創力 (LTRX) 2006 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Lantronix fiscal third quarter 2006 earnings conference call. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to 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 website at www.Lantronix.com beginning today at 7 PM Eastern time and thereafter. There will also be an audio playback available for two weeks beginning today at 7 PM Eastern time. The number to call is 1-888-286-8010. The pass code is 27201015. 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, past 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' 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 risk factors in our report on Form 10-Q for the period ended March 31, 2006, and are other SEC filings for an understanding of the factors that may differ -- that may affect our business and results or actual results could differ materially.

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.

I would now 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' financial and operating results. Bob Cross, Senior Vice President of R&D, David Schafer, Senior Vice President of Worldwide Sales, and John Warwick, Senior Vice President of Operations, will be available with Marc and Jim during the Q&A session.

Marc will now start the call with an overview for the quarter.

Good afternoon everyone. For the Company's third fiscal quarter and nine months ended March 31, 2006 we continued to execute on our strategy of increasing exposure in industrial and commercial machine-to-machine device networking and deemphasizing our noncore product lines. We're pleased with our improving financial results this past quarter and the steady growth.

Fiscal year-to-date revenues for device networking grew over 17% compared to last fiscal year. Device networking accounted for close to 68% of our total sales over the nine month period compared to 61% in the same period last year.

Revenues in our core product lines, which combine device networking and IT management, were up over 9% in the first nine months of fiscal 2006, compared to the same period in 2005. While we expected stronger year-over-year performance in the core business, this gap was primarily due to slower than expected growth in the IT management category. As I will discuss in a moment, we believe this drag on growth in our core business has come to an end.

As indicated in today's news release, Lantronix achieved $13.1 million in total revenues during fiscal Q3, a record sales level since our turnaround began in 2002. Also significant is that for each of the past three years revenue has sequentially fallen off in the March quarter, as institutional and government spending declined compared to the last quarter of the fiscal year -- of the calendar year, excuse me. This year Lantronix revenues grew sequentially in the March quarter, indicating that an increase in device networking adoption more than offset the historic seasonal decline.

For the quarter ended March 31, 2006 device networking revenues increased 11% compared to the same period last year, and as I already mentioned, increased fiscal year-to-date by 17%. Device networking growth in the quarter was driven primarily by strong double-digit increases in embedded product shipments.

In the March quarter we experienced softness in sales of our device networking external products. We believe this is a seasonal affect because integrators who tend to purchase our external products typically accelerate project spending into the immediately preceding December quarter.

A secondary factor that may have affected external box business could be the new reduction in hazardous substances law, or RoHS law in Europe. RoHS is an initiative to eliminate environmentally hazardous materials, such as lead in electronic products. The new law goes into effect June 15, 2006. As a result European customers are clearing their shelves before the law goes into effect, and will be replenishing their stock with new RoHS compliant products as they become available. Lantronix has begun shipping RoHS versions of its products, and we expect orders in Europe to resume normal levels in the coming months.

I mentioned previously that IT management revenues as part of our core business have lagged from our plans. However during the quarter sales in ITM continued to turnaround, delivering modest sequential growth in fiscal Q3, up about 1% from the previous quarter. The last two quarters were the first period in over a year that we posted sequential gains in IT management. And the repositioning of this line to address the data center vertical appears to be paying off.

The sales and deployment cycle for data center products can be longer than one year, and the new business we have won at several Fortune 500 companies is beginning to shift. For competitive reasons, we will not discuss the specifics of these wins, however, we expect ongoing growth in this segment, and are confident about its improved outlook for the coming quarters.

The period ended March 31 represents our fourth consecutive quarter of positive cash flow, with our balance of cash, cash equivalents and marketable securities increased by $158,000 during the period, with a quarter ending balance of $7.4 million. We continue to remain essentially debt free.

On the litigation front, in fiscal Q2 we announced reaching an agreement in principle to sell the remaining securities lawsuits. In fiscal Q3 we reached agreement with an insurance carrier that had previously refused to participate in the settlement. Prior to reaching agreement with this carrier, Lantronix expected to issue $2.6 million in warrants to complete the settlement. We have been able to reduce this expense. And the current outlook for the Lantronix portion of these settlements has improved to about $875,000 of warrants. As a result of the Company's reduced obligations, we reduced our class-action settlement reserve, and this helped us report a profit for the quarter. The good news is that we are beginning to report profitability a quarter earlier than we would have otherwise. I will discuss our outlook for profitability going forward later on in the call.

Two days ago we announced that the Company entered into a two-way patent cross license agreement with Digi International, settling all outstanding patent disputes. The agreement establishes a six-year arrangement in which each of our companies have certain equal rights to the other's current and future patents. With the patents litigation behind us, and shareholder lawsuits wrapping up, we will reduce our G&A expenses going forward. Lantronix will continue to protect its intellectual property rights aggressively with other competitors as appropriate.

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

And good afternoon everyone. For the third quarter of fiscal 2006, as Marc mentioned, Lantronix reported revenues of 13.1 million, and net income of $399,000, or $0.01 per share, compared to revenues of 12.3 million and the net loss of 1.4 million, or a net loss of $0.02 per share, for the same period last year. I would also like to highlight that starting from July 1, 2005 stock compensation expenses are being charged to cost of revenues and operating expenses due to the adoption of Statement of Financial Accounting Standard 123R. Total share-based compensation expenses for the March quarter were $250,000.

As one of the first companies required to adopt FAS 123R, we indicated at the end of the first fiscal quarter that our expenses would total about 250 to $300,000 each quarter. We said that we would not discuss this regularly going forward, and we haven't in recent quarters. We just wanted to affirm this earlier estimate and our position relative to 123R. These expenses are smaller compared to our overall cost each quarter.

With respect to the sources of revenues, approximately $8.7 million came from our device networking category, 2.9 million came from the IT management category, and 1.5 million from noncore other product lines. This compares to the third fiscal quarter a year ago when 7.8 million came from the device networking, 3.0 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. This compares with 62% and 38% respectively for the same period last year.

Our gross margin for the quarter ended March 31, 2006 increased to 50.3% compared to 46.2% for the quarter a year ago. The improvement is attributable to lower products returns resulting in a decrease in our warranty reserve. We also had a decrease in our amortization of purchased intangible assets and a decrease in manufacturing overhead costs.

Operating expenses for the March 2006 quarter were $6.2 million compared to $6.8 million for the March 2005 quarter. This decrease was primarily due to the recovery of accrued litigation settlement expense, somewhat offset by an increase in SG&A related to increased legal fees in recent quarter, and higher expenses for R&D. We continue to maintain tight controls in managing our operating expenses.

SG&A expenses for the quarter were $6.0 million (technical difficulty). R&D expenses were (technical difficulty) for the quarter compared to $1.3 million (technical difficulty). Our balance sheet remains strong with reasonable balances in our accounts receivable, payable and inventory accounts. Net inventories were $6.8 million as of March 31, 2006, the same $6.8 million as at the fiscal year end June 30, 2005.

Accounts receivable balances showed DSOs of about 15.6 days, an improvement from 18.5 days last quarter. Since our DSO target is less than 30 days, we expect that we're near our limit of improvement in this metric.

We are pleased with our financial results for the quarter, and we continue to anticipate a financially healthy fourth quarter. I will now turn the call back to Marc.

We have come along way in the past few years. And our financial and operating results continue to improve. The great buildout of the global device network has certainly accelerated this past year, and this is really just the beginning. The Company's core engine continues to be device networking, with the embedded product lines exhibiting the most growth. Our embedded OEM business has been especially strong the past few quarters. Ongoing interest in XPort and WiPort excites us, due in part to record levels of ongoing evaluation kit shipments.

Many applications, such as medical and security, are also beginning to embrace wireless device networking in a bigger way. We recently released our second generation of wireless LAN products based on 802.11 standard. Our WiPort allows designers and OEMs to quickly and easily build secure wireless capabilities into virtually any electronic device. The WiPort is certified by the SEC, which allows many OEMs to utilize Lantronix license and bypass 802.11 regulatory testing. This value proposition is very attractive for customers who are focused on time to market and keeping costs down.

One vertical market with a high interest in our LAN wireless technology is medical. We recently began to ship a custom wireless device server to a large Fortune 500 medical company. The company installs our product in a custom design plastic tote that also includes their blood analyzer. The entire system is portable, with a complete battery and charging system built into the Lantronix wireless server.

As readings are taken from patients in a hospital, the Lantronix product connects to the hospital's computer systems and automatically transfers the analyzed data without human intervention. The whole system is designed to eliminate data entry errors, and to free up the nursing staff by eliminating paperwork.

Having invented the embedded Web server module category with the introduction of XPort in 2003, Lantronix continues to lead the industry through ongoing innovation. Last month our latest addition to the embedded device networking family, the XPort Architect, received EDN Magazine's Innovation of the Year Award at the industry's major annual conference event, the Embedded Systems Conference.

With the XPort Architect we created a product that goes far beyond simple network connectivity. This product contains protocols and features to make it easy to connect to companies’ business systems, effectively creating a bridge between the device and the enterprise infrastructure. As we deliver more of the pieces necessary to build end-to-end device networking systems, adoption of machine-to-machine applications will accelerate throughout the industry. The EDN Magazine Award for Innovation is recognition that we're staying ahead of the curve, anticipating customer needs, and expanding the market segments that our products serve.

On that external device server side, we recently introduced the UDS-1100, which is a more powerful and RoHS compliant version of our best-selling UDS external device server.

Earlier this week Lantronix launched the first in a new category of products designed to help customers implement device networks at the enterprise level. Our traditional device networking products, such as XPort, and our single port device servers are really components that are used to enable devices to connect to the network or Internet. We consider these products to address the device enablement problem in M2M.

In contrast, our new EDS-4100 is a programmable sophisticated multiple IO product designed to aggravate several devices together to construct an infrastructure located at the edge of the network for devices to attach to. These types of products help the customer extend their infrastructure at the edge, so network enabled devices can communicate. The new products are really in the class we call device networking infrastructure equipment.

Our console servers are an example of a group of products in the IT management business that are also device networking infrastructure equipment. In this case, console servers provide an EDGE level point of concentration for devices typically found in data centers, such as servers, routers and switches. Lantronix has been delivering networking infrastructure equipment to data centers, and is now applying this expertise to other traditional M2M applications, such as security, medical, building automation and retail point-of-sale.

Fiscal year-to-date revenues in the core business grew 9%. And total revenues, including non-core products, grew 6%. We're pleased with the growth of device networking this past year; however, we expect that IT management business to tick up more significantly in the third quarter.

The good news is that we are seeing continued steady signs of acceleration in IT management. Looking forward towards the next several quarters, based on our growing strength in data center products, we expect the IT management category to continue to turn around, delivering sequentially larger improvements to the top line as we go forward.

In the device networking business, the success of our Ethernet offerings and the promise of the current crop of wireless design wins should continue delivering double-digit year-over-year growth moving forward.

I would now like to update you on our guidance for the remainder of fiscal 2006, which is also detailed in the earnings release. Based on our results to date and overall trends, the Company expects to achieve the low range of our annual guidance of 14 to 19% in core revenue growth, and 10 to 15% in overall revenue growth in fiscal 2006. Our original guidance, established in July of last year, anticipated a device networking increase in the range of 18 to 25%. And we expect to close out the year consistent with this expectation. We also expected IT management to grow in the 13 to 16% range, and instead for the first nine months we have experienced a decline of about 9%.

I want to be clear that our core growth engine of device networking, now approximately 68% of total sales, is extremely healthy. Looking back over the last several years, device networking unit growth has been solid. In fiscal 2005 our unit shipments increased approximately 44%. And our current estimate is that we will end fiscal 2006 with over 55% unit growth compared to last year. This represents about four times as many device networking units shipped in fiscal 2006 compared to three years ago in fiscal 2003.

In the current June quarter we expect to deliver strong year-over-year revenue growth in the double-digit range, setting the stage for even higher performance in fiscal 2007. We have been operating with a financial model of approximately 50% margin, and $7.4 million in operating expenses to deliver profitability at revenues in the range of 14 to $15 million. With the recent litigation settlements, and the associated reduced legal expenses, we estimate the revenues required to deliver profitability have improved to the range of 13.5 million to $14.5 million.

Per our guidance at the beginning of the fiscal year, we have been cash positive in each of the past four quarters. Our outlook is for ongoing quarterly growth in our cash balances.

Moving into fiscal year 2007, our financial results will benefit from several factors, including ongoing product mix changes, the ramp up of product lines introduced over the past years, and the contributions from new product lines we will be announcing in the next few quarters. Next fiscal year Lantronix will expand its footprint in the device networking space with additional exciting product lines designed to accelerate the adoption of networking in the M2M market and garner an even stronger position for Lantronix within the industry.

As we have mentioned previously, our target market continues to expand, and has only been marginally tapped. We estimate the opportunity for device networking products to be in the range of $12 billion, with less than 3% of these devices currently attached to the network.

Our Company is committed to maintaining its leadership position in M2M by delivering the industry's most complete device networking components and equipment to meet the needs of OEMs and integrators busily creating tomorrow's world of connected machines. As we complete fiscal 2006 and move on to executing the next phase of our strategic plan in 2007, Lantronix is in an ideal position to further accelerate growth.

Thank you all for your ongoing support. And with that I will open the call for questions.

(OPERATOR INSTRUCTIONS). Lenny Bracken with Bracken Capital.

Can you give a little more color on why the IT management category will reaccelerate?

Certainly. Within IT management there are two core product lines. One is terminal servers, which are a very old product line, and it is probably about a six or seven year old product line at this point. And we're talking about the old B2-100 terminal days. That product line has been declining. The new data center products in that category have been increasing at a nice rate on the order of 10% or thereabouts. And we're now starting to cross that -- the point where we are seeing overall -- the overall mix actually grow.

Okay. Just as a follow-up as well, can you give us an idea of how the wireless connectivity segment contributed in the quarter?

The wireless segment still is less than 5% revenues overall. But there are a lot of design ins that we have been winning in that space, both of the WiPort level -- the embedded level, as well as the external box level products. We believe that going into fiscal '07 we're going to see a significant increase from that category.

Do you think it is going to be double-digit in fiscal '07?

I would expect in terms of contribution of the business, yes.

That's impressive. Is there any new competition when you are bidding on contracts in that segment?

No one new per se. The same group that we have already been competing with. No real change in that space.

Then we should have a stellar year guys. Thank you.

David Soetebier with J.M. Dutton.

Great quarter. I was wondering if you could quantify the savings in the G&A area? Should we look for a reduction as much as 100,000 a quarter?

Basically, within SG&A that includes our legal expenses, and we will expect over a period of a couple quarters that to grow down in the range of 4 to $500,000 per quarter. And so that has been a significant expense for us. And as we wind up all of our litigation and outstanding regulatory matters, this will enable us to reduce G&A even further. Litigation costs for the Company have been significant for four years now. And by end of this calendar year we should be done with that.

(OPERATOR INSTRUCTIONS). David Soetebier with J.M. Dutton.

Let's fill in a few more blanks here if we have time. On the R&D, March was 1.52 million, I believe. December was 1.26. What is going on there and what type of number should we expect going forward?

We have been increasing R&D the last few quarters. Some of that has got to do with headcount. Some of it has got to do with external spending on some services that we're involved with. We have been increasing R&D expending. Going forward I would expect it to increase a little bit from that 1.5 number, maybe up to 1.6 or 7 over the next few quarters, and then kind of hold flat. Part of the expense reduction that we are seeing due to our legal expenses decreasing is going into that R&D.

Super. Then on the device networking, just a clarification. I'm a little bit confused on the sequential growth versus the seasonality comment. In my notes it looks like I have 9 million in device networking sales for December, and then 8.7 for March. If my notes are correct, I show a little bit of seasonality. I'm just looking for clarification on that.

That is correct. There was seasonality there. In the past though the drop has been quite a bit more significant than that. Maybe the guys can pull the numbers out for us. But if you look at the prior year, and even the year before that, the drop in device networking from the December quarter to the March quarter was much steeper.

And so what we think is happening -- I expected to see some decline in the device networking piece. And that decline that is seasonal was actually offset by new orders and customers starting to ramp. We're almost flat due to the offset, but not quite.

Then I'm confused again on the European business. Not confused, but could we expect an upturn this quarter then as the environmentally I guess call it safe product is shipping? I think as a percent of total it dropped off this quarter.

That is part of our expectation is that Europe will come back a little bit as we start to transition over. But the timing of this RoHS transition in Europe with our customers, no one really knows what that is going to be. We may still be impacted a little bit this quarter by that, but we have no way of knowing at this point.

[Jed Vester] with Manchester Management.

A quick question on your comment about record shipments of development kits in device. Can you quantify that at all?

Well, let's say this. This last quarter -- the development kits were higher this quarter than they had been in any of the previous four quarters. And they are on the order of magnitude of 300 to 400 kits a quarter that go out, to give you a feel.

It was the highest quarter for XPort kits.

XPort and WiPort kits. And WiPort was also (inaudible).

Ever?

Ever since we introduced the product.

Carol Pasparker, private investor.

I just wanted to ask how much of the product manufacturing is outsourced, and how much of the installation is outsourced as well?

All of our manufacturing is outsourced. We use contract manufacturers in the Far East to build our products. We don't do anything in-house except for warehousing. And as far as installation goes, we sell through a network of integrators and value-added resellers primarily, or directly to ODMs, so they are responsible for the installation. We don't really do that.

Do you expect any increase in costs in any of the manufacturing outsourcing due to fluctuations in the dollar?

No, actually we expect over time, because of our volume growth, to be able to extract lower prices going forward. We haven't really been very far down the learning curve yet with our contract manufacturers in volume.

Lenny Bracken with Bracken Capital.

Did you guys give the -- maybe I missed it -- the XPort statistics, either year over year or sequentially?

No, I didn't. We didn't talk about it specifically this time around, other than the total revenue levels in the category in general. But XPort has been very strong. We're still experiencing year over year growth north of 100% in XPort sales in terms of units. It has been very healthy for us.

And has that -- been any change in the pricing?

This price still remains the same on the XPort products. We've had some reduction in product margin as we ramp into volume. That is due to customers now getting volume discounts as we start to move into production. But the pricing remains the same, and the price pressure on that product category has been minimal.

(OPERATOR INSTRUCTIONS). Bill Mascovitz with Heartland Funds.

Sorry, I was disconnected, so this might be repetitious. Did you give us some guidance in terms of when you're going to be operationally profitable?

With our breakeven in the -- now down to 13.5 to $14.5 million, it is attainable if we hit the necessary revenues, and things work, it is attainable next quarter as we originally hoped at the beginning of the year.

The fourth quarter that we are currently in. So that is our hope.

Your largest customer, what percent -- maybe you could just give us a general idea in terms of your top 5 customers, what they account for in total sales?

There isn't a customer that is more than 5% of sales. When you really get down to the integrator level, the second tier, if you look at how we move our product and what is reported in the Qs and the filings, you would see that Ingram Micro is about 13 -- the top five customers are 41% of sales, but that includes customers like Ingram Micro, Tech Data, etc., who are distributors.

Ingram and Tech Data, our two largest distributors, account for 25% of our revenues. And then the other three would account for 16, to make 41% of the total. But it tends to be -- the major customers that you would think of are people that employ our technology in their products. And they are not in this level -- these are the first tier distributors.

No one is more than 5% when you get down to the actual real customer level.

This concludes the Q&A session. I would now like to turn the call back to Marc Nussbaum for closing remarks.

Thank you everyone for participating in this afternoon's call. Jim and I will be attending the AEA conference in Monterey next week on May 8. And we look forward to seeing some of you there. Thanks again for your support, and have a good evening. Goodbye.

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