創力 (LTRX) 2008 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fiscal second-quarter 2008 Lantronix Inc. conference call. My name is Audrey and I will be your coordinator for today. (OPERATOR INSTRUCTIONS). I would now like to turn the presentation over to your host for today's call, Mr. Sanjay Hurry, Investor Relations counsel for Lantronix. Please proceed, sir.

Thank you, operator. 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, and an audio playback will be available through March 7. The number to the replay of the conference call will be 888-286-8010 or 617-801-6888 for international callers. Pass code is 82493130.

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 implementation of new and improved Corporate marketing messages, the success of new business lines to create significant value, the acceleration of quarterly comparisons as the year progresses, the increase in device networking sales and the decrease in noncore 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 the result of these 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 and 10-Q for the first fiscal quarter ended September 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 like to now introduce Reagan Sakai, interim Chief Executive Officer and Chief Financial Officer of Lantronix. He will begin the call 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; Brad Painter, Vice President of Worldwide Sales; and Daryl Miller, Vice President of Engineering.

With that, I would like to turn the call over to Reagan.

Thank you, Sanjay. Good afternoon, everyone. Thank you for joining us on our earnings conference call. We are pleased to report results for the second fiscal quarter ended December 31st, 2007 at the high end of the range we provided on January 24th. We are making excellent progress in the Company's transition from an organization focused primarily on product-driven sales to one that is customer and partner centric. Our emphasis is on leveraging the existing product portfolio to address the needs of the device networking market while also developing complementary solutions with large market opportunities.

On last quarter's conference call, I outlined initial steps to refocus the Company's execution on the device networking opportunity. I would like to update you on our activities and progress to date.

Until recently, Lantronix was a Company focused on product development that was driven by technology rather than market opportunity. Sales and marketing initiatives were dictated first by technology development and second by customer and partner requirements. This resulted in our inconsistent financial performance over the past several years.

Over the past four months, the senior management team and I have spent considerable time with key customers and partners, most recently with our European, Middle Eastern and South African partners in late October and the feedback was great. They love our tech support, our commitment to the device networking space and, more importantly, they truly appreciate the renewed attention we are giving to their specific requirements. We will be meeting with our Asia-Pacific partners next week to listen to their input as well as provide them with our strategic initiatives.

Beginning with the second fiscal quarter, we undertook a more customer-centric approach to R&D, sales and marketing. Today, we are listening to end-user customers and our partners and letting their feedback drive product development and how we sell to them. We are implementing a closed loop reporting system in which we speak with customers and partners, get their feedback, implement recommendations and report back to them on actions taken and next steps.

It is important to note that customer-centric means much more than customer input. It also involves our interaction with our valued customers. It is our understanding of their business models and how we can make them more profitable. It's implementing processes and creating a corporate culture that make it easier to do business with Lantronix. In terms of product development, we're bringing customers into the product development cycle earlier, creating products they want rather than products we think they should buy. We are also using them to identify market opportunities and how to target them.

That said, I want to make it clear that while we are increasingly customer and partner centric and value their input, we have identified complementary untapped or underserved markets and are pursuing major customers in them. We know our technology has value in a variety of customers and markets.

As part of the transition, we also identified operational inefficiencies that left us unable to maximize revenue. Over the past four months, we have focused on enhancing cross functional cooperation among departments. By constantly monitoring progress and holding people accountable for their cross functional commitments, we believe we can increase our ability to close revenue opportunities successfully.

Turning to the quarter's results, going forward, we will discuss net revenues on a combined basis as opposed to reporting net revenues in terms of core and noncore. With the noncore business now accounting for less than 10% of total net revenues and expected to decrease sequentially as we near end-of-life for these products, we are discontinuing this metric as it is no longer representative of the Company's business and certainly not of its growth drivers.

Combined net revenues will provide you with a more meaningful assessment of our business. Total net revenues for the second fiscal quarter ended December 31st, 2007 increased 3% to $15.3 million, up from $14.8 million in the year-ago period and up 17% sequentially compared to $13.1 million for the first fiscal quarter ended September 30, 2007. From a product perspective, we experienced revenue growth across all strategic product lines. Revenue performance also reflected process improvements on the operational inefficiencies I detailed moments ago.

In terms of geographic mix, sales in the Americas accounted for 58% of net revenues and international sales were approximately 42% for the fiscal quarter ended December 31st, 2007. This compares to approximately 65% and 35%, respectively, for the fiscal quarter ended December 31st, 2006.

Gross margin for the quarter was 51.5% and in line with our operating model. This compares to 49.9% in the year-ago period and 49.3% for the fiscal quarter ended September 30, 2007. The increase in gross profit margin percent as compared to the fiscal quarter ended September 30th, 2007, was attributable to product mix and the higher absorption of fixed manufacturing costs.

Total operating expenses were $7.1 million for the fiscal quarter ended December 31st, 2007 compared to total operating expenses of $8 million for the fiscal quarter ended December 31st, 2006.

Selling, general and administrative expense for the fiscal quarter ended December 31st, 2007 decreased 12% to $5.3 million from the fiscal quarter ended December 31st, 2006. The decrease in selling, general and administrative expense is due primarily to decreased personnel-related expenses as a result of the departure of executive-level employees, which was offset by sales and marketing head count additions to support international growth in our ManageLinx product line. Research and development expense for the fiscal quarter ended December 31st, 2007 decreased 7% to $1.8 million from $1.9 million for the fiscal quarter ended December 31st, 2006.

Our return to profitability highlights the substantial operating leverage inherent in our business model. We reported a net profit of $1 million or $0.02 per basic and diluted shares for the fiscal quarter ended December 31st, 2007. This compares to a net profit of $87,000 or $0.00 per basic and diluted share for the fiscal quarter ended December 31st, 2006.

Net income for the second fiscal quarter ended December 31st, 2007 included $104,000 of other income related to the sale of a marketable security and a $169,000 tax benefit related to the recovery of a foreign tax liability. Net income for the second fiscal quarter ended December 31st, 2006 included $700,000 of other income related to the sale of our interest in Xanboo Corporation.

Turning to the balance sheet, at December 31st, 2007, we had cash and cash equivalents of $7.2 million, essentially unchanged from the quarter ended September 30, 2007. Net inventories were at $10 million at December 31st, 2007 compared to $10.5 million at September 30, 2007 and $11 million at June 30th, 2007. Our annualized days sales outstanding in receivables was 20 days for the second fiscal quarter ended December 31st, 2007 compared to 19 days for the first fiscal quarter ended September 30, 2007 and 21 days for the fourth fiscal quarter ended June 30, 2007.

Our working capital was $5.9 million at December 31, 2007 compared to $5.6 million at June 30, 2007 and $4.3 million at September 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 facility as of December 31st, 2007.

We've continued to maintain an accrued settlement liability of $1.1 million related to our settlement of the shareholders' lawsuits and we do not expect to record any additional liability for the settlement. We expect to issue warrants to purchase Lantronix common stock with a fair value of $1.1 million to the class plaintiffs as the 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 above average trading price during the 45-day trading period prior to the date of issuance.

Looking ahead, we remain committed to the substantial device networking opportunity in front of us. We are determined to capitalize on our technology strengths to connect, communicate and control. From a product perspective, we are well-positioned. Our Device Enablement business generates approximately 75% of our revenues and we believe the market is growing in excess of 10% a year while still in its nascent stage. Our opportunity in Device Enablement is very clear. We are focused on expanding our presence within each of our volume customers, as well as selling our solution to customers or into markets with potential for larger volumes. As the de facto leader in this space, we believe that we have the ability to capitalize on these initiatives.

A subset of Device Enablement is embedded devices and we have shipped well over one million of those devices spanning three product generations. With more than 2,000 customers, however, the reality is that we are selling in volume to only a few customers. At the same time, because our products sell into industrial type verticals, once designed in, we are typically designed in for several years. This has the effect of almost creating a recurring revenue component to our business. The market continues to grow and we are investing to capture a greater portion of it with the addition of sales and marketing head count during the quarter to support international growth. We believe that once complete, the customer-centric initiative I detailed earlier will further enhance our efforts.

Turning to our management platform business, we believe it holds substantial opportunity for Lantronix in the long term and is a key to accelerating revenue growth. Products in this family include Spider, SecureLinx data center products and ManageLinx. And it is these offerings that we believe hold the greatest potential for Lantronix. I would like to briefly touch on each.

The SecureLinx family, which includes our data center products and Spider, exhibited strength during the quarter. As we enter the third quarter of shipments since its release, we continue to see new applications for Spider, as evidenced by our announcement with The Planet Corporation.

The Planet Corporation is a server hosting company generating new revenue streams from its implementation of Spider that allows its customers to remotely manage their servers. We believe that the remote office market will be a growth driver for us. Spider and our remote office manager products, also part of the SecureLinx family, are well-positioned to capitalize on this market.

The new ManageLinx product family is a plug and play hardware solution that offers our customers a simple way to create secure network connections to remote devices anywhere in the world via the Internet. Traditionally maintaining such connections would be a time-consuming and difficult task when dealing with large numbers of customers, locations and devices. With ManageLinx, equipment vendors can now verify status and initiate needed service calls with an Internet connection and IT staff can reach equipment hosted on other people's networks to provide remote maintenance and support.

Secure access to network-enabled equipment is now easier than ever before. We believe that the success of current VPN market serves as a good indicator of the potential for our ManageLinx-based offerings and we expect the new family of products to find acceptance in a wide range of vertical markets. By increasing our customers' remote access capability, we expect ManageLinx will also drive additional demand for our other products, such as Spider and the DeviceLinx product family of device servers. ManageLinx is currently in trials with select beta customers and we expect to be making additional announcements concerning this new offering over the next several months.

Lantronix has the technological expertise and product offerings to become an established leader in the device management marketplace.

In keeping with our customer-centric approach, we will partner with technology vendors to drive greater adoption of our products. In the future, we expect to announce an open Linux solution for customers seeking more development flexibility.

It is clear that our market opportunity is expanding and we believe we have the solutions to accelerate revenue growth over the long term. During this transition, however, we believe it prudent to begin to provide financial guidance on a quarterly basis to enable the investment community to measure our performance relative to expectations.

For the third fiscal quarter ended March 31st, 2008, which is a seasonally slower quarter for us, we anticipate total net revenues to increase 8 to 11% year over year or between $14.3 million and $14.7 million, up from $13.3 million in the third fiscal quarter ended March 31st, 2007.

Total operating expenses are estimated to be between $7.4 million and $7.6 million, reflecting strategic head count additions and investments made in sales and marketing as part of the Company's customer and partner-centric initiatives.

Our expectation for net income for the quarter is in the range of break even to a $0.01 net loss. We expect cash to remain flat to down $500,000.

In conclusion, we remain focused on executing on the device networking market opportunity. As we move through the current transition, I am increasingly confident that what is required is evolutionary rather than wholesale change to capture that opportunity. We have the technology and the customers, a solid financial foundation, and a dedicated management team and employees, the right mix of factors to drive accelerating revenue growth and more consistent financial performance through the end of the fiscal year and beyond.

With that, I'd like to open the call to any questions. Operator?

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

Thanks for taking my call. Reagan, in terms of, I guess in light of what Cisco reported yesterday and their outlook, their weaker than expected outlook given the U.S. economy, are you guys seeing any potential weakness out there, any change to the second half of the year or anything that would raise some eyebrows?

So speaking on FQ2, which is the December quarter, we did not see any slowdown in the overall U.S. market. As it relates to what we're seeing this quarter, it's basically the same. Order rates have remained strong and shipments into customers -- and obviously we recognize revenue on sell-through -- but it still remains pretty strong.

Okay. So you are not seeing any signs right now.

No.

Could you just expand -- you talked about the I guess some of the strategic changes just expanding on being more of a customer and partner-centric organization. What's really the major difference from what you guys have been doing in the past? Is it really just centered on developing technology and trying to anticipate your customers' needs without really listening to them? Is that just -- was it just a lack of attention to your customers?

Yes. We anticipated our customer needs, but we never really went back and validated what we were developing with a simple phone call or talking to our various partners. If we had validated some of our product offerings, they probably wouldn't have seen the light of day.

So as part of the closed loop reporting, we've got a very good engineering staff. They know what to develop. We've got very good marketing and sales people, but you always need to check back with the customers and say this is what we heard from you; are we on the right track?

Right.

That said, we're not sitting back in a reactive mode and waiting to hear from them. We also -- specifically with ManageLinx and our remote office product, we believe we are going into markets that are either underserved or haven't been identified yet.

Okay. And on the -- you talked about the operating leverage in the model. It looks like you are running pretty lean right now, and operating expenses are probably tracking to be the same as they were last year. Going out, if you can, how should we be thinking about, I guess from a modeling perspective, the levels of SG&A and R&D? Are we talking modest increases as you guys add to the sales and marketing staff here, just to a sense of what kind of ramp there might be?

Yes, it would be very modest increases. You won't see much increase in our manufacturing spending. Certainly not in G&A. It's going to be some on engineering as it relates to ManageLinx; certainly in sales and marketing. You're still going to get some of that quarterly choppiness, and that's related to it might be a year-end audit or tradeshows, where we're spending a little bit more in the Springtime than obviously in the wintertime.

Okay.

But the 7.4 to 7.6 for this quarter, the March ended quarter and increasing slightly the following quarter and there beyond.

Okay.

One of the reasons for this increase sequentially is since it's the beginning of the year, two things -- one is the payroll taxes are obviously higher at the beginning of the year and they kind of slide away, as well as we were out hiring in the December ended quarter.

Okay. And then, just looking on the top line, your growth potential in the market. How much of -- thinking about how you can grow that top line, how much of it would just come from being a more efficient organization rather than relying on the market really coming to you I guess and that device networking, Device Enablement market really growing? It's still obviously in the early stages here. But if you guys are running a tighter, more efficient ship, do you think that can have just a pretty significant impact on the top line?

Yes. I think in the short term, running a tighter ship, we have a better opportunity, a better chance of hitting our numbers. On the long-term, running a tighter ship means that we're going to be developing products, introducing products into larger market opportunities.

Okay.

We want to be multi-hundred million dollars in the future. That requires us to go after big market opportunities.

Okay. All right, great. Thanks, guys.

[Winder Hughes], [Focus] Funds.

Hoping to amplify on Mike's question. Before I say that, I hope that the warrant holders make a lot of money because I guess if their exercise price is $3 above wherever, then we will all be happy campers at that point.

That's correct.

With the operating leverage, had the delta between a $60 million run rate and say a $100 million run rate, if more than half of that is from like the newer box products, like Spider and ManageLinx, wouldn't you see a pretty large increase in the gross margins, where had a steady-state level that -- the gross margins here would probably be in the high 50s? That's kind of A. And then B, for every dollar of revenue that you grow from like a $50 million level, SG&A and R&D, what would be the sensitivity there? Is it like 5%, 3%, 7%? Help me with that. That's my first question, but I'll have some more after that. But just go there first.

Kind of with our current product mix, for every incremental dollar sold, we typically bring down about 60% of that incremental dollar to the bottom line or to operating profit. Spider is certainly within that realm or within that range. We believe ManageLinx will have a better margin than that. And there are, also, we believe, licensing opportunities with certain parts of our ManageLinx technology that we are also looking into, so that -- obviously that would be much, much better margin.

So as I said, you're bringing 60% if not more to that gross margin line, manufacturing spending does not increase significantly because we go through contract manufacturers. If you walk down the line, G&A doesn't really increase from here on up to $100 million in revenue. Certainly we're going to want more sales coverage. As we sign larger customers, we will need account managers. On the marketing side, we want to grow that with the revenues and we believe we can increase engineering accordingly as well. But a significant portion of that will fall to the bottom line.

So it's fair to say that for every dollar from here, 50 to 55% should kind of be on the operating income line? That seems very reasonable to me if 5 to 10% of every dollar of sales is going to be SG&A or R&D.

I wouldn't go as high as that.

(multiple speakers) on the gross margin.

I would put it probably 40 to 50%.

Okay. Second question, with ManageLinx, what are some examples as to how that becomes a fulcrum point that will draw in high revenue for either Spider or for XPort and WiPort? Be specific there because I have a hard time believing that this big impediment out there was the fact that you had to get beyond the firewall and now that you've solved that problem, it sounds like it's a big deal, but it doesn't sound like that was the big impediment, but help me understand why that was a big impediment, why that hurdle has been overcome and then how that will draw in more sales from these other products.

Are you asking specifically how ManageLinx got through that impediment in the marketplace?

No. It is my understanding that by not having this firewall thing out there, that this M2M market was just kind of not really happening and now that you guys have this breakthrough, that that was kind of like the eureka moment of the space and so that should pull through higher revenue from these other products like XPort and WiPort, of which folks thought was going to be a zillion dollar market here and it's not happening yet. So just help us all just kind of reconcile that. Or if I'm not asking the question the right way, rephrase it and then answer it.

Okay, so we don't believe it's a eureka moment as it relates to M2M. We do believe that ManageLinx is dragging or will drag with it additional embedded and Spider sales. And the main reason for that is as we talk to customers, our beta customers, they now realize that they can be attaching other remote devices onto the network and they realize that we do have these embedded devices.

They also realize that many of the devices sitting behind the firewall are servers and they can now get to those servers via our Spider product and technology.

The real aha moment for ManageLinx was that with the advent of firewalls, as you know, it basically put the iron curtain up between user and remote site. Their first substantiation to get through that was VPNs. But with a VPN, you expose your entire LAN to whomever is out there, whoever gets access.

With our ManageLinx product, because we are not tunneling through the firewall but tunneling out from the remote site, and then matching up at our router, we're making more one-to-one connections, secure one-to-one connections, where the remote service provider is only seeing the equipment that he has authorization to see. And the remote service providers view that as being very compelling and we believe the customer who sits behind the firewall is also quite happy because he's not exposing his entire network to a service provider.

So, for example, if I'm Xerox and we have some large account I would say Merrill Lynch, who has like 1,000 offices, and we want to monitor all of their copiers, their printers, ad nauseum, why couldn't Merrill Lynch's IT department say look, let the guys from Xerox see all this equipment and there's some protocol thing that's done and so it's done and there's no big deal and there's no need to have ManageLinx. So help me reconcile that.

Okay, so under the current situation, we'll just use Xerox generically here, they sell a printer to Merrill Lynch, Merrill Lynch puts it up onto their network. Everybody can print to that printer. When that printer goes down, how Xerox finds out that that printer went down and they obviously have a service contract, is Merrill Lynch calling up and saying the printer is down; it doesn't work. Xerox now has to send out a technician. He goes out there; that takes half a day. He verifies that the printer is broken and he needs to come back either later that day or the next day to fix it. And so Merrill Lynch department or function is down while that printer is in kind of repair status.

The current solution, which is more of a sledgehammer approach, would be to authorize, give Xerox VPN access to that printer. But what that does is also, it opens up the rest of Merrill Lynch's network to Xerox. And that's not what Merrill Lynch wants.

So you're saying that there is no way that Merrill could give special protocol to Xerox just have access to their printers because if they did, they would have access to everything and therefore ManageLinx absolutely solves that problem?

Essentially, yes.

Okay. So that's fair. Okay. The next --

In effect --

I got it. I got it. Two more questions. On the consumer mass-market, this year -- or I think like the last 90 days or so, several companies have done some IPOs that are going after this kind of home networking space. And we always thought that like the George Jetson opportunity was out there. If the market goes mass-market on the consumer side, and these devices, whether it's washing machines or toasters and what have you, go like an OEM level, which then would move the market from a box level or a module level into the chip space, how would you play with a chip world out there?

And last question, on the partner side, it sounds like most of the partners you have are distributors. And in my world, a partner is somebody who would sell into like a vertical, whether it's oil and gas or it's retail or it's healthcare.

So help me understand where you are on the partnership side, because I haven't seen those types of partnerships yet where you've got Cisco [of course] a ADC, who is selling into certain verticals.

On the first part, if the whole market goes straight connectivity, which is basically washing machines, HVAC, refrigerators, toasters, and you just want point A to point B connectivity via Ethernet port, that's not the place where we play. That's going to go Freescale or similar companies as that. If the manufacturer of HVAC or refrigerator or washing machine wants some sort of intelligence, which means processing that data, compiling that data, being able to present itself with maybe some historical data to a service technician that's monitoring that equipment remotely, we believe that goes more towards our embedded devices. Because our embedded devices does -- are basically miniaturized Web servers. There are or we do have memory and we do have processing power on our embedded devices. The next step is once that becomes ubiquitous and you have all of the connectivity, all that home appliances will be sitting behind your home firewall. So ultimately, how will [Meelie] or Bosch or General Electric get to their equipment if they are sitting behind the Winder Hughes home firewall? And we believe that could be long-term and also an opportunity for ManageLinx, where you could license some of that managing technology to those manufacturers, which allow them to present themselves outside of the Winder Hughes home firewall.

Okay.

Okay? On the partnership side, yes, we do agree with you that we have been typically a two-tier distribution. Part of our efforts, I know within Brad's group, is to go look after or hunt larger OEMs or larger customers that act like OEMs. And I'm hopeful that those efforts will bear fruit in the coming quarters.

Okay. Thank you.

(OPERATOR INSTRUCTIONS). Bill Nasgovitz, Heartland Funds.

Pretty close. Nasgovitz. Nothing new. I'm sorry I came on late, so this might be repetitive. I'm sorry, but just pricing -- if you haven't talked about it, could you? Otherwise, I'll listen to the replay.

Pricing as it relates overall company or pricing within each product line?

The most important parts of your business.

Okay. We have not seen pricing pressures or declines in our major product lines.

And what do you attribute that to? That's great to hear.

Well the good news is there isn't much pricing decline let's say on our embedded products, which is a significant part of our business. The bad news -- the reason for that is the market is fragmented. So there isn't the 800-pound gorilla or two 800-pound gorillas driving down costs or price. So because it's fragmented and because we do add value to the customer, there's less pricing pressure to drive down a contracted price. That said, as we start chasing larger volume opportunities, we are willing to give volume pricing to ensure quantity.

Okay.

Mark Newman, Atlanta Investment Company.

The question is, and let me see if I can put this into perspective. You said the industry -- I think you said -- the industry was growing a little over 10%. And my question is, and we've discussed this in the past, what is your guidance or can you give us a guidance of what kind of sales growth you think you can have? And if the industry starts to really transcend, which I guess it hasn't done yet, what's the multiplier of the industry transcending upward and finally coming to fruition relative to the growth rate which you are expecting right now?

So currently I said it was in excess of 10%. We think it's growing 10 to 20%. But certainly to validate the promise of the M2M that's been bantered around over the last probably three to five years, I think people are looking for that 30+% growth. We believe part of what will validate that type of growth are products like ManageLinx.

It's one thing to be monitoring and controlling 1,000 remote devices. It's another thing to be controlling and monitoring 10,000 or 100,000 or a million remote devices. It's a matter of scale. And we believe that with ManageLinx, where you are able to aggregate and control multiple products at one time, multiple remote devices at one time, that solves part of that problem inhibiting growth. But ManageLinx is still in its early stages and this is more just kind of an intuitive feel.

Last time we talked, there was the indication that -- well, let me reword this. Is the growth in this business and relative to the industry, a function of you and others coming out with sophisticated products or talking to the client and then seeing if the client wants it? Or is it a function of the client eventually saying we are ready to go into this type of industry and you have the products?

It's actually -- it bifurcates. On one side, more on the consumer what I would also call light commercial, it's really end user knowledge. They have to request this Internet accessibility, if you will. So it's the consumer saying yes, I believe having an intelligent dishwasher or an intelligent washing machine is something I'm willing to pay more for. And that, we believe, is a while away.

There is other -- the other side of the market is those commercial people -- commercial industrial, where being wired was part of their business model. So for example, one of our strong fortress verticals, if you will, is security. And that's alarm panels, security card readers, cameras, so on and so forth. Those products already had a wired nature to them. So they just replaced it out from telephone and they went Ethernet.

So in that marketplace, the customers get it. They are replacing it with Ethernet. But the kind of less than good use is they tend to be slow-moving and it's not consumer light volumes.

Well, it's that last point I want to get to -- the slow-moving. In other words, do you have to go out to the client and show them the productivity aspect of the product or do you get cold calls into the firm in saying I heard about this, what can you do for me?

We actually get both, but in terms of the larger volume opportunities, we actually have to go out and touch the customer.

You do?

Yes.

And when you go out to touch them, do you give them a rate of return on their investment of some specific period like six months or 12 months if they invest X amount?

Yes.

What is the sales tactic you use? I mean the financial sales tactic?

At this point it's more cost reduction and productivity. So for example, it would reduce the number of service calls you have -- ineffective or totally nonproductive service calls of sending somebody out. So there's the savings on that. We are also working with some customers where we're trying to come up with new revenue opportunities for them.

So do you translate that into a payback ratio?

Yes.

And that payback ratio -- that depends upon the product or is it uniform or --?

Yes, for example, ManageLinx -- we'll just use ManageLinx -- that payback is probably less than three or four months.

So with the stock being where it is and me being a holder for a long time for our funds, I don't want to start blowing smoke, but I mean theoretically, even if we went into a recessionary environment, theoretically, this is, and you can respond to this, you are a productivity tool, so that you could actually sell this as a way of saving money.

That's correct.

And do people buy into that sales pitch?

Yes, they do. And arguably, whether we are in a recession or entering one, our embedded business remains strong. In fact, we had a very good December-ended quarter. And the March-ended quarter is shaping up to be pretty good as well too.

Now I might as well pursue this one more time. Assuming that the industry does finally turn and it becomes a real industry because it's much easier to operate in an industry that's ramping rather than you making the industry ramp, do you have the capacity and the funds to be able to substantiate that type of growth if all of a sudden, it started to happen in the next six to 18 months?

I believe so. We have $7 million of cash. I have $5 million A/R debt facility that we can certainly increase. The debt market is certainly available to us. We have been running basically cash flow breakeven. We are not a capital intensive company.

And your manufacturing suppliers have the capacity to supply a real ramp-up at some future time?

Yes. A few of our contract manufacturers are actually WD -- Western Digital suppliers are contract manufacturers. So they certainly understand the high-volume model.

Reagan, I thank you very much. I think my friend Winder had finished all my other questions before me.

Thank you, Mark.

(OPERATOR INSTRUCTIONS). At this time I see no further questions. I would now like to turn the presentation back over to Mr. Sakai for any closing remarks.

Thank you once again for joining us in our conference call and we look forward to talking to you in about three months' time.

Thank you for your participation in today's conference. You may now disconnect. Everyone have a great day.