創力 (LTRX) 2008 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to the third quarter of fiscal 2008 Lantronix earnings conference call. My name is Erica and I will be your coordinator for today. At this time all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS) I would now like to turn the presentation over to your host for today's call, Mr. Sanjay Hurry, Investor Relations. You may proceed sir.

Think you Erica. 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 June8. The number to call for the replay is 888-286-8010 or 617-801-6888 for international callers with pass code 97372130.

With me on the call today are Jerry Chase, President and CEO; Reagan Sakai, CFO; and Daryl Miller, VP of Engineering. Before starting the call please be reminded that during the course of this conference call management will be making forward-looking statements in their prepared remarks and 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, acceleration of quarterly comparisons as the year progresses, the increase in device networking sales and a 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 a result of several factors. For a more detailed discussion of these and other risks and uncertainties please 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 third fiscal quarter ended March 31, 2008.

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

Additionally, I'd like to inform you that management will be meeting with investors in San Francisco on May 22. If you'd like to schedule a one-on-one please contact me. My contact details are located at the bottom of today's earnings press release. With that, I would like to turn the call over to Jerry Chase, President and Chief Executive Officer of Lantronix.

Thank you, Sanjay, and good afternoon everyone. I'm happy to be here and to speak with you today. As many of you are aware, I joined Lantronix as President and CEO about three months ago. In Lantronix I saw a company with many of the right ingredients for success, accompanied with a solid brand name, strong partnerships, excellent technology and product quality, strong customer support, high-quality people and a solid balance sheet with a stable cash position. We have many of the fundamentals necessary to be successful in our markets, however, there are some things we need to improve upon primarily related to getting closer to our customers and how we market our products to them. We will talk more about that later in the call.

First, I would like to briefly share with you some observations since joining the Company and what you can expect to see from us in the coming quarters. As Interim CEO, Reagan Sakai did a great job of getting the ship on course and executing some important changes that are already beginning to bear fruit. Reagan and the team launched a customer centric approach to R&D and sales and marketing. Along with operational streamlining this resulted in a return to profitability in the first quarter. Reagan is a tremendous asset to Lantronix and the leadership team and we will be building on many of the initiatives established under his direction.

In my short tenure at Lantronix I've spent most of the traveling and meeting or US and European partners and customers. We've also been fortunate to have two major shows during this time, the embedded systems conference show in San Jose and the [interop] show in Las Vegas enabling even more opportunities for customer interaction.

Right after our Board meeting later this month we will hit the road again and continue our visits with customers this time in Japan and China and then we will be heading back to Europe for a Pan-European partners conference. In our customer meetings to date we have seen two strong themes emerge.

The first is the need to continue with the customer centric focus Reagan and the team have emphasized over the last two quarters. From the feedback we received our customers like that focus. It is being well-received and we will strengthen and continue it. Going forward, the input we receive will prioritize our efforts, drive our product roadmap, drive our resource allocation and determine how we go to market.

The second theme is that Lantronix has a market opportunity to bring more of our inherent software and remote networking capability to the forefront of our product offering. Before discussing specific initiatives we expect to execute on in the coming quarters I will ask Reagan to first provide us with an overview of the quarter's performance. Reagan?

Thank you, Jerry. Turning to the quarter's financial results as you recall starting last quarter we're no longer reporting revenues in terms of core and noncore. With the noncore business (inaudible) to less than 10% of total revenues in recent quarters and expect a decrease sequentially as we near the sunset of this business. We have discontinued this metric that is no longer representative of the Company's business and certainly not of its growth drivers.

Net revenues will provide you with an accurate assessment of our business going forward. Net revenues were $14.5 million for the third fiscal quarter of 2008 an increase of $1.3 million or 10% compared to $13.3 million for the third fiscal quarter of 2007.

Device networking net revenues which includes our device enablement and device management product lines were $13.7 million for the third fiscal quarter of 2008 an increase of 18% compared to $11.6 million for the third fiscal quarter of 2007. Net revenues for the Americas region was $8.3 million for the third fiscal quarter of 2008 an increase of 1% compared to $8.2 million for the third fiscal quarter of 2007.

Net revenue for Europe, Middle East and Africa, our EMEA region was $4.2 million for the third fiscal quarter of 2008 an increase of 21% compared to $3.5 million for the third fiscal quarter of 2007. Net revenue for the Asia-Pacific region was $2.0 million for the third fiscal quarter of 2008 an increase of 34% compared to $1.5 million for the third fiscal quarter of 2007.

As a percentage of net revenues, the Americas, EMEA and Asia-Pacific regions were 57%, 29% and 14%, respectively for the third fiscal quarter of 2008 compared to 62%, 26%, and 12% respectively for the third fiscal quarter of 2007. Gross profit margin was 50.4% for the third fiscal quarter of 2008 compared to 51.8% for the third fiscal quarter of 2007. The decrease in gross profit margin percent was primarily attributable to product mix as a result of an increase in embedded device enablement products as a percentage of total net revenues.

Total operating expenses were $7.7 million for the third fiscal quarter of 2008 a decrease of 3% compared to $7.9 million for the third fiscal quarter of 2007. Selling, general and administrative expense was $6 million for the third fiscal quarter of 2008 compared to $6 million for the third fiscal quarter of 2007.

Research and development expense was $1.7 million for the third fiscal quarter of 2008, a decrease of 10% compared to $1.9 million for the third fiscal quarter of 2007. We reported a net loss of $464,000 or $0.01 for basic and diluted shares for the third fiscal quarter of 2008 compared to a net loss of $1.1 million or $0.02 per basic and diluted shares for the third fiscal quarter of 2007.

Turning to the balance sheet; cash, cash equivalents and marketable securities were $7.3 million as of March 31, 2008 compared to $7.2 million as of December 31, 2007. Two quarters ago, we set out to better manage our inventories and I'm happy to report that net inventories were $8.1 million as of June 31, 2008. This was a decrease of $1.9 million or 19% from last quarter's $10 million of inventory and a decrease of $2.9 million or 26% from a fiscal year end of June 30, 2007.

Our accounts receivable DSO were 19 days for the third fiscal quarter of 2008 compared to 20 days for the second fiscal quarter of 2008. Our working capital was $6.9 million as of March 31, 2008 compared to $5.9 million as a December 31, 2007. Working capital as of March 31, 2008 was positively impacted by a distribution of stock warrants during the current quarter in connection with the shareholder lawsuit settlement. This concludes my prepared remarks. I would now like to turn the call back to Jerry.

Thank you, Reagan. As you just heard we're reporting a strong quarter in what has traditionally been a soft demand period for Lantronix. (inaudible) our device networking revenue growth was a notable improvement in sales execution combined with growth in international revenues. With that said, I would like to spend a few moments outlining some of our near-term initiatives to grow our leadership in the industry.

One of the first initiatives is in sales where we are looking at optimizing our current resources. It is imperative that we continue our focus on larger more lucrative customers and sales opportunities. We rely heavily on our channel partners and will work even more closely with them to serve our mutual end customers. Our go to market strategy will also include more participation in our partners marketing programs, our redesigned websites centered on customer needs, more video clips explaining our products, more case studies, and a greater percentage of our efforts focused on Web based marketing.

We are pleased that the performance of our DeviceLinx product line which includes our embedded and external enablement products and represents a majority of our device networking revenues. Going forward, we will protect, defend, and grow our technical leadership in this vital product line. Without taking our focus off of DeviceLinx as I mentioned earlier, our customers have told us Lantronix has an additional market opportunity.

We have the opportunity to bring more of our inherent software and networking expertise to the forefront of our product offerings. As you know, historically Lantronix has focused on offering hardware solutions. Our Website and other marketing material focus heavily on this aspect of who we are. The reality is that our hardware platforms have always had a strong, active or in some cases latent software component.

In fact, it may surprise you as it did me that out of 27 design engineers here at Lantronix, 25 of them are software engineers. Clearly Lantronix has an opportunity to network our products and those of third parties to address larger more lucrative customer opportunities by providing software key activated applications. These applications will reside on fewer processing platforms with common operating systems, common initialization and messaging layers, and a common software key activation layer.

This is a lower cost, lower risk way of doing what we are already doing. To coin a phrase, we are already working hard and this approach allows us to work smarter. Therefore, going forward, a key focus will be to elevate our software to bring it to the forefront of our product portfolio. ManageLinx currently in beta trial at a number of customer sites is an important step in this direction.

In the medium and long-term, ManageLinx is the glue that ties Lantronix's products together into a cohesive whole and enables cross product line sales. The immediate first ManageLinx application is called VIP or Virtual IP access which offers customers first to market IP protected, highly secure method of communicating with and controlling specific designated equipment behind firewalls.

A limited market launch for ManageLinx is planned for the quarter beginning July 1, 2008. This will include the core VIP access firewall tunneling capability and other customer requested features. The current schedule calls for a release of version 1.1 in the fall 2008 which layers additional powerful enhancements onto the product. The basis for securely adding licensed software content will be added at that time.

Version 2.0 the follow-on release due in Q1 of calendar year '09 will begin the regular two time per year cycle of introducing value added applications. These releases will support new product sales and importantly will also target our installed base for upsell opportunities.

Additional benefits from focusing our efforts in this direction include an anticipated optimization in our cost structure by eliminating the need to maintain multiple hardware platforms and operating systems. Focusing on fewer hardware platforms frees up R&D resources that can now work on deploying customer driven features and functionality. Fewer platforms also means less inventory thereby improving our working capital position.

We look forward to updating you on this on our next conference call. Now I will turn the call back to Reagan to give you our guidance for the fourth fiscal quarter. Reagan?

Looking headed for the fourth fiscal quarter of 2008, we expect device networking net revenues to increase by 15 to 20%. We expect total net revenues to increase by 4 to 9% or between 15.3 and $16 million from the $14.7 million reported for the fourth fiscal quarter of 2007.

Gross profit margins are expected to be in the range of 50 to 52%. We expect fully diluted earnings per share of breakeven to a $0.01 loss. We expect cash to remain flat to down $500,000 as of June 30, 2008. This concludes our prepared remarks. Operator I would like to open the call to questions.

(OPERATOR INSTRUCTIONS) Michael Ciarmoli, Boenning Scattergood.

Thanks for taking my call. Reagan, first question, just housekeeping. What was stock compensation expense in the quarter?

It was about $248,000.

What do are guy seeing in terms of the economy? I know you broke out your revenue by geographic area. I don't know how closely you follow (inaudible) international. They said it's some poor conditions in the US market but said it's strength oversees. It seems like you guys are a little bit more diversified to weather any turbulence in the US. Do you think kind of the weakness persists here? What are you seeing in terms of your pipeline, what are customers saying? Do you think there's going to be some near-term challenges?

We were heartened to see the growth in EMEA and APAP. Those two regions are driven primarily by our device enablement product line so that tends to be long-tail revenue. Since we're dollar-denominated and we sell to our distributors, we don't believe that the weak dollar helped out on the demand. So that was pure integration into customer applications.

On the US side, typically the March ended quarter is seasonally soft for our management products. And that is primarily the US content and as you saw we did a 1% increase in US certainly not as much as we would've liked. But the key points are that we didn't hear any of the what I would call economic related excuses coming from our customers like a project was canceled, a project was pushed out, I need three more signatures on the PO or we're redoing the ROI. We really didn't see any of that in the March ended quarter.

Fair enough. Looking at your plans here for the ManageLinx launches versus some of your other strategic initiatives, as you start to focus more -- take a more software centric focus what kind of expenses do you think will crop up if any?

That's one of the nice things here is that there's been an inherent software capability at Lantronix. So we already have most of the resources that we need to do what we're doing. And during the prepared comments I said that -- I mentioned that we're going to be working harder as opposed to smarter. We have 25 software engineers on board already which was a surprise to me. I would imagine it's a surprise to a number of the participants on the call.

And so what we're doing by having -- what we're doing now is we're supporting multiple operating systems. We're supporting multiple messaging layers. We don't have a software key activation layer. So really this is simply if we do nothing else but this, this is just simply working smarter, more efficiently and doing what we're already doing but doing it better. And now we're also sort of organizing ourselves if you will to better accept customer input to better organize and deploy our engineering team.

So this is working smarter. We've already proved we can work harder. This is we don't expect large risks. We don't expect large outlays. This is organizing ourselves for battle differently.

Do you foresee any increased expenses on the sales and marketing side trying to build awareness or is that something you guys have built into the model right now and are kind of doing that currently?

What we have got right now, our outside sales force is focused on everything from $500 orders to $5000 to $50,000 to $0.5 million. And clearly we want our outside sales force to focus on the upper end of that continuum. And so what you can see us doing is you can expect to see us beefing up our inside sales force because we don't want to lose any orders. But you can also see us focusing -- basically narrowing the scope of our outside sales force but deepening their responsibility.

I would also mention that we've had an increase in the number of larger orders that we're chasing. So we want our outside sales force to be freed up. We will incur some costs as we hire people to support us or to beef up outside and inside sales and I think maybe Reagan has something to add here as well.

I think we mentioned that last conference call we are out there looking to upgrade or add to our bench strength so we have four active searches going on.

Okay, last question on the gross margin outlook. I know you guys issued guidance for the next quarter. When do we start thinking about gross margins I guess being listed as you guys take a more software centric approach? Is that an '09 event or just -- if you can give me some guidance as to where you think these margins will go with the product mix?

It will be -- you will see the margin expansion but it won't come until our FQ3 FQ4 of '09 which would be first and second calendar quarters of next year.

(OPERATOR INSTRUCTIONS) [Winder Hughes, Hughes Capital].

It sounds like things are finally moving in the right direction. What was the backlog? And if you can talk about design wins that you saw versus what you had seen in the previous quarters and the activity from the installed base, how they're either buying more or less than historical patterns.

Give me a sense for how the installed base is behaving and what the behavior is with the new design wins. And then thirdly and I'll jump back in here after the third question, with the year-to-year (inaudible) I kind of had it in my head that the net revenues that you reported by geography that was the same number as the 14.5 right?

That's correct.

So if you took a hit for about $1 million from last year because the (inaudible) business was most of that hit in the US therefore the US in the device business was actually higher than the 1%?

So we're looking down that number. I'll go back to your original first three questions. As it relates to backlog, as you know we typically enter the following quarter with less than I would say 15% of that quarter's revenue in backlog. We had a little bit more than that on -- we were on allocation for a product or two so that bumped up a little bit but it was nothing to indicate a home run type of quarter. But it's less than 20% of the current quarter in terms of backlog.

In terms of design wins, I think most of the revenue growth occurred from current customers just ordering more as opposed to design wins. And that's what we are seeing. As you know the embedded side of our business was a part of the business that did pretty well this last quarter.

What does the pipeline look like in the larger box type of deals like your Spider branch office manager, things like that? And you guys are working with some OEMs in that area to. So what's going on there?

So the pipeline for Spider, SLB, our console server product looks pretty good. June is typically for Lantronix a good device management quarter. And so there's nothing to indicate otherwise. So we would expect good orders this quarter from that product family. And then going back to your other question at a top level the decline -- it was about an $800,000 in our legacy product year on year. About $600,000 of that was related to the US. So yes, it is correct that if you were to take that out US did grow more than the 1%.

So one question then here for either Daryl or Jerry. With ManageLinx if that becomes available in July, is that correct? Is that what you all are targeting?

Yes, we are in beta trial now with about 10 or 12 Fortune 500 type customers and we're going to start offering it for limited market release in our Q1 but the quarter started July 1 of 2008.

So walk us through a case study as to what a typical large scale ManageLinx sale would kind of look like not only from the ManageLinx side but the lever side as you get more implementation of XPort, WiPort, Spider so that one can really see how this is something that is truly different than the past.

Just to give an example, imagine out there that there is a large manufacturer of copier machines. There is a number out there let's just sort of mentally pick one. And they have thousands or tens of thousands of copiers out in people's office buildings behind firewalls.

And as part of those often as we know service contracts are sold and typically the way a service call be initiated is somebody will go to the copy machine, discover that it doesn't work, wander around and try to find the person responsible for the copier who will make a phone call, a truck roll will go with probably about 85% of the right parts. Of courses as we've all seen typically they then come to the conclusion that they need to come back the next day and fix it.

So what ManageLinx does is it allows that copier and Daryl can explain the next part of what I'm going to say but in a highly secure predefined fashion to report itself through the firewall out to be out back to the large copying machines office and basically say I've made this many thousand copies, I'm starting to get low, my toner needs to be replaced, gosh I'm not working. And so to proactively report itself back in its status so that the guesswork is removed as well as the delay. And also what we can do going forward is not only that but with various combinations of our product we can also do additional troubleshooting and perhaps some remedial fixing including rebooting the machine.

So this is very secure. Its first to market, it's IP protected. And this is sort of an initial application. So let me pause there and see if you wanted to go into anything I said or ask additional questions.

Hold that thought. In that example, you have now sold ManageLinx but where in that example have you sold more WiPort, XPort and Spiders etc. in conjunction with ManageLinx?

In that particular example we would have conceivably XPorts inside the copier and we would have our DSC which is a virtual connectivity device inside the company's -- inside the company's building that the copier would report itself to again over the LAN and then the DSC would consolidate the inputs from the machine and tunnel that messaging through the firewall to the DSM. In that example that would be some products we would deploy.

Have you seen here Daryl that (inaudible) thing it's kind of been long in developing but is this -- I don't want to call it like an intra-company solution but like an inter-company which I guess means beyond the firewall. Is this something that is really like a game changer or is it going to be additive (inaudible) what we're doing?

M2M is used loosely and it doesn't have a clear definition. But if you look at it at face value having machines talk to machines, ManageLinx actually facilitates that to a level that really hasn't been available before allowing machines behind multiple firewalls to communicate with each other securely and using industry standards strong encryption. So we think this does nothing but facilitate M2M.

I guess -- okay well thank you. If I have something else I will jump back in the queue unless you have some more you'd like to add with the example there.

That's it Winder and come back on if you have another question. Thank you for this one.

[Mark Newman, Atlanta Capital].

(multiple speakers) A couple of questions, I have been a shareholder for a long time and fairly large. Of course Winder asked all the tough questions so I will ask just easy ones.

On the first one, have you gentlemen thought about a reverse stock split for the following reasons. Number one, institutions don't like to buy or hold stocks that are selling under two or three dollars. Number two for retail clients, the commissions are very high and very difficult for them to buy. And in addition to that there's no margin. Of course the third one is the NASDAQ listing.

And the fourth reason is it sounds like you gentlemen are really building a company here and I have a question for that. But as earnings ramp, if you report $0.01 and then a $0.013 or $0.014 it doesn't show up as well with the shares outstanding versus a reverse split. So that's my first question and I have one other.

So I'll keep the NASDAQ listing requirements separate from the reverse. As you know, we could implement a reverse stock split to get above the $1 listing requirement. So, I have confirmed with the NASDAQ that we currently are in compliance with all of their other listing requirements so at this time it's just the $1. That time that first grace period expires I believe June 23. And if we don't hit the $1 dollar assuming that we don't trip the other listing requirements there's a good chance that we will get another 180 days. We obviously would like our results to speak for themselves and get the stock above $1 kind of the old-fashioned way.

As it relates to a reverse stock split to get us on the radar screen for major institutions, that is certainly an idea that we do look at. We are looking at all alternatives to get the stock price up both on performance as well as a reverse stock split. We understand that is a different situation than the NASDAQ listing. which is getting it above so that the retail broker can push it as well as mutual funds and some of the higher end hedge funds.

Correct. But also the other point is that you do have some retail people in the stock and the commissions are very high under $1 by the way. My second question is it sounds like the Company is starting to ramp up sales and earnings. I have asked this question over the last couple of years.

And that relates to the fact that once you start to get to the position you wish to get to, is the industry and is your Company conducive to a 30% plus growth rate in sales and earnings? Is the industry and the Company -- is this business conducive to that type of earnings progression once you get everything in place and sales progression?

I would say that we have sort of -- goods questions. I would say from an internal standpoint we do most of our manufacturing outsourced. So that would be something that wouldn't affect us in terms of our overhead and our growth. I was very surprised and pleased that the majority of our engineering 25 out of 27 are software engineers. So that's a good focus for us and one of the things that we're going to have to do there is get those guys more consolidated and have larger teams working on more important products. But that's sort of an internal organization.

I think as I sort of look around the clock I think the internal organization -- I think we're pretty sticky. We're not going to be adding people and costs in a linear fashion. I think we can ramp fairly easily. We have Oracle as a backbone system. We're doing -- we're going to be outsourcing our software key management system which for those of you know what that means (inaudible) that we're not going to try to reinvent the wheel. As you start to grow you absolutely need that to be scalable.

So I think again, Reagan, and his team have made a lot of good decisions. I think we're pretty sticky where we are and I think we ramp nicely. I think if you look at the market we're in, it gives all of the classic indications of being a growth market. And if you look at Lantronix within that you know we are well-positioned so you have a lot of fragmented suppliers. Nobody dominates the market. Even our closest competition we don't see in every deal. Maybe we see them in half or a third of the deals. On a scale of one to ten where 10 you come at a tremendous price pressure and one you don't come under any price pressure, we're much closer to one than we are to ten.

So a lot of signs that this is a fragmented and growing market. As Reagan mentioned earlier this quarter we had a good last quarter. The quarter that we're in is looking strong. Obviously we look our into the economy like everybody else does but so far it doesn't seem to be affecting us. So we are liking our position.

But I will also say that as I mentioned in my prepared remarks that we're not as close to our customers as we need to be and we don't understand our markets as well as we need to. So we have an effort underway that will continue to get closer to our customers to do the research, to do the homework to understand our markets more and we will report that back to you as the quarters come along.

Let me refine that question a little bit. Is there any catalyst external or internal that relates to the sales growth I was talking about that has to take place for you to have the potential of that kind of growth?

So, a big hurdle that would need to happen -- no, I would say if I'm understanding your question correctly, we have -- we do need to implement. We need to have a successful rollout of ManageLinx. This is going forward to going to be a platform for us to tie sort of in a glue fashion. So we need to execute very cleanly on what we are already doing and then externally people are out there adding to their IT infrastructure. They're continuing to connect everything to the Internet. So I would say nothing cataclysmic. I think that many of the drivers are already in place.

In the past we have heard that there are some industries that just don't like to change, in other words they are slow to change. So, have you seen a catalyst that either productivity or whatever catalyst you wish to discuss that enables these people to say we should spend this money because the payback ratio is X and this is where we have to go? In other words, are we there yet?

I want to say we have seen specific examples. But for example you're a long-time holder of Lantronix. Our XPport product line is now 4.5 years old and really over the last couple of quarters we have seen close to record shipments for that product line. So here's an older product that continues to grow quarter on quarter, year on year.

Our wireless products are doing well. So 802.11 technology, those products are growing in the type of range that you're talking about, kind of high teens, 20 to 30% from time to time. I think ManageLinx layered on will start dragging with the sales in our SecureLinx product line as well as our embedded products. So I think that all put together you can (inaudible) together a story of the 20 to 30%.

The other thing too is we reported 18% growth this last quarter for our device networking in the aggregate on what is typically been a seasonally soft quarter. So you know that's a good quarter for us and that is a good indicator for us.

Well, let me tell you what I'm getting at and then I will stop this. Let's make up a company. Let's say PepsiCo or Coca-Cola. Let's assume that if they were really aware of all of this that they should be ordering this thing left and right until the cows come home, that this could really be beneficial to the company. Are there large companies around like that who either are not aware of the product and the payback ratio and the productivity tool of it so that they would be ordering it? And if so how do you get to those people to initiate them in the product?

So, we are in beta trial with some brand-name Fortune 500 companies so the indication is that yes, we do seem to be addressing a problem that they have had that they are willing to invest in to fix. So we don't want to go too far out on a limb there. But we do seem to be engaging at that level.

And I would say we are also -- when we're talking about ManageLinx and these kinds of networking solutions we're going to be calling on more sophisticated players within the organization. In some cases we're already calling on these customers but at a lower-level, the IT manager level or the engineer level. But what we do we do very well so we have good references, we have a good presence in their architecture. And as we have started to go out and make our pitch, we have had people say look we're not the right people to talk to within our company but when you are ready we'll get you in front of the right people.

So I think what we need to do is internally we're putting our script together if you will, our pitch -- what is that we're offering. We're going to be -- we're also identifying partners out there. We have a list of desirable partners that we're going to be targeting. We've had an offer for people to put us in touch with (inaudible) to go out and pitch our story and make sure we're ready for prime time. So, as the product matures in the field, as we get our story better together we're going to be approaching and building on these relationships and calling on these organizations at a higher level and then of course.

I would be remiss if it didn't mention again we're getting into this two major software release per year model that says okay not only is a so we're doing now but we're coming out with a major release in October and these are the features that are prioritized. What you think? And of course you get into this normal two times per year so you're always talking to a customer about what you're going to do, what you're delivering, what you've done and then you back into what you're going to do. So it's a nice model and we're starting to get into that.

Lastly, if you hit into any of these large whales as potential clients A, is there a RazorBlade business once you are embedded in these companies? And two, are you looking for a distribution outlet similar to a consulting firm that is embedded in these companies that if you go to them they in turn can resell it?

On the RazorBlade there are hardware opportunities for us to connect more and more devices. But we are starting to think of our hardware and again we're going to protect, defend and grow this business. And this is a very important business for us because not only is it hardware but it's a platform. It's a platform that runs applications and so the RazorBlade business could be a combination of additional connectivity hardware but also now that we have all of these platforms out in the field there's a tremendous opportunity for us to upsell to offer additional applications that are sold via software keys and we would collect revenue as if we had sold a product that you could touch. Regarding sort of a consultant distribution not really sure I understood the question.

In other words there are people who are either accountants or what not who are into these companies that -- like the division of of IBM for arguments sake that if they were aware of your product they in turn could introduce it to their clients.

Got it, yes. I would say there are opportunities for us to do that. We are targeting companies specifically. In other words we will be looking inside those companies for these opportunities. We would be very open to it and we're not used to calling on customers at a high-level so it's something we're going to have to get inside our DNA. But yes, we would be opened to this type and we will be looking for this type of outlet for our selling efforts.

[Henry Glasson], Wedbush Morgan.

I just wanted to ask a quick question. I noticed it looks like you generated about $100,000 in cash in the quarter. Is that right?

That's correct.

Adjusted to kind of follow-up on the reverse split issue do you guys go see a point anywhere in the near future where you're going to feel the need to raise additional cash and potentially dilute?

No.

So you are pretty comfortable that what you have there in cash is sufficient to get to a point where you can stabilize and grow the Company?

That's correct. We don't see any fundraising on the equity side that would dilute the shareholders. And first of all our currency, the stock price is just not at a level that is attractive for us to go out and we have done a very good job of managing the balance sheet so you saw it with the decline in inventories. We continue to collect pretty well on our AR and from a GAAP net loss perspective we're bouncing around breakeven. So $7 million of cash is pretty good.

So DSO's at about what was it, 19 days?

Yes.

Is that something that will change materially with changes in product mix?

It should not.

(OPERATOR INSTRUCTIONS) This concludes the question and answer portion of the call. I will now turn the call over to management for closing remarks.

Thank you operator. I would like to thank everyone for their participation in our call today and we look forward to speaking with you again next quarter.

Thank you for your participation for today's conference. This concludes your presentation. You may now disconnect and have a wonderful day.