創力 (LTRX) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter fiscal 2007 earnings conference call. At this time, all participants are in a listen-only mode. We will be conducting a question-and-answer session towards the end of this conference. If at any time (OPERATOR INSTRUCTIONS).

I would now like to turn the call over to your host for today, Ms. Kristen McNally, Investor Relations for Lantronix. Please proceed, ma'am.

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 lantronix.com, and an audio playback will be available through February 15. The number to call for the replay is 888-286-8010 or dial in 617-801-6888 for international callers with passcode 64096239.

Please be reminded that during the course of this conference call management will be making forward-looking statements in their prepared remarks and in response to your questions concerning, among other matters, the future adoption of device networking [M10] products, potential top and bottom line growth, expanded sales, marketing, and R&D activities, the introduction of new products, continuing emphasis on unit growth, and the launch of new business lines.

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. For a more detailed discussion of these and other risks and uncertainties, see the Company's recent SEC filings including its Form 10-K for the fiscal year ended June 30, 2006.

You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof and the Company undertakes no obligation to update these forward-looking statements to reflect subsequent events or circumstances.

I would now like to introduce members of the Lantronix management team -- Mark Nussbaum, Chief Executive Officer and Reagan Sakai, Chief Financial Officer. We will begin the call with an overview of Lantronix's financial and operating results followed by a Q&A session. Mark Nussbaum will now start the call. Mark?

Thank you, Kristen, and welcome everyone to our earnings call covering the second quarter of fiscal year 2007. Joining Reagan and me on today's call are David Schafer, Senior Vice President of Sales; Chris Preston, Senior Vice President of Marketing; Brian Campbell, Senior Vice President of Operations; and Bob Cross, our Senior Vice President of Research and Development.

I will begin by briefly covering an overview of performance for the period and then Reagan will follow with a financial review. I will conclude today's call with remarks about our product development activities and our financial outlook; then we'll open the call for questions.

Lantronix experienced strong year-over-year revenue growth of 15% in fiscal Q2 as we delivered the Company's highest quarterly revenues in five years, the highest device enablement revenues in the Company's history, and the highest device management revenues in the past three years. Results this quarter were driven for the first time by significant contributions from both the device management and the device enablement product lines with device enablement up 21% and device management up 30% compared to the same period last year.

Device enablement sales were a record $10.8 million in revenues reaching 73% of total sales. This, by itself, is a $43 million annualized run rate business that has demonstrated consistent annual growth over the past three years. Device enablement includes all of our products that are designed to bring everyday devices onto the network or Internet. We offer these products in three different configurations including modules, silicon with software, and external boxes.

The highest growth configurations we sell are in the form of embedded modules or boards which are typically mounted inside our customer's product on the device's printed circuit board. Our sales of these embedded products have grown at an increasing rate each year since I joined the Company in 2002, with growth in the most recent 12 month period of 39% in revenues compared to 30% in the 12 months prior, and 18% in the 12 months prior to that. These embedded products contributed approximately 40% to total revenues in the most recent quarter compared to just 25% four years ago. Later on the call, I will comment on a few of our recent product announcements and discuss in some detail last week's launch of our new category of embedded device server, the XPort Direct gateway module.

This quarter, we were also pleased with our solid performance in device management, which is now showing signs of becoming a significant contributor to overall revenue growth. Device management revenues increased 30% to 2.6 million or 17% of total net revenues for the second fiscal quarter. Our data center class counsel server is driving the recent growth in this category, and we are actively working on new products in this category that simplify the deployment of large scalable remotely managed device networks.

Our revenues from noncore products contributed 10% of total revenues for the second fiscal quarter as compared to 16% in the same period last year as we continue to manage the business away from these markets.

With that as a framework for our topline results, I will now turn the call over to Reagan Sakai. Those of you who have not met Reagan yet, he joined Lantronix in November as our Chief Financial Officer. Reagan came to us from technology startup HyPerformix, and has also served as the Chief Financial Officer of NASDAQ listed Crossroads Systems Corporation.

Reagan will now review our second quarter financial results in greater detail. Reagan?

Thank you, Mark, and good afternoon, everyone. Net revenues for the second quarter of fiscal 2007 were $14.8 million, the Company's highest quarterly revenue in five years. This is an increase of 15% over last year's comparable fiscal quarter of $13 million and a sequential increase of 19% compared with net revenues of $12.5 million for the first fiscal quarter.

Looking at the composition of revenues, device enablement revenues increased 21% to $10.8 million or 73% of total net revenues compared to $9 million or 69% of total net revenues for the second fiscal quarter of 2006. Second fiscal quarter device management revenues increased 30% to $2.6 million or 17% of total net revenues compared to $2 million or 15% of total net revenues for the comparable period last year.

Non-core revenues were $1.4 million, a decrease of 29% compared to $2 million in the second fiscal quarter of 2006 as we continue to deemphasize older legacy products. In terms of geography mix, sales in the Americas accounted for approximately 65% of second fiscal quarter net revenues and international sales were approximately 35%. This compares to approximately 61% and 39% respectively for the second fiscal quarter of 2006.

Gross profit margin was 49.9% for the second fiscal quarter compared to 50.9% for the comparable period a year ago. The decrease in gross margin percent is primarily attributable to a combination of sales incentive discounts and a change in product mix from higher margin, noncore legacy products towards lower margin device enablement products.

Total operating expenses were $8 million for the second fiscal quarter of 2007. This compares to $10.1 million for the second fiscal quarter of 2006, which included litigation settlement expense of $2.6 million. Selling, general, and administrative expense decreased to $6.1 million from $6.2 million compared to the same period last year. Research and development expense increased to $1.9 million from $1.3 million for the comparable period last year, in line with our planned increase in R&D investment this year to support new product development initiatives.

We sold our remaining ownership interest in Xanboo during October 2006 for a cash consideration of $700,000. This amount was recorded as other income during the second fiscal quarter ended December 31, 2006. We reported net income of $87,000 or $0.0 per basic and diluted share for the second fiscal quarter. This compares to a net loss of $3.6 million or $0.06 per basic and diluted share for the comparable period last year and a net loss of $651,000 or $0.01 per basic and diluted share for the first fiscal quarter of 2007.

At December 31, 2006, we had cash, cash equivalents, and marketable securities of $7.8 million compared to $7.8 million at September 30, 2006. However, the rounding does not reflect the actual cash increase or approximately $60,000 during the second quarter.

Net inventories were $8.5 million at December 31, 2006 as compared to $9.2 million at September 30, 2006 and $8.1 million at June 30, 2006. Our DSOs were 20 days for the second fiscal quarter of 2007 compared to 21 days for the preceding fiscal quarter. Additionally, our working capital increased by approximately $500,000 from the preceding fiscal quarter. Other than capital leases recorded on our consolidated balance sheets, we have no debt and we have no borrowings against our bank credit facility as of December 31, 2006.

As we disclose in our Form 8-K dated December 29, 2006, the Company reached a settlement agreement for its shareholder lawsuit. Under the terms of the agreement, the Company will not be required to contribute any cash to the settlement. However, the Company expects to issue certain of the company's securities in the form of warrants or common stock to the settlement fund valued at approximately $1.1 million in early 2007. As of December 31, 2006, the Company had recorded an accrued settlement of $1.1 million, representing its share of the settlement liability.

With that, I will now turn the call back to Mark.

Thank you, Reagan. I would now like to comment on our recent product development activities. First, over the past five months, we have brought to market a new line of industrial networking products and an expanded channel support program to address the growing need for industrial hardened solutions. These applications have been adopting device networking technology rapidly and industry analysts have forecasted growth in the use of device networking in industrial automation applications of 44% in each of the next five years.

Our new industrial line addresses segments where adoption of M2M networking is particularly strong, such as industrial and factory automation, building automation, energy utilities, transportation, and manufacturing. So far, we have released four new products under this industrial umbrella, including our first Wireless device servers specifically designed for extreme environments.

Our new products in this area are the XPress DR Plus, the XPress DR Plus Wireless, the UDS 1100-IAP, and the XPress-I/O, which was just announced last week. Our second major product launch was the Evolution device server family, a new line of high-density multiport device servers that enable secure network access for up to 32 devices. These products bring nontraditional equipment under the control of IT managers. Target applications include retail point of sale, medical, manufacturing, security, telecommunications, government, and IT data centers.

Our third major product introduction was just last week, when we announced the new XPort Direct embedded module, designed specifically to launch the next wave of device networking adoption in high-volume machine to machine applications. The introduction of the original award-winning Lantronix XPort in 2003 drove hundreds of companies to adopt device networking.

This was followed by the Company's WiPort Wireless device server, which has driven new applications and a second wave of adoption. Last week's announcement of the Lantronix XPort Direct device gateway embedded module creates a new category of device server for the industry. At a breakthrough price point of under $20 in volume, this dramatically cuts the cost to network a device for many applications.

The XPort Direct is designed to address incremental, newly emerging, high-volume applications and to expand the market to new classes of use such as entertainment, home automation, residential equipment service, and other segments which could not previously afford to adopt M2M technology.

To increase our sales coverage for both existing products and the new lines I just discussed, over the past six months we have expanded our sales team with a small increase in direct headcount and added 20 new reseller partners, bringing the number of VARs, distributors, and manufacturer representative organizations selling Lantronix products to well over 200 worldwide.

Turning now to our outlook for the remainder of fiscal year 2007, we continue to expect a combination of device enablement and device management to deliver year-over-year revenue growth of approximately 20% compared to growth of 13% for the same product set in fiscal 2006. For the first half of fiscal year 2007, these lines delivered 14% year-over-year growth.

For the full fiscal year 2007, total revenues are expected to be in the range of $58 to $60 million. This represents a growth outlook of 12% to 15%. Fiscal year to date, revenues for the first half of '07 are up 9% compared to just 5% at the same half-year point in fiscal 2006.

Over the past few years, our revenue seasonality trend has been a slow fiscal first quarter followed by a strong fiscal second quarter and then an approximately flat fiscal third quarter leading into a sequential pickup in the fourth fiscal quarter. The same seasonality has expressed itself so far this year and we expect this gentle trend to continue.

Our annual growth forecast is primarily based on historical order trend rates, supplemented by broad indicators such as general interest in new products as evidenced by evaluation kit sales. Our top ten end-users typically make up less than 20% of our net revenues, and therefore, any individual customer's outlook for the year can only be used as a general trend and not a quantitative indicator for forecasting purposes.

Sales of embedded evaluation kits continued to be strong in fiscal Q2. Over the past 12 months, we have sold over 1,700 evaluation kits for our embedded products. This is an increase of about 17% compared to the prior 12 month period.

The early adopters of our technology have been associated primarily with applications that already have some form of connectivity in their business model. For example, alarm panels have used dial-up modems and have been monitored by central alarms for years. These types of applications are increasingly moving to broadband connection and we have been an early participant in this conversion.

Based on our discussions with both existing and new customers, we are seeing opportunities to expand our attach rate to include higher volume deployments in increasingly more mainstream applications such as residential security, home automation, and medical. We also believe the next wave of M2M networking will include devices that have not in the past been traditionally connected.

For example, we are seeing accelerating interest from device manufacturers for high-volume applications such as medical equipment, retail point of sale, and certain consumer-centric products. We believe these trends are strong indicators of future growth in our markets and that momentum is building towards a significant acceleration in adoption from which Lantronix will benefit in the coming years.

The business is operating near the P&L breakeven point and we expect to reach profitability from operations in the fiscal third or fourth quarter and to deliver increasing cash balances in both fiscal Q3 and fiscal Q4. Management's goals include ensuring that Lantronix constantly grows its leadership position in M2M device networking, and establishes maximum early exposure to this opportunity so that we are in a prime competitive position as it develops.

We've now reached the point where 90% of our revenues are from the device enablement and device management product lines. Over the past 12 months, we released 13 new products to this market, including a new set of industrial hardened device servers, a new multiport family, three new Wireless products, and most recently, a revolutionary new category of price point for embedded solutions with Lantronix XPort Direct gateway.

Looking forward, the team is aggressively executing several additional new and exciting product concepts that we intend to launch over the next six months. These innovations are intended to further accelerate market adoption of device networking, reinforce the Company's leadership in the industry and provide incremental revenue growth.

As I stated before, this is just the beginning and I have no doubt that Lantronix and the M2M opportunity will deliver outstanding shareholder value over the next several years. Thank you for participating in today's call. I will now ask the operator to open the line for questions. Michelle?

(OPERATOR INSTRUCTIONS). David Soetebier, J.M. Dutton & Associates.

On gross margin, could you give us a little more detail on that? You talked about a goal of 52%, and I assume that's been on the device enablement and device management, and with I guess the use of a lot of outsourcing, I would think those are reasonable expectations, so just could you kind of talk me through that again why we dropped below 50 this quarter?

I'll take that. The reason for the drop is as we deemphasize the noncore products, those non-core products because they are more fully reserved, bring to us greater gross margin. So but moving forward, how do we get back to the 50% to 52% range? Is that -- and with expanding revenues we are amortizing, [phasing] our manufacturing spending over a larger revenue base, and we do have aggressive cost reductions in the product cost category. So going forward, we feel comfortable on a modeling standpoint of 50 points of gross margin.

You were cut off there for a second. So you're comfortable at greater than 50%?

We have plans to get us to greater than 50%, but I think a good modeling point would be 50 points.

And that's for both device enablement and device management?

No, that is for a mix. Kind of Lantronix corporate, if you will.

Michael Ciarmoli, Boenning & Scattergood Inc.

In terms of SG&A, I thought that you said it was going to the levels seen in the fiscal first quarter, of about 5.5 million was going to be the level going forward. Can you explain the uptick of about 500,000 in the current quarter? And what should we look at going forward?

So part of that was related to marketing activities. We had a conference in Europe; obviously with increased sales for the quarter, one would expect sales related expenses to increase, and we also have some remaining legal expenses still hitting us in that quarter. Moving forward, sales expense should flatten out --

Should it flatten out at that six level or is it going to dip back down? To about the 5.5 range?

No, it won't dip down to the 5.5 range -- SG&A should stay in the high fives.

And then, in terms of -- you said you added sales reps. How many sales reps do you have now?

We have about 30 external salespeople and we've added about three over the last six months, roughly.

I will jump back in the queue and let someone else ask a question.

(OPERATOR INSTRUCTIONS). David Soetebier, J.M. Dutton & Associates.

Could you give us a level of business on the Wireless? Level this quarter relative to last quarter?

Sure, I can give you a feel for that. I'm not sure last time I gave out Wireless number, I believe I said we're about 5% of revenues, and I believe that was in a Q1 timeframe. I'd have to go back and check that. We're now between our embedded Wireless products and our box [level] Wireless products; they've now contributed roughly about 10% of revenues this last quarter. So it's certainly picking up nicely and we expect that to continue to grow as a percent of total revenues as we move forward.

Michael Ciarmoli, Boenning & Scattergood Inc.

Can you give us any unit growth statistics? I know in the past you've disclosed percentage of unit growth that you are seeing. Do you have those numbers available?

I'm sorry, Michael. We're not going to be sharing that for competitive reasons.

What about any other additional trends you might be able to give us an adoption, where you're seeing, what industries you're seeing the most adoption from? I know earlier you said industrials. Do you have any particular customers? Do you have a good sense of who the guys that are adopting are?

Well, of course we do have a good sense of that. I don't want to share that for competitive reasons also. But what we can talk about is that the verticals that are adopting aggressively right now seem to be in the security arena, industrial automation, some medical is starting to happen. And actually, Chris Bresson, I'll let Chris, my VP of Marketing add some color to that.

Thanks, Marc. Yes, from a market perspective, we're seeing basically three things taking place. First, we continue to see a strong interest in activity for M10 in the top three verticals that Marc mentioned -- security, industrial automation and IT, as these markets continue to focus on reducing costs, reducing technical complexity, and increasing product differentiation.

Second, we do absolutely continue to see strong interest in Wireless solutions, especially industrial, automation and medical, as the concerns about security, reliability, and ease of connectivity are being addressed.

And then lastly, what's interesting is we're starting to see a growing market activity around home automation. Examples of this include -- if you remember back at the CES show, if you happened to attend that, Best Buy announced their connected life.home marketing campaign again in CES Las Vegas, and the market view is shifting from what primarily was a message around being hip and cool to really proving that home automation is, number one useful, it's practical, and it's becoming a virtual necessity in our developing digital lifestyles. So this is obviously creating new opportunities for M10 and for us as well as Lantronix in the marketplace.

Another question. In terms of I guess you said the product mix impacted the gross margin. How do you manage that going forward? You've recently introduced a lower-priced product and the goal is to keep the margin at that 50% level, I guess, with the expectation that it could tick higher. How does that factor into the process?

Well, first of all, the margins on the new product that we just introduced are similar to the existing embedded product line, really no difference, even though we've hit a much lower-price -- market price point for that product. And that's got to do with a lot of our cycles of learning over the last couple of years in this business about how to make this much more cost-effective going forward. I expect that to continue down the road, so ASP's will decline over time in that embedded business, no doubt.

In terms of the margins, the way we look at it is this. Right now, as I've mentioned in the past, there isn't a customer currently with Lantronix that represents more than let's say -- typically more than 3% of our revenues. So, the volumes that these customers are buying in right now are such that we can keep our prices healthy and keep our margins very healthy. If somebody were to walk in here yesterday, or tomorrow, sorry, and give me an opportunity to sell one million pieces at a lower margin, I would certainly consider that and that might affect our margin model.

Right now, for the foreseeable future, that's not the way the business seems to be operating. And that's the reason for us maintaining our outlook for around the 50% gross margin range.

Keep in mind also that if we were to get large contracts like that starting to fold into the mix, I'd certainly start talking about those numbers and the design cycle would be such that it would take well over a year before that affected the margins for the Company.

Jeb Besser, Manchester Management.

Two quick questions. First of all, I remember the last time we had a major new product introduction, when you introduced XPort, there was a long period of cannibalization of your older products. What can you tell us about the differentiation between the original XPort and XPort Direct that's going to prevent cannibalization of the product line?

Good question, Jeb. A couple of things. First of all, we're a lot smarter management team than we were back then. And so a lot of careful thought has been given to that exact issue here at the Company. The first thing is that this is really an incremental market that we're addressing with new applications and although I expect that there will be some customers that windup converting over, I don't expect that to be a significant trend. And the reason is that the XPort Direct has very different functionality than the core XPort product does.

The XPort Direct doesn't really have a human interface that makes it compatible with Web browsers. Remember, the XPort is being billed as a gooey compatible -- as a device you put inside somebody else's -- [embedded] inside a product that makes it compatible with all the world's Web browsers. The XPort Direct does not do that. It's really meant for true machine to machine applications, where some machine is talking to it as opposed to a person talking to the device.

In fact, around here, we've been talking about the difference between machine to machine applications for device -- for the XPort Direct and man to machine applications like the traditional XPort's been designed into. So, it really is a different application.

The other thing is from a functionality standpoint, the two devices are not PIN compatible with each other, so an existing customer can't remove an XPort Direct and put this one in even if they could work with the current functionality of the XPort Direct. The most important point I believe is this last one, which is the price point difference between the XPort and the XPort Direct. It's much smaller on the order of $10 as opposed to the difference that we saw last time between the old board level embedded products and the XPort, where the price difference there was $70 to $100 difference.

And so that does a couple of things. One, it means that there is in each kind of conversions it's not going to affect the financials nearly the same way, and two, it means that my customers are not nearly as highly motivated to try to make that conversion.

Well, that's a great answer. Now, as far as the adoption curve on this product, how -- I mean you just talked about how it's not -- you can't do a port for port swap. What do you think the design ramp-up -- design and ramp-up cycle is going to be here? Is the market getting more established so that the design and the product cycles are faster? Has this product been with major customers for a while and you just haven't announced it? Give us a sense as to when this is going to be a contributor.

Sure. Samples of the product went out roughly within the last three weeks or so. We begin shipping evaluation kits actually tomorrow, we'll be shipping evaluation kits. So, it's still very early in that cycle. Although our customers now are familiar, more familiar with the technology, this again is being targeted towards new applications. Either new customers or new divisions within existing customers, so there's going to be a learning curve. It's still an embedded product and although we'll have revenue that's, I believe, significant in fiscal year '08 from the XPort Direct, I don't think it's going to have a huge impact on the Corporation until fiscal '09. It's going to be a 12 month cycle before you really see big numbers in the Direct product. Just like any other embedded product.

As there are no further questions, I will turn back to Marc Nussbaum, Chief Executive Officer for Lantronix.

Well, thank you very much for everyone participating in today's call. Reagan and I appreciate it and we look forward to reporting on next quarter results shortly. Have a great day. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day.