創力 (LTRX) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Lantronix, Inc. first quarter 2008 conference call. At this time, all participants are in listen-only mode, and we will conduct a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded for replay purposes.

I will now like to turn the call over to Ms. Kristen McNally, Investor Relations. 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 November 22. The number to call for the replay is 888-286-8010 or 617-801-6888 for international callers with pass code 66099555.

Please be reminded that during the course of this conference call, management will be making forward-looking statements in prepared remarks and in response to your questions concerning, among other matters, the implementation of new and improved corporate marketing messages, the success of new business lines to create significant value, the growth of Spider sales in fiscal 2008, the quarterly comparisons as the year progresses, the increase in device networking sales, and the decrease in non-core net revenues.

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, 2007. 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 Reagan Sakai, interim Chief Executive Officer, and Chief Financial Officer of Lantronix. We will begin the call today with an overview of Lantronix's financial and operating results followed by a Q&A session. Joining Reagan for the Q&A will be Brian Campbell, Senior Vice President of Worldwide Operations; Mark Prowten, Vice President of Marketing; and Daryl Miller, Vice President of Engineering. Reagan, please go ahead.

Thank you, Kristen, and good afternoon, everyone. I plan to keep my comments today rather brief given the short time since our last conference call in September. Additionally and more importantly, Lantronix is in the midst of a transition as we conduct our search for a permanent CEO to replace Marc Nussbaum.

At this time, on behalf of Lantronix and its employees, I would like to thank Marc for all of his contributions over the past five years. I would also like to thank Dave Schafer, former Senior VP of Worldwide Sales and Bob Cross, former Senior Vice President of Engineering for their contributions.

As we advance towards identifying the right candidate for the CEO position, the rest of our executive team is making great progress. We have been dissatisfied with the pace of overall top line growth in recent years. However, we are now finally transitioning through the depletion of the legacy business. We are experiencing growth in our core device networking business, and we expect great results from our ManageLinx product line.

Despite the recent change in our management structure, our management team is functioning very well. Employee morale is strong and everyone is moving towards a common goal. Leading the charge, we have the following functional vice presidents -- Brian Campbell, Senior Vice President of Worldwide Operations, has been with Lantronix for 15 months, and prior to that, Western Digital for 17 years, where he held a variety of operational and management roles.

Brad Painter, VP of Worldwide Sales, has been with Lantronix for over three years and has more than 23 years of experience, including a combined nine years with Hewlett Packard and IBM. Mark Prowten, Vice President of Marketing, has been with the Company for over 11 years, and he has been a major contributor to many of our successful product initiatives. Daryl Miller, Vice President of Engineering, has been with Lantronix for eight years, and he has more than 25 years of high-tech experience, including 14 years at Tektronix prior to Lantronix.

Finally, due to our passion and high expectations for ManageLinx, I have appointed [Peter Deutsche] as head of Business Development for ManageLinx. He has been with Lantronix for two years. He has more than 20 years of high-tech experience including 2.5 years as Director of Engineering, Content Management Systems at Cisco Systems. And as a reminder of my background, I have been at Lantronix for exactly one year and I have more than 25 years of financial management experience, including more than four years as a public company CFO.

With regard to the CEO search, the Search Committee of the Board of Directors is actively engaged and the process is ongoing. In the meantime, the Company is in extremely competent hands.

I would now like to comment on the important progress our team is making in several key areas.

First, we have spent the past 40 days working diligently to bring Lantronix closer to the customer. We have spent a significant amount of that time in face-to-face meetings with our distributors, partners, and customers. We held a partner conference in Europe a few weeks ago, which was very well received and well attended.

The EMEA sales team, sales and marketing management, and I personally met with about 45 delegates representing 27 companies and 22 countries. We met with our North American manufacture rep firms and our field OEM sales team in southern California this week, and we are hosting customer meetings in Japan early next week. These meetings are a great opportunity to solidify our relationships, answer questions about the transition within the Company, and reinforce our commitment to serving the needs of our customers. The interest and turnout we have generated is more than we could have anticipated, so we believe that this has been a strong, solid strategic move.

A key part of moving closer to the customer is implementing new and improved corporate marketing messages. This is our second primary area of strategic rejuvenation. Our objective [has] more clearly defined our marketing message as it relates to the problems we solve for customers rather than simply the technological and functional superiority of our products. This is fundamentally a matter of culture change for our Company. In the past, we have been primarily an engineering and technology driven company. This can be seen in our market-leading innovations such as XPort, YPort and Spider, and our more than 20 new product launches during fiscal 2007; our most aggressive period of new product introductions since entering the device networking and M2M market.

Now that we have a robust technology portfolio across core device networking platforms and markets, our emphasis this year will be on ways that we can help our customers and partners add value, allowing us to create new revenue opportunities and to expand our revenue streams from existing products and technology.

We have received great customer feedback over the past several weeks about how we are noticeably more open to listen to customers and executing based on their specific needs. This is an area where we are strongly committed to strengthening our resources and being much more proactive as we move forward. This is an area of change that I'm particularly passionate about, and you should expect forthcoming announcements related to this initiative.

Third, we are continuing to facilitate good traction overall in our product portfolio. There is a lot of excitement among our customers, partners and employees regarding ManageLinx -- our newest communications and management platform. This is really a defining communication platform that has truly been the missing piece towards delivering a total solution to the distributed IT and M2M management space.

ManageLinx helps drive adoption by making [it] easy and cost-effective to deploy, communicate with and manage thousands of remote devices across the Internet. The ManageLinx offering will eventually consist of several products including various software options, remote premise servers or gateways, and customizable OEM platforms. We expect these business lines will create significant value for the Company over the long-term.

On November 6, 2007, we announced the release of our SecureLinx Branch Office Solutions Kit, a scaleable and affordable solution for remotely managing IT assets. By combining the SecureLinx Branch Office Manager and SecureLinx Spider, we give system administrators a space saving, single source tool to securely manage servers and IT infrastructure equipment from anywhere over the Internet. During the last two months of our fourth fiscal quarter of 2007, initial sales and shipments of our SecureLinx Spider were strong. We expected that shipments would plateau in our first fiscal quarter of 2008 as customers and partners evaluated this solution. In effect, the revenue for Spider for our first fiscal quarter of 2008 confirmed our expectations. The good news is that the pipeline for larger orders looks healthy.

As we work on building our distribution and sales for each of our individual products and device enablement and management categories, we are taking a much more customer-driven approach and delivering solutions that can create incremental revenue streams off of existing product lines. The more we assist customers in making our solutions relevant and applicable to their specific business requirements, the closer we can be to our customer as a total solutions provider and networking partner.

Now turning to our first quarter 2008 financial results. Net revenues for the fiscal quarter ended September 30, 2007 were $13.1 million, an increase of 4% over $12.5 million for the fiscal quarter ended September 30, 2006, and a sequential decrease of 11% compared with net revenues of $14.7 million for the fiscal quarter ended June 30, 2007. The decrease in net revenues from the fiscal quarter ended June 30, 2007 is primarily due to the seasonality of our business and a sequential decline was expected. That said, September sales were softer than expected after a particularly strong August.

Device Enablement net revenues for the fiscal quarter ended September 30, 2007 increased [9% to $9.8 million] or 75% of total net revenues compared to $9 million or 72% of total net revenues for the fiscal quarter ended September 30, 2006. Device Management net revenues for the fiscal quarter ended September 30, 2007 increased 14% to $2 million or 15% of total net revenues compared to $1.7 million or 14% of total net revenues for the fiscal quarter ended September 30, 2006. Total device networking net revenues for the fiscal quarter ended September 30, 2007 increased 10% to $11.8 million or 90% of total net revenues compared to $10.7 million or 86% of total net revenues for the fiscal quarter ended September 30, 2006. Non-core revenues for the fiscal quarter ended September 30, 2007 decreased 29% to $1.3 million or 10% of total net revenues compared to $1.8 million or 14% of total net revenues for the fiscal quarter ended September 30, 2006.

In terms of geographic mix, sales in the Americas accounted for 61% of net revenues and international sales were approximately 39% for the fiscal quarter ended September 30, 2007. This compares to approximately 61% and 39% respectively for the fiscal quarter ended September 30, 2006.

Gross profit margin was 49.3% for the fiscal quarter ended September 30, 2007 compared to 52.8% for the fiscal quarter ended September 30, 2006 and 50.8% for the fiscal quarter ended June 30, 2006. The decrease in gross profit margin percent as compared to the fiscal quarter ended September 30, 2006 was attributable to an increase in certain inventory reserves in connection with the review of the Company's product offerings as part of our efforts to simplify the product portfolio by discontinuing slow moving and non-strategic products.

The decrease in gross profit margin percent as compared to the fiscal quarter ended June 30, 2007 was attributable to a lower absorption of our overhead and reserve costs due to a decline in total net revenues. Our gross margin target range remains at 50% to 52%.

Total operating expenses were $8.1 million for the fiscal quarter ended September 30, 2007 compared to total operating expenses of $7.2 million for the fiscal quarter ended September 30, 2006.

Selling, general and administrative expense for the fiscal quarter ended September 30, 2007 increased 14% to $6.3 million from $5.5 million for the fiscal quarter ended September 30, 2006. The increase in selling, general and administrative expense is due primarily to severance costs. Selling, general and administrative expense for the fiscal quarter ended September 30, 2007 included approximately $780,000 related to the departure of our former President and Chief Executive Officer and other former employees. Expenses associated with executive search for a permanent CEO and $121,000 for a value-added tax liability in connection with a tax audit of a foreign subsidiary.

Research and development expense for the fiscal quarter ended September 30, 2007 increased 3% to $1.8 million from $1.7 million for the fiscal quarter ended September 30, 2006. Research and development expense for the fiscal quarter ended September 30, 2007 included approximately $120,000 related to the departure of a former employee. We reported a net loss of $1.7 million or $0.03 per basics and diluted shares for the fiscal quarter ended September 30, 2007. This compares to a net loss of $651,000 or $0.01 per basic and diluted share for the fiscal quarter ended September 30, 2006. As described above, our net loss for the fiscal quarter ended September 30, 2007 includes approximately $1 million related to departures of former employees and a VAT charge.

Turning to the balance sheet. At September 30, 2007, we had cash, cash equivalents and marketable securities of $7.2 million compared to $7.7 million at June 30, 2007. Net inventories were $10.5 million at September 30, 2007 compared to $11 million at June 30, 2007. Our accounts receivable DSO were 19 days for the first fiscal quarter compared to 19 days for the fourth fiscal quarter of 2007. Our working capital was $4.5 million at September 30, 2007 compared to $5.6 million at June 30, 2007.

Other than capital leases recorded on our consolidated balance sheets, we have no debt and we have no borrowings against our bank credit facilities as of September 30, 2007. We continue to maintain accrued settlement liability of $1.1 million related to our settlement of the shareholder's lawsuit. And we do not expect to record any additional liability for this settlement. We expect to issue warrants to purchase Lantronix's common stock with a fair value of $1.1 million to the class plaintiffs as final consideration for the remaining settlement liability. The warrants will have a contractual life of four years and exercise price will be set at $3 above the average trading price during the 45 day trading period prior to the date of issuance.

Looking ahead, we expect to see favorable quarterly comparisons as the year progresses. Our outlook for fiscal year 2008 is unchanged from the guidance we gave last quarter. We currently expect device networking to exceed 95% of sales and deliver year-over-year growth of approximately 15% to 18% compared to 13% growth in fiscal year 2007.

In fiscal year 2008, as we exit the remaining non-core product lines, we expect a decline of up to $5 million or 70% in non-core net revenues compared to fiscal year 2007. Including the impact of non-core products, total year-over-year revenue growth is expected to be 5% to 7% in fiscal year 2008. Gross margins are expected to be comparable to fiscal year 2007 levels, and our outlook includes profitability from operations during fiscal year 2008. Additionally, we expect to be cash flow breakeven to $500,000 positive for the fiscal quarter ended December 31, 2007.

Overall, from a balance sheet cost structure, management alignment and product portfolio perspective, the Company is in good shape. We are taking a structured, thoughtful and carefully planned approach to the changes that are needed. More change is on the way as we refine and articulate our strategies and go to market approach, but the inflection point in our business is within our reach. The people we have in place today will be instrumental in bringing our Company to that turning point.

Finally, a few comments on our upcoming annual meeting of stockholders coming up on November 14 here in Irvine. Chairman of the Board HK Desai and Director Katherine Braun Lewis will not stand for reelection to our Board, as disclosed in our proxy statement filed October 25. Thomas Burton will stand for reelection but plans to retire from the Board as soon as we are able to identify a qualified candidate to fill his seat. This is disclosed in an 8-K filed on October 25. On behalf of our shareholders and employees, we wish to thank each of these individuals for their years of service and dedication to Lantronix.

We recently announced the appointments of Bernhard Bruscha, founder and former Chairman of Lantronix; Curt Brown, former Executive Vice President of Research and Development of the Company; and Thomas M. Wittenschlaeger, Chairman and CEO of Raptor Networks Technology as members of our Board. We are pleased to welcome them and we will keep you apprised of other Board-related developments as they happen.

That concludes my prepared remarks for today. I will now ask the operator to open the calls for questions. Operator?

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

Reagan, can you just go into a little more detail about what you're seeing in the marketplace right now in the demand for some of your products? I mean, are you seeing strength in particular verticals? And where you expect to see strength or how the new strategy might focus on some particular verticals as opposed to maybe the approach you were taking in the past?

Okay, so, let me break that down into two parts. On a product-specific basis, on Spider, we had expected a plateauing of shipments and revenues in Q1 as customers and partners started evaluating that solution for a wider deployment. We are seeing, in the sales funnel, sales activity, larger deals begin to pop up. And still, that's a bit away from actual sales but we're heartened by the growth in that sales pipeline.

For our SLC product line, we're seeing good order activity through this month and the remainder part of this quarter. And we are particularly pleased with the growth or the order rate that we're seeing for our embedded product lines for this quarter.

On the verticals, one of the things that by getting closer to the customer, especially on the beta for ManageLinx is one of the verticals that we'll be concentrating on is this Remote Product Services, where it's primarily an MSP doing work for its customers and its installed base. So that's a vertical that we'll be going after.

The medical device vertical is very strong. We expect good things this quarter. And the security vertical is also one that we believe we have pretty strong presence in. That's another vertical that we'll be concentrating on.

Okay, great, thanks. Additionally, if you could just talk a little bit more about -- I guess, how long do you think the strategic reshaping is going to go on for? It doesn't sound like from the guidance being reaffirmed there are going to be any business disruptions. Do you anticipate this to go smoothly? Is there anything out there that's still very uncertain?

No. First of all, you've got a committed and competent management team. We understand the strategic vision. Some of the shortfalls has been on the blocking and tackling in the past.

The example or the analogy I would give is that Marc Nussbaum provided -- he was like a painter, right? We had paint in effect on the pallet. And it's this management team that's in effect, putting that paint up onto the easel. Not all the colors on that pallet are going to get up onto the easel and it's not going to be the same color combinations. But we've got a pretty robust technology portfolio. We're excited about ManageLinx coming forward. Some of our products like Spider and LSC are maturing in the marketplace.

And so it's really a matter of executing on those, understanding what the customer problems are, so that the next generation of LSC or future feature enhancements are also in line with what customers want. That's what we're really concentrating on at this point. So this is not a turnaround situation. It's a refinement. It's articulating a more customer-centric focus.

Okay. Great. Thanks, guys.

Winder Hughes, Focus Fund.

That's Winder Hughes. But that's okay, it's never done right. So I like what I'm hearing so far. And as a large holder who has kind of had to suffer with this for the last three years, I would also hope that we're at an inflection point.

Several questions for Reagan and then maybe some of the other guys, they'd like to jump in the mix.

Number one, on the current quarter with the charges and expenses that you had in September, like with SG&A and the gross margin line, as well, will those move back? Will SG&A move back down and then even down some more just because those salaries aren't there and the gross margin moved back up because you took the write-offs?

And number two, I'd like to hear more about ManageLinx from whoever the most informed source there is on the perspective of what does ManageLinx now allow a very large-scale user to do that he couldn't do today? So, like in other words, does ManageLinx really bring in the large-scale OEM buyer?

And then thirdly -- and maybe this is where like some other guys here can jump in -- is what are the things that you're doing now that are different 90 days, six months ago, that you feel now is going to have an impact going forward? I know that's loaded, but take it away.

Okay, so I'll take questions one and three, and Mark Prowten, our Vice President of Marketing will take number two on ManageLinx.

As it relates to operating expense and gross margin, yes, you should see operating expenses and gross margin get back to what I would call normal spending levels. Those were one-time reserves and we took them to the P&L and appropriately accounted for them in fiscal quarter 1. Same thing for gross margin. There's nothing to indicate from our analysis that would indicate a decline in gross margin from our guidance of 50 to 52 points.

With regards to what are we doing now that's different? I think part of it is renewed vigor, but I can tell you that myself, Mark Prowten and Brad Painter representing the management team here as well as our product line managers, we were out in Europe for three or four days. We met with every one of our customers. We asked them what we were doing right, what we were doing wrong, any areas for improvement. We took all of that to heart. We met with our North American rep firms and their representatives and our field OEM's team this last week. We asked the same questions. We listened. We just didn't spew out technology and product direction. We wanted to know what problems they're seeing, what issues they're seeing in the marketplace, and how our products are successful in that marketplace.

Brad Painter is not in the office today. He's at a customer site talking to customers. And early next week he will be in Japan talking to our Asia-Pacific customers. So in basically two weeks' time, 2.5 weeks time, we have talked to pretty much every one of our worldwide customer base -- not end user customer, but certainly our distributors, VARs, and larger customer base. So, and that's a change from the past. We're looking more towards our technology portfolio and understanding what problems they solve as opposed to what I would call more feeds and speeds type of marketing.

So, Reagan, so (multiple speakers) --

I understand that I'm nuancing it a bit, but we believe by getting closer to the customer and solving their problems, that will increase our revenues.

So, historically then, I mean, we really weren't doing this? Is that what you're saying?

Not to the same level that we're doing now. Part of it is we released 20 new products. I would venture to guess a portion of those will be highly successful and a portion of those will not be as successful. In the future, my hope is that we won't release 20 new products; we'll release five to six, but every one of them will be successful because we will have asked the customer what problem we're trying to solve.

Okay, I got it. ManageLinx?

On ManageLinx -- can you hear me okay?

Yes.

Okay, great. So, on ManageLinx, if I recall, Winder, the question was will it scale the larger OEMs?

What does it really do that -- I mean, because it seems like history to date that most of the buyers of your products are like a guy will buy 1,000 of these exports or 5,000, but there's no 20,000, 50,000, 100,000 node buyer because there hasn't been any means by which the buyer could manage those nodes, which goes back to we're making like the hardware but not really thinking about how they would wire it all up and --

Make use of everything.

But what does ManageLinx now bring to the buyer that will enable the very large-scale buyer to go big here? Whether it's like a Xerox or Hewlett-Packard, [Hover] printers or -- I mean, there's a limitless number of applications. So that's what I'm trying like to understand is what does ManageLinx bring that was not here that will bring in these large buyers?

Okay. That's a very good question. First of all, ManageLinx, as we have grown to really admire now -- I've been out to many companies showing this off and speaking with them and finding opportunities -- what ManageLinx really does for Lantronix, first of all, is it ties sides of our business much closer together. We have our device networking business which we're all familiar with and we have our management side, more to the data center [or the] Branch Office side. ManageLinx really does tie these two much closer together.

In regards to opportunities, large OEMs, one thing should be clear is that ManageLinx is not designed to only speak to a Lantronix network enabled product. It is designed to communicate with any device out there in the world. If it happens to be networked by Lantronix, that's just that much more of a benefit for us or for the customer.

The really important thing about ManageLinx, it is really targeted towards the companies, similar to what you mentioned, that have many customers; thousands, 10,000's, 15,000, and onwards customers. And they may only have three to five devices per location but they have 10,000 locations or more. So it does scale very nicely to that. And it solves a couple of very compelling problems. The whole M2M scenario of taking and connecting machines from one location to another is a great vision that a lot of companies have, but we also have the technology constraints that are put over the Internet and at companies for security purposes, such as firewalls and things of that nature. So as companies try to tie these things together, they run into obstacles.

One of the things that we really tried to do with ManageLinx is really go back and ask all these companies, what are your major problems? And we picked two of the top ones to solve. They were very difficult to solve. We have solved them. And we're going to get a lot of traction out of ManageLinx, we believe. And it really does make this M2M start coming together much nicer and it will scale very well.

When does that become released? And the final question for Reagan here is with the pipeline of things like Spider and your XPorts, give us some sense for the deal sizes you're seeing today versus you saw six or nine months ago. I mean, I think it's like where you're seeing deals like $5,000 and $10,000 last year, now you're seeing $100,000 deals. Give us some just kind of order of magnitude there about how the pipeline has changed.

Okay, so, on the first part, we expect to go to our first customer ships GA -- I want to say, not GA -- but first customer ships to our beta customers later this month. We expect revenue units to be available very latter part of this quarter but most likely early part of fiscal quarter three. And depending upon how well the beta and testing goes -- because obviously we're asking for their input during this process as well. It's not only as a technological type of beta but it's a customer requirement beta. We would expect revenues the latter part of the fiscal year.

As it relates to size of deals, I can only tell you anecdotally. I mean, I literally started here one year ago today. And at that time we were tracking deals that were $10,000 to $15,000 -- or actually $5,000 to $15,000. And as you know, it takes a lot of $5,000 to $15,000 deals to make up $1 million.

We now track deals that are in excess of six figures. And we see a lot more of that activity rolling through the P&L. We see a lot more of those deals on our sales activity list. And it's just the size of the deals and the velocity of those deals going through the pipeline seems to be increasing.

Thank you very much.

(OPERATOR INSTRUCTIONS). At this time, there are no more questions. And I would like to turn the call back over to Mr. Reagan.

Thank you for participating in today's call. Thank you for your support and have a great evening.

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