創力 (LTRX) 2007 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2007 Lantronix Inc. earnings conference call. My name is Nicole, and I will be your coordinator for today. (OPERATOR INSTRUCTIONS). I would now like to turn the call over to Ms. Brandi Piacente, Investor Relations for Lantronix. Please proceed.

Good morning, everyone, and welcome to today's 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, and an audio playback will be available through September 20. The number to call for the replay is 888-286-8010 with passcode 828-80513.

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; end-to-end 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.

Readers are cautioned not to place undue reliance on these 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. Marc Nussbaum, Chief Executive Officer, and Reagan Sakai, Chief Financial Officer. We will begin the call with an overview of Lantronix financial and operating results, followed by a Q&A session. Marc Nussbaum will now start the call. Marc?

Thank you, Brandi, and good morning, everyone. As many of you know, we are in New York for the Kaufman Investor Conference which is why we are holding our earnings call earlier in the day.

I am going to begin today with a review of our achievements for fiscal 2007 and the key drivers in our business. Reagan will review our financial 2007 results and fourth-quarter results. Then I will talk about our expectations for some of the new growth vehicles we introduced this past year and our outlook for fiscal 2008. Before closing the call, we will take your questions.

The M2M industry has clearly progressed forward this past year. However, it has not yet reached the longer-term high-growth levels forecasted by industry market analysts. Early OEM adopters of M2M are primarily addressing industrial and commercial applications that are often slow to embrace new technology. Impediments to adoption of device networking include the difficulty of collecting data from remote devices, integrating this data with enterprise business processes and the complexity of managing secure connectivity over the Internet to tens of thousands or millions of devices. We continue to believe that the industry is at least a year away from its inflection point based on design activity we are seeing in OEMs. However, M2M is beginning to penetrate increasingly higher volume opportunities in key applications.

We are also seeing increased M&A activity, analyst interest and heightened tradeshow activity in this space, and most importantly, customers are getting a better understanding of the value proposition that M2M brings to their businesses.

To drive the Company's growth and to continue expanding our leadership position in M2M, we added over 20 new products this past year. This was the largest product expansion by our team in the Company's history, and as a result, we expect acceleration in our device networking M2M business in fiscal 2008.

At the same time, we have announced the final phase of exiting our legacy noncore business lines. Although we will continue to see the effect of this exit on our financial results throughout the year, the Company should be clear of this detractor beginning in fiscal 2009.

Operationally Lantronix has solidified its position in M2M by establishing three business platforms on which the Company's future will be based.

DeviceLinx. This family of products enables companies to connect their devices to the network using industry standard Internet-based wired and wireless communication protocols. DeviceLinx revenues are reported in our Device Enablement category.

SecureLinx. SecureLinx helps organization manage both consolidated IT assets located in the data center and also in distributed branch offices. SecureLinx revenues are reported in our Device Management category.

ManageLinx. ManageLinx is our newest business platform, making it easy for organizations to automate the remote management of large-scale M2M deployments and integrate device data into their business processes. These products help drive industry adoption while making it easy and cost-effective to deploy, communicate with and manage thousands of remote devices. ManageLinx's revenues are also reported in our Device Management category.

Together these three business platforms form the foundation of the Lantronix device networking strategy.

The Company executed well this past fiscal year through five key achievements. One, we successfully ramped the products introduced in fiscal 2006 and earlier, validating our M2M market and product strategy. We set new records by delivering 12% growth in Device Enablement and 16% growth in Device Management for the year.

Two, as I just mentioned, we executed a rapid fire sequence of over 20 new products to drive future growth, our most aggressive period of new product introduction since entering the market. These include brand-new growth vehicles across all three device networking business platforms -- DeviceLinx, SecureLinx and ManageLinx. I will discuss these new products further after Reagan's remarks.

Three, we have continued to broaden our distribution channels and successfully expanded the Company's international sales reach. Some examples include, in Europe, ACAL is a pan-European value-added distributor for international suppliers has been selling our Device Management products for about a year. We recently expanded our distribution agreement with them to now carry our complete product line. This new agreement extends our reach through 17 regional offices in Europe, the Middle East and Africa, some 5000 plus active end-users and resellers.

We also added Bell Micro, a pan-European distributor for our Device Management products. Bell Micro addresses 14,000 reseller customers through 10 regional sales offices.

In Asia our selling partners have been primarily focused on building embedded business for Lantronix and done a good job of gaining traction in the local market. The sales of Device Management products in the region have been minimal. To change this, we recently established a relationship with ADT, a major Japanese distributor to sell our Device Management products and build a network of resellers in the region. We have also changed management in the Asia-Pacific territory and are continuing to expand our sales representation in the region.

In North America we established an agreement with ADI Security, a distribution division of Honeywell. ADI has 100 branch locations in the US and Canada, and Lantronix will be a key partner of ADI's networking initiative. We also signed a number of new regional industrial distributors and integrators in fiscal 2007, and we are in talks with others.

Our fourth key achievement was increased traction in key vertical markets, including industrial, automation, medical and banking as exemplified in part by the types of partnerships I just mentioned. The medical applications for M2M are central to reducing a nation's cost of medical care, and we're working with dozens of companies in this important vertical.

And five, we successfully transitioned all ongoing device networking product lines to comply with the restriction on hazardous substances or RoHS environmental regulations in Europe.

Our financial results have sequentially improved each of the past three years, and today our product portfolio, sales reach and customer base is stronger than ever. Based on our Q4 results, all three of our major product categories including embedded Device Enablement, external Device Enablement and Device Management are growing at the same time. The embedded portion of the Device Enablement product lines grew 19% in the fiscal year. The year-over-year growth in XPort was strong in the first half of the year and slower in the second half, which we believe reflects general OEM market conditions.

While the XPort family contributed double-digit growth in fiscal 2007, the real rising star was our newer wireless 802.11 WiPort family with sales growth of over 100% compared to fiscal 2006. Purchases of evaluation kits for both XPort and WiPort continue to be strong with 1827 sold in fiscal 2007 compared to 1597 in fiscal 2006 and 1860 sold in fiscal 2005.

Our external Device Enablement product lines grew 4% in fiscal year 2007. Within this category the star was our industrial device servers which grew 40% for the year. This compares to a decline in industrial device server revenue in fiscal year 2006. This was a major turnaround. Over the past five months, we have seen a strong pickup in external Device Enablement demand.

As I mentioned, the Device Management product line grew 16% in fiscal 2007 compared to a decline of 1% last fiscal year. Again, a nice turnaround. Most of this growth in Device Management occurred in the second half of the year. In fiscal Q4, for example, Device Management increased 50% year over year. This growth was driven primarily by increased traction in the serial console server market with the SecureLinx SLC family growing 64% compared to fiscal year 2006.

In total, device networking revenues, which include the combination of Device Enablement and Device Management, contributed 80% of sales and grew 13% compared to the prior fiscal year. Lantronix device networking revenues have been up year-over-year in each of the past 11 consecutive quarters.

We managed our cash usage well, ending the year with $138,000 of last year's ending balance, even as we increased revenues. We also maintained the same healthy gross margins as last year.

I'm also pleased that we decreased total operating expenses by about $400,000 for the year, while increasing our investment in new product by $1.4 million or 23%. Our loss from operations was close to half of what it was in fiscal 2006, and in fiscal Q4 we were within $89,000 of breakeven from operations.

Our strategy is to drive M2M adoption by making it it easier and more cost-effective to deploy complete M2M device networking solutions. We're pursuing three avenues to drive long-term revenue growth. One, at the device or node end of the business, we're expanding horizontally to new applications and markets.

Two, we are leveraging the market's elasticity, driving down the cost to add connectivity to devices and thereby bringing the technology to increasingly higher volume applications.

And three, we are expanding vertically as we increase the value Lantronix brings to end customers by providing enterprise connectivity and management middleware for large complex applications.

In fiscal 2007 Lantronix has made solid progress moving forward on these fronts. This year we expanded into the branch remote office market, the KVM window server management market, the ethernet industrial switch market, the M2M management middleware market and most recently the Device Enablement System-on-Chip market. We also made great progress in making device networking more affordable with the introduction of the XPort Direct product.

I will follow-up with what we expect in the year to come after Reagan has provided details on our financial results. Reagan?

Thank you, Marc, and good morning, everyone. I will begin with the fiscal year 2007 results, followed by our fourth-quarter results and then some final comments on the balance sheet.

For the fiscal year ended June 30, 2007, net revenues were $55.3 million, an increase of 7% compared to $51.9 million for the fiscal year ended June 30, 2006. Device Enablement revenue increased 12% to $39.7 million or 72% of total net revenues compared to $35.4 million or 68% of total net revenues for fiscal 2006. Device Management revenue increased 16% to $8.9 million or 16% of total net revenues compared to $7.7 million or 15% of total net revenues for fiscal 2006. Non-core revenues decreased 24% to $6.7 million or 12% of total net revenues compared to $8.8 million or 17% of total net revenues for fiscal 2006.

In terms of geographic mix, sales in Americas accounted for 63% of total net revenues, and international sales were approximately 37%. This compares to approximately 63 and 37% respectively for fiscal 2006.

Gross margin for fiscal year 2007 was 51.2%, nearly equivalent to 51.3% for fiscal year 2006. Total operating expenses were $30.8 million or 56% of net revenues for fiscal 2007 compared to $31.2 million or 60% of net revenues for fiscal 2006. The decreasing trend in operating expenses has resulted in a lower operating profit breakeven point. We are currently operating at that breakeven point.

Because of the significant operating leverage in our model, increased revenues will translate directly into profitability in fiscal 2008 since we will not be increasing operating expenses at the same rate. Our fiscal year net loss improved by 43% to a loss of $1.7 million or $0.03 per basic and diluted share compared to a net loss of $3 million or $0.05 per basic and diluted share for fiscal 2006.

I will now discuss various financial results for the fourth fiscal quarter ended June 30, 2007. Net revenues were $14.7 million, an increase of 8% over $13.7 million for last year's comparable fiscal quarter and a sequential increase of 11% compared with net revenues of $13.3 million for the third fiscal quarter of 2007. Device Enablement revenue increased 6% to $10 million or 68% of total net revenues compared to $9.5 or 69% of total net revenues for the fourth fiscal quarter of last year.

Device Management revenue increased 50% to $2.9 million or 20% of total net revenues compared to $1.9 million or 14% of total net revenues in the fourth fiscal quarter of last year. Non-core revenue decreased 20% to $1.8 million or 12% of total net revenues compared to $2.3 million or 17% of total net revenues in the fourth fiscal quarter of last year.

In terms of geographic mix, sales in the Americas accounted for 64% of fourth fiscal quarter net revenues, and international sales were approximately 36%. This compares to approximately 61 and 39% respectively for the fourth fiscal quarter of 2006.

Gross profit margin was 50.8% for the fourth fiscal quarter compared to 53.9% for the comparable period a year ago and 51.8% for the third fiscal quarter of 2007.

In order of significance, the decrease in year-on-year gross margin percent was attributable to inventory-related reserves, product mix and pricing discounts. Despite the comparable declines, gross margin remains in our target range of 50 to 52%.

Total operating expenses were $7.6 million for the fourth fiscal quarter of 2007. This compares to $7.4 million for the fourth fiscal quarter of 2006. Selling, general and administrative expense was $5.7 million compared to SG&A of $5.9 million a year ago. Research and development expense was $1.9 million compared to $1.7 million for the comparable period last year. We reported a net loss of $89,000 or $0.00 on a per share basis for the fourth fiscal quarter. This compares to net income of $1.5 million or $0.02 per basic and diluted share for the comparable period last year, which included other income of $1.3 million for the sale of the Company's interest in Xanboo Inc.

Turning to the balance sheet. At June 30, 2007, we had cash, cash equivalents and marketable securities of $7.7 million compared to $7.6 million at March 31, 2007 and $7.8 million at June 30, 2006. Net inventories were $11 million at June 30, 2007 compared to $9.8 million at March 31, 2007 and $8.1 million at June 30, 2006. The increase in net inventories was primarily due to a buildup of external Device Enablement products in connection with the new product release and higher growth products.

Our DSOs were 19 days for the fourth fiscal quarter compared to 20 days for the third fiscal quarter and 16 days in the year ago quarter. Our working capital increased to $5.6 million from $5.3 million at March 31, 2007 and $5.4 million at June 30, 2006. 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 June 30, 2007. As of June 30, we had a remaining accrued settlement liability of $1.1 million related to our settlement of the shareholders lawsuit. We expect to issue warrants to purchase Lantronix common stock with a fair value of $1.1 million for the class (inaudible) as final consideration for the remaining settlement liability. The warrants will have a contractual life of four years, and the exercise price will be set at $3.00 above the average trading price during the 45 day trading period prior to the date of issuance.

That concludes my remarks for today. I will now turn the call back over to Marc.

Thank you, Reagan. Five years ago the Company had experienced a financial control breakdown, the business strategy was unclear and five acquisitions executed over a period of five quarters created a pronounced lack of efficiency companywide. The management team has come a long way in riding the ship since then.

Today Lantronix is in a position of competitive strength in the M2M market. We are delivering organic growth in device networking while we shed the leftover product lines from years past.

Recently we announced the end of life of almost all non-core products, and we will rapidly complete the exit of this business in fiscal year 2008. The benefit of retaining these non-core product lines over the past few years was that profits from the non-core sales helped fund our emergency in the M2M market. The downside unfortunately has been a drag on our reported consolidated rate of growth. For example, our M2M business was 88% of sales and grew 13% in fiscal year 2007. However, our recorded revenue growth including the non-core portion of our business was 7% for fiscal 2007.

As we exit the remaining non-core lines in fiscal 2008, we expect a large decline in non-core revenues from $6.7 million down to as low as $2 million, a decline of almost $5 million or a reduction in non-core sales of 70% compared to fiscal year 2007. This will have the effect of subtracting about 10 percentage points from what our growth rate would be if non-core sales were flat between 2007 and 2008. This negative impact on our reported revenue growth rate is expected to be immaterial beginning in fiscal year 2009.

Looking ahead, we believe fiscal year 2008 could be a breakout year for our device networking business. I will now discuss our expectations for some of the products introduced this past year.

The advent of inexpensive wireless M2M networking is expected to be an important driver of adoption over the next few years. Since entering the wireless business in March 2004, we have sold over 1700 WiPort evaluation kits, and our recently announced wireless MatchPort module now brings the cost of wireless device networking down to under $60 in volume applications. The medical vertical seems particularly interested in the 802.11 wireless standard, and we have won or are being considered for over 30 projects at medical device companies.

Last year we closed a contract with a Fortune 100 manufacturer of medical equipment, which included a minimum purchase commitment to Lantronix of $750,000 over 12 months. Our wireless business is expected to deliver growth of over 100% in fiscal year 2008.

In January 2007 we launched the XPort Direct gateway module bringing wired device networking to under $20 for volume applications and opening new applications, including HVAC, entertainment and others.

Our customers' design cycle is typically 12 to 18 months. Therefore, our internal model anticipates modest contribution from the XPort Direct in fiscal 2008.

We recently announced our entry into the M2M device networking system on silicon business with the launch of two chip products based on our award winning XPort technology. This positions Lantronix to benefit as the market expands beyond modules to include chip on board solutions.

Our data center products, including our console servers, continued to capture design wins at major end customers. This past year we expanded our device management offerings to include the remote branch office IT equipment market with the SecureLinx Spider distributed KVM for Windows servers and the SecureLinx Branch Office Manager, a new product designed for managing Linux servers and computer-related equipment in remote branch offices. The SecureLinx Spider and the SecureLinx Branch Office Manager are each expected to grow at rates above 30% in fiscal 2008.

Our new ManageLinx instant M2M offering will eventually consist of several products including various software options, remote premise servers or gateways, and customizable OEM platforms. Several of these will be licensed based on the number of devices connected which will grow over time, creating a potential ongoing revenue stream with each design win. ManageLinx is in its early testing phase, and our two 2008 annual outlook does not include significant revenues from this new family in fiscal 2008. We expect that this new business line will create significant long-term value for both our customers and shareholders.

We introduced the XPress Industrial Networking and Ethernet Pro Switch families last year, and the number of industrial distribution partners has grown. The move to standardize on ethernet networking and industrial applications is driving demand, and the addition of ethernet switches makes Lantronix more competitive as a broad supplier to this market.

With these new products as catalysts, our outlook for fiscal year 2008 is for device networking business to exceed 95% of sales and deliver year-over-year growth of between 15 to 18% compared to 13% growth in fiscal 2007. Including the impact of non-core products, total reported revenue growth is expected to be between 5% and 7% for the year. Gross margins are expected to be comparable to fiscal 2007 levels, and because expenses will be approximately flat for the year, we expect to deliver profitability from operations which should accelerate in the second half of fiscal 2008 and into fiscal 2009.

Over the past five years, we have been participating in the M2M opportunity by helping customers make their devices communicate on the network. Lantronix is breaking down barriers to adoption by extending our technology to new devices and new classes of applications. They are also beginning to participate in the M2M enterprise middleware opportunity by helping companies connect, manage and acquire data from remote devices.

We are aggressively executing product innovations, sales channel expansion, value chain expansion and vertical market penetration. In fiscal year 2008, we will continue our attack with the goal of strengthening a sustainable beachhead in M2M that will create ongoing shareholder value for years to come.

Thank you for participating in today's call, and with that I will ask the operator to open the call for questions.

(OPERATOR INSTRUCTIONS). Michael Ciarmoli, Boenning & Scattergood.

Can you talk about just the markets in general. I know you talked earlier in the call about the aggressive predictions for the M2M market not really materializing. It seems like some particular markets are showing some strength, particularly the utilities or energy management sector. Can you talk about any -- I know you mentioned briefly the medical sector. Any plans to really attack some of those other verticals that might be showing some strength or if you have any products that are capitalizing on any of the energy management solutions out there in the marketplace today?

Good question, Michael. The focus for the Company has been in primarily three vertical areas. One is security. The other one is computer or IT. And the last one is basically building automation and industrial automation combined. And within the industrial and building automation area, that includes energy management functions, things like that. So it is a pretty broad category.

The third or sorry the fourth category that is really new for us that we're focusing our attention on right now is medical. And it is my belief that the medical market is ripe right now, although it is small in terms of numbers of adoption for networking today. I believe it's going to be a very rapid growth area, so that is why we've selected that as our next specific focus.

While there has been pockets of success on specific projects in utilities, it is a long design cycle, and it is kind of spiky, and frankly, the margins have not been terribly good in that market. So we address some energy management applications from our industrial building automation perspective, but I'm not specifically going after trying to sell utilities on our products.

There is also a question of technology in that space. Some of the technology successes in utilities have been, in fact, communications over AC powerline. And that is not one of the technologies that Lantronix has invested in.

Okay. Great. Just switching gears, in the area of pricing and margins, it seems like the way this industry is going it is going to continue to drive prices down to spur on that adoption in volumes. Is there any concern -- I know you gave your outlook for '08 with gross margins essentially the same. Is there anything out there or anything you guys are doing that is allowing you to charge premium pricing for your products or anything that can really protect that gross margin as the volumes really begin to expand here and maybe more discounts are applied to some particular quarters or products?

Okay. So let me respond a couple of ways on that. First of all, pricing has been very stable in the business. We see on the order of 5% or less ASP degradation annually in most of the products that we bring to market. So margins -- so prices have been stable.

On the margin side, what we believe is going to happen as the industry scales and volumes go up, we're going to continue to get cost reductions on our products, which will keep the margins in front of the price erosion. Also, the new products for instance like our XPort Direct with this under $20 price point in volume, we make the same margin on those products as we do on our higher end products. So we have been able to take the cost down effectively.

And the last comment is in terms of overall business strategy, although the embedded business generally does carry a slightly lower margin than our external and box level business, what we see happening -- you will notice we had significant growth in the management side recently. That is going to more than offset we believe any margin impact that you might see over time in the embedded piece of our business.

Also, movement up the value chain into some new business models in terms of how we charge for our products and more software content will also over time offset any tendency towards degradation. So it is a balanced business model from a margin perspective.

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

With 20 new products announced in the last year, I was wondering if there has been any supply disruption, and is there a change in how you get the XPort, the lower-priced products manufactured?

No real change has occurred. The only supply disruption we had was around this time last year in fiscal Q1 where we had a chip problem that impacted the quarter a little bit. But since then we have not had any issues, and we continue to manufacture using the same contract manufacturers, and they have been able to scale up very nicely for us.

Great. On the noncore business, you talked about some pretty significant declines in total revenues. Are there going to be price cuts in this? Is this like a firesale, or is this just work it out?

No, it is actually just the opposite. I have taken prices up on some of those products. We have announced end of life on the majority of the -- almost all of them at this point actually -- and the last time buys on probably the highest volume or highest revenue products in that category was actually this quarter. So after fiscal Q1 we expect a very rapid drop-off in noncore sales, and we're getting good prices for them now.

I show no further questions at this time. I would like to turn the call back over to Mr. Marc Nussbaum for closing remarks.

Well, thank you, everyone, for being on the call this morning, especially to our constituents on the West Coast. It is pretty early out there, and thank you for support. Have a great day. Bye-bye.

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