going to second this, and you know his feelings on it. I think the reason why he asked that to be broken out, I understand your point of view on competitive reasons, but it's hard for the generic investor to really track how much growth is to come unless one breaks that out quarter to quarter. Because on the surface, given your guidance, one would say, oh, this company is not that attractive valuation-wise because it's not really growing that fast. But we both know, and we all know, that if you look out in the next six to 12 months, if you extrapolate, the growth is a lot higher. And [that's Jeff's] point of view, and I guess I'd feel the same in that sense. Thank you.

Okay.

There are no further questions in the queue.

Thank you very much, operator. Thank you everyone for participating on this afternoon's call. Jim and I look forward to reporting to you on our results for the third quarter of fiscal 2006 in early May, and thank you again and have a great day.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect.