創力 (LTRX) 2009 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to the First Quarter 2009 Lantronix Earnings Conference Call. My name is Nakita and I will be your operator for today. At this time all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of today's presentation, at which time you may participate by pressing *1. (OPERATOR INSTRUCTIONS). I would now like to turn the call over to Mr. Reagan Sakai, CFO. You may begin.

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 November 29. The number to call for the replay is 888-286-8010 or 617-801-6888 for international callers with pass code 73125603.

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; the plans for future expenditures; the acceleration of quarterly comparisons as the year progresses; the increase in device networking sales and the decrease in noncore revenues; statements regarding future financial metrics, including non-GAAP profitability and cash flow.

These forward-looking statements are based on Lantronix's current expectations and 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, 2008.

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 Jerry Chase, President and Chief Executive Officer of Lantronix. Please go ahead, Jerry.

Thank you and good afternoon, everyone. Just a short time ago on September 17, we recorded our fiscal year 2008 result which ended on June 30, 2008. At that time, we discussed the results we hoped to achieve from changes in our sales organization, the new marketing campaigns we would be launching, and the restructuring effort we undertook during the summer. We stated our commitment to be more responsive to our customers, drive profitability and generate positive cash flow here at Lantronix. We also stated that with an improved financial situation we would be able to focus our efforts on improving and expanding our product lines and accelerating our growth and profitability.

In the current economy we, like many other companies, can take nothing for granted. However, for the quarter ended September 30, 2008, our first fiscal quarter of 2009, we're pleased to report positive progress toward our revenue goal with year-over-year net revenue growth of 9%, attributed in large part by an 18% increase in our device networking. We were profitable on a GAAP, EBITDA and non-GAAP basis, and we increased our cash position by $783,000 to $8.2 million while paying down our accounts payable by $1.3 million.

We have also been working closely with our customers and partners on our product roadmaps and are excited at the results. Reagan and I will cover these topics and others during today's call. Reagan?

Total net revenue was $14.2 million for the first fiscal quarter of 2009, an increase of $1.2 million or 9% compared to $13.1 million for the first fiscal quarter of 2008. Net revenues for the first fiscal quarter of 2009 included approximately $253,000 for last-time purchase of one of our device networking products and approximately $213,000 for license revenues of one of our noncore products.

Device networking net revenue was $13.5 million for the first fiscal quarter of 2009, an increase of $1.8 million or 15% compared to $11.8 million for the first fiscal quarter of 2008. Our device networking business is comprised of device enablement products and device management.

Device enablement, or DeviceLinx, net revenue was $11.6 million for the first fiscal quarter of 2009, an increase of $1.7 million or 18% compared to $9.8 million for the first fiscal quarter of 2008.

Device management net revenue was $2.0 million for the first fiscal quarter of 2009 compared to $2.0 million for the first fiscal quarter of 2008.

Net revenue for the Americas region was $8.4 million for the first fiscal quarter of 2009, an increase of 6% compared to $7.9 million for the first fiscal quarter of 2008. Net revenue for the EMEA region was $3.8 million for the first fiscal quarter of 2009, an increase of 13% compared to $3.4 million for the first fiscal quarter of 2008. Net revenue for the Asia-Pacific region was $2.0 million for the first fiscal quarter of 2009, an increase of 14% compared to $1.7 million for the first fiscal quarter of 2008.

As a percentage of net revenue, the Americas, EMEA and Asia-Pacific regions were 59%, 27% and 14%, respectively, for the first fiscal quarter of 2009 compared to 61%, 26% and 13%, respectively, for the first fiscal quarter of 2008. Gross profit margin was 52.9% for the first fiscal quarter of 2009 compared to 49.3% for the first fiscal quarter of 2008. The increase in gross profit margin percent was primarily attributable to increase absorption of manufacturing overhead costs as a result of higher net revenues and lower manufacturing costs, lower inventory reserve costs and an increase in license revenues.

Selling, general and administrative expense was $5.2 million for the first fiscal quarter of 2009 compared to $6.3 million for the first fiscal quarter of 2008. The first fiscal quarter of 2008 included expenses totaling approximately $880,000 related to the departure of the Company's 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 an audit of a foreign subsidiary.

Research and development expense was $1.5 million for the first fiscal quarter of 2009 compared to $1.8 million for the first fiscal quarter of 2008. The first fiscal quarter of 2008 included expenses totaling approximately $120,000 related to the departure of the former VP of Engineering.

Total operating expenses were $7.3 million for the first fiscal quarter of 2009 compared to $8.1 million for the first fiscal quarter of 2008. Total operating expenses for the first fiscal quarter of 2008 included expenses totaling approximately $1 million related to the departure of the Company's former President and Chief Executive Officer and other former employees; expenses associated with executive search for a permanent CEO; and $121,000 for a VAT liability in connection with an audit of a foreign subsidiary.

Net income reported in accordance with U.S. generally accepted accounting principles, or GAAP net income, was $184,000 or $0.00 per share for the first fiscal quarter of 2009 compared to a GAAP net loss of $1.7 million or $0.03 per share for the first fiscal quarter of 2008.

GAAP net income for the first fiscal quarter of 2009 included a restructuring charge of $593,000. The GAAP net loss for the first fiscal quarter of 2008 included expenses totaling approximately $1 million related to the departure of the Company's former President and Chief Executive Officer and other former employees; expenses associated with executive search for a permanent CEO; and $121,000 for a VAT liability in connection with an audit of a foreign subsidiary.

In addition to GAAP results, we report adjusted net income referred to as non-GAAP net income or loss. Non-GAAP net income consists of net income excluding share-based compensation; depreciation and amortization; litigation settlements; interest income and expense; other income and expense; income tax provision and restructuring charges, as well as charges and gains that are driven primarily by discrete events that management does not consider to be directly related to the Company's core operating performance.

We believe that the presentation of non-GAAP net income provides important supplemental information to management and investors regarding financial and business trends relating to the Company's financial condition and results of operations. The non-GAAP financial measures disclosed by Lantronix should not be considered a substitute for or superior to financial measures calculated in accordance with GAAP. And the financial results calculated in accordance with GAAP and reconciliations to those financial statements should be carefully evaluated.

The non-GAAP financial measures used by Lantronix may be calculated differently from and, therefore, may not be comparable to similarly-titled measures used by other companies. In our Investor Relations' section of our website, we have provided reconciliations of the non-GAAP financial measures to the most directly comparable GAAP financial measures. Non-GAAP net income was $1.3 million for the first fiscal quarter of 2009 compared to non-GAAP net loss of $1.1 million for the first fiscal quarter of 2008.

Turning to the balance sheet, cash and cash equivalents were $8.2 million as of September 30, 2008, an increase of $783,000 compared to $7.4 million as of June 30, 2008. Net accounts receivable were $2.9 million as of September 30, 2008, a decrease of $1.3 million compared to $4.2 million as of June 30, 2008.

Net inventories were $8.1 million as of September 30, 2008, compared to $8 million as of June 30, 2008. Accounts payable were $6.4 million as of September 30, 2008, a decrease of $1.3 million compared to $7.7 million as of June 20, 2008. Our working capital was $7.1 million as of September 30, 2008, an increase of $1.7 million compared to $5.7 million as of June 30, 2008.

As we announced previously, in August 2008, we entered into an amendment to our line of credit which provides for a three-year, $2 million term loan and a two-year, $3 million revolving credit facility. The term loan was funded on August 26, 2008. Division of the term loan allows us to be more timely with our supply chain partners. This is an integral part of an ongoing initiative to optimize our supply chain with regards to cost, quality and timeliness.

This concludes my prepared remarks. I would now like to turn the call back to Jerry.

Thank you, Reagan. As I mentioned in my opening remarks, our DeviceLinx business grew at 18% year-over-year. DeviceLinx is our bread-and-butter business and, as you would expect, it will continue to receive the bulk of attention in investment dollars in the coming year.

Since last we spoke, we've been in front of our customers with our various product roadmaps and have incorporated a number of these recommendations into our product plans. These include greater processing power; more flash, more RAM, and popular Lantronix form factors. We are enabling applications that allow customers to develop specific solutions for their verticals; greater accessibility to our platforms via Linux; and more wireless options. Many of these initiatives are already under development and we will be working with our partners and customers on cooperative marketing campaigns and efforts as launch dates get closer.

ManageLinx continues to show promise and we continue to appropriately invest in its development and launch. Since last we spoke in mid-September, we have responded to customer feedback with software enhancements that improve usability and scalability. ManageLinx continues to perform well and deliver on a promise of an easy-to-install, highly secure solution for communicating through the firewall and enabling remote product service models.

Confidence in ManageLinx amongst our sales force, partners and customers is growing as it continues to perform reliably across a number of market verticals and geographies. On our recent trip to Beijing and Tokyo to meet with our partners, it was encouraging to see and feel the growing enthusiasm for ManageLinx. With the acute attention being placed on optimizing business cost structures, the value proposition of ManageLinx becomes even more compelling. However, as we mentioned last time, the sales cycle for ManageLinx is in the range of 9 to 12 months. Current economic conditions may delay this cycle, so we still have our work cut out for us before ManageLinx becomes a meaningful part of our revenue profile. Diligent work and prudent investment are key elements of our approach to launching ManageLinx.

As we discussed last time, we are also getting more focused on our marketing efforts. We have more discretionary dollars allocated to marketing than at any time in the past two years. In addition to budgeting more dollars, we are also shifting the emphasis from traditional marketing tactics to online and interactive campaigns which help us cast a wider net and reach potential customers as soon as they discover they have a networking problem.

I'm sure you know from personal experience that the Web is becoming the first place that people go to get information on solutions to their business problems. The emphasis of marketing has, therefore, shifted from a reliance on print advertising and trade shows to interactive ads, paperclip campaigns and search engine rankings.

We've been investing in search engine optimization techniques on our website to yield the highest possible rankings from searches in the key search engines. If you haven't visited our website recently, please take a look at the many new solution videos we have posted, as well as improved navigation of our customers' success stories and case studies. In the near future, you will also see us experimenting with interactive campaigns on social media sites and blogs.

In addition to our new media efforts, we retained a PR firm last month. The goals for our PR efforts are to elevate Lantronix's visibility beyond industry and trade journals to more mainstream technology pubs; to improve our visibility with the analyst firms and position Lantronix as a thought leader in device connectivity and remote product services; and to have a more consistent message internationally.

From a tactical standpoint we've begun running quarterly marketing campaigns which focus on two or three key messages for the quarter. This allows us to increase the frequency that targeted customers receive our message and also to plan coordinated marketing efforts with our partners worldwide. This quarter we're running campaigns designed to highlight our wireless solutions and a separate campaign designed to play on market interests in becoming more green and reducing costs to reduced energy usage.

You will also note that our messaging is more solutions oriented and less [speeds and seeds]. We're talking about benefits and how to solve business problems rather than just product features and technical details. In the March ended quarter, you can expect more of these solution messages which will highlight both new product introductions planned for the quarter and staple products like our UDS1100 device server.

We're encouraged with the results that we've seen so far from our new marketing approach, but we're still at the beginning and we have a lot of work to do. We look forward to updating you further on our next conference call. Reagan?

For the remaining quarters of fiscal 2009 and taking into account the full impact of our recent restructurings, our non-GAAP profitability breakeven point will range from $12.2 million to $12.7 million in quarterly revenue. To summarize and re-emphasize, these are not revenue guidance ranges but are intended to provide guidance on our quarterly non-GAAP breakeven points with regards to quarterly revenue. We expect to do better than non-GAAP breakeven and we fully expect to drive positive cash flow.

This concludes our prepared remarks. Operator, I would now like to open the call to questions.

(OPERATOR INSTRUCTIONS) Our first question comes from the line of Kevin Ciabattoni with Boenning & Scattergood. You may proceed.

Hey, Jerry and Reagan, nice quarter.

Hello.

Can you give some color on what specifically was driving sales in device networking in the quarter? Was it specific products, sales into specific sectors?

Yes, so we saw as Reagan described, we saw growth across our geographies via U.S.-Asia. We continue to stay strong in traditional verticals; like security, medical, industrial, automation. And we're seeing some growth in some new verticals; audiovisual and gaming.

Okay, and you touched on the new marketing efforts in a decent amount of detail. Were there any significant changes in terms of the sales organization or any of the distribution networks or channels?

During the last earnings call, we announced that we had reorganized the U.S. into geographies; so the East, the Central and West, as opposed to having a focus on our IT products and our imbedded products. So that's working out well for us. We've also added an inside sales force and strengthened them in order to focus on numerous but smaller opportunities. We don't want to leave any money on the table. So, I think after a quarter of sort of getting used to the idea we're starting to gain some traction. We continue to work through our partners in all geographies and continue to look for ways to strengthen those relationships and to market with them where appropriate.

Okay, and sort of along those lines, you talked about being more responsive to customers and you went into that a little bit here. What benefits are you seeing there in terms of maybe allocating money towards R&D differently or in terms of the timing there? How does that work?

So, the way we've seen it so far is that we've spent a lot of time, weeks and months, developing new product roadmaps that took us forward. As I mentioned in my remarks, we're de-emphasizing speeds and seeds, but you can only de-emphasize speeds and seeds if you have speeds and seeds. In other words, that's a given, so we continue to invest in the robustness of our platform. What we did is once we came up with a solution that was probably at about the 80% level, we started getting out in front of partners, getting out in front of customers. They liked what we were doing. We heard a strong request from them to focus on enabling applications that are vertical agnostic but that help all the verticals create more applications, which lead us to some Linux work that we're doing. Across all geographies we were encouraged highly to investigate, and more than investigate but to proceed forward on wireless options, which we're doing. Then, of course, also we had some fun with a new product, a new version of our Spider product that we're launching, KBM. So the immediate feedback has been to get in front of customers with what we think is a 70% or 80% solution; allow customers to get us up to 100%; and then we all get excited about it and start making plans for how we deploy this stuff going forward.

Okay, when you said investigate wireless options, are you talking about different bands of wireless?

So basically, to bring this back to applications, there are a number of our products that work well in wireless and the feedback from customers is that we need to allow mobility or remote control via wireless. So we're agnostic as to the actual technology we use. Although we have some thoughts as you would imagine, but basically allowing those wireless connections.

Okay, so just adding it across more of the product line?

Yes, beefing it up and just allowing our products to be used in any applications.

Okay. In terms of the current cost structure, I mean how far do you -- what's your outlook on how far that you can take the top line there? It looks like R&D actually scaled back a little bit year-over-year taking the payment last year into account. How does that affect your growth potential going forward and your ability to compete?

So, regarding the cost structure, we're pretty sticky where we are. So we can drive the top line pretty far before we have to do anything with the cost structure. I think we pointed out the R&D was down a little bit, but a big chunk of that was related to some separation payments that we had to make. I think you know this, Kevin, but just to recall to the other listeners, we do have a contract manufacturing model and so we do most of our manufacturing overseas. So, we're feeling pretty good. We're not looking to add proportionately as we grow the top line, so we feel like we've got a robust cost structure. We are adding a salesperson here, and SAE there, you know quality assurance over there, but nothing on a large scale nor is anything on a large scale plan.

Okay, I think that was all I had for now.

Thanks, Kevin.

Yes.

(OPERATOR INSTRUCTIONS). Our next question comes from the line of Winder Hughes with Hughes Capital. You may proceed.

Hi, guys.

Hi, Winder.

Hey, Winder.

Wow-wow. I liked everything I've read and heard so far. In fact, half of my questions the other guy he just asked them. But congratulations, I think that that's a really good quarter but I'm also liking the stuff that I'm hearing, especially in light of the fact that you're doing this with 75 or so percent of the people that you had last year. So, congratulations, and I really mean that.

Gross margins, Reagan, those are very nice and I know that like you have all these things that can be one-timers here, but as the business model starts to scale here where can gross margins go, or what's kind of your bracketed goal?

Okay, so as you know, kind of our business model in the short-term has always been gross margins 50 to 52 points, as we did see the pop-up this quarter because of the licensing revenue as well as with higher revenues. It absorbs our fixed costs. So we feel pretty good at that 51% range. As we start bringing in more deals and increase the top line, obviously the absorption of our fixed costs goes up even more. So you know, I can see this -- as well a ManageLinx when that becomes a significantly part of our business, that has a software content which as you know has a very high gross margin. So, the 50 to 52 point range goes to the 52 to 54 point range, but I really see that towards the latter part of FY'09 if not into FY'10.

So take ManageLinx out of the picture here to the straight hardware play where you are now, as the revenues get increased your thinking is that the gross margins are in the 52 like the 54 range?

No, I would say the 52 to 54 -.

Make it more than that?

Yes, the 52 to 54 is more with ManageLinx coming in. With kind of the business model as it sits now with the product mix that we have now, it's probably going to be 51 to 52 point range.

Okay, fair enough. Jerry, the deal that you all had announced last week with the software company on ManageLinx, can you discuss kind of what the implications that element means for the business model; that's one. Of the customers who are using it now, has anybody said no because of the economy? And thirdly, when you size up this market, where is the low-hanging fruit? The guys that have these industrial modems and they're overpaying and how big is that market? And I'm assuming that market is smaller than the market that is completely untapped at this point in time. So three questions I guess.

Okay, so basically the announcement we put out last week should be very familiar for our listeners who are used to working with software applications. And of course ManageLinx, first and foremost above all things, allows network accessibility to equipment behind the firewall. But what this equipment is designed to do is to be upgradeable in the field in terms of additional capability, also in terms of additional users. There might be in some cases customers want to run concurrent software on our platforms. So basically, this software key activation layer that we co-developed with [Acreso] allows us the flexibility and imposes the discipline to control our software. So it was an important step.

We were very pleased with them as a provider and going forward a simple application or a simple use for this would be if a customer wants to upgrade the number of users that are being -- or the number of pieces of equipment that are being accessed to the system. Then, we can charge additional license fees without necessarily deploying additional equipment. So, but just to emphasize first and foremost, we're looking at ManageLinx as the backbone of a remote product service architecture and this particular development allows us to control that software as we go forward.

We are seeing some delays in the economy. We see a lot of interest, as I mentioned, across geographies particularly here in the U.S. and Asia where I was last week. I'm going to Europe next week, so I'll be able to have a more personal view on that. But these are much larger business opportunities that we're looking at that require longer evaluation, so in some cases companies are going through purchasing slowdowns, or they're reorganizing and so we are impacted by that. The sales cycle on ManageLinx is probably about 9 to 12 months and I think current economic conditions are entering a delay into that. Although I will emphasize that ManageLinx continues to perform very well. It's very robust. We have taken feedback from our customers and incorporated that into a recent software release focused on usability and scalability.

Then regarding low-hanging fruit, what we're going to attack first, nothing sort of pop us in mind. Certainly, the VPN market is $1.2-$1.3 billion. We would certainly expect to tap into some of that, but we would also be expecting to grow our own market capability based around ManageLinx and nobody as far as we know is doing anything quite like ManageLinx. We did file some patents here, four patents to protect the technology, but we're approaching this on a broad scale and it's going to take time. We don't really see any sort of easy wins, low-hanging fruit.

The last question on device enablement; so how's that business performing now? You grew nicely in the June quarter; it grew nicely in the March quarter; and obviously it grew nicely in the September quarter. So how is it performing now, December quarter-wise?

Well as you know, the device enablement -.

Device enablement.

-is broken between imbedded and external, and imbedded business is actually growing in the high 20% range; basically 27% to 30% year-on-year for the last couple of quarters, actually the last three quarters. And our external business has been growing in I would say middle single digit, you know kind of the 5% to 8% range. But we also get good margin from our external blocks' business. So kind of combined together, you're seeing growth patterns of device enablement, or what we call DeviceLinx, between 17% and 20% year-on-year for the last three quarters. So Xport continues to be a good driver for the imbedded. We're seeing good pickup on MatchPort albeit on a smaller base, and there's about two or three flavors of products within our external category that continue to pull strong for the P&L.

So those trends are still in place now?

Excuse me?

Those trends are still in place now, right?

Yes.

Lastly, anything new with device management? I know that's a smaller segment, but you've got Spider, that's something that's new and expanding. Any color there?

So yes, Spider is a nice product for us. We're looking at nice growth rates for our existing offering. We're looking at some one-off opportunities, but Spider continues to be very well received and we're growing and investing in Spider.

All right, thank you. Congratulations again.

Thanks Winder. Thanks for the call.

Our next question comes from line of Michael Ciarmoli with Boenning & Scattergood. You may proceed.

Hey, guys, thanks for taking my call. Quick question, I know you guys don't really disclose a backlog. But given the nature of the current economic situation both in the U.S. and overseas what looks to be deteriorating there, can you talk about maybe your sales pipeline, the type of pipeline coverage you have? And then maybe a little bit about what you're seeing, if you've got an early read on what corporate IT spending budgets are starting to look like for '09; if you get a sense of how your business is going to kind of shake out?

Mike, we typically enter the quarter with less than 10% to 15% in backlog.

Right.

So we're not a backlog-driven company. The current order rates and shipment rate look pretty good for October.

Okay.

That said, anecdotally because we're on www.salesforce.com to track our pipeline.

Right.

We monitor that literally on a daily and weekly basis. We haven't seen projects cancelled, but anecdotally you will hear of projects being moved out or a longer approval cycle; more signatures required for approval.

Right.

So, that's kind of on the project related, which would be I would say more of our external box and our SecureLinx product.

Okay.

Imbedded, we're one or two steps removed from the end-user customer because it's imbedded into a device. So we would have to wait until the security panel demand falls away, but we haven't seen that as of yet.

Okay, any sense as to what budgets, you know, what might transpire in the months coming ahead and how that might impact future business? I know it might be a little early to tell if the clamps get put on IT spending to some extent. But any read you're getting right now from talking to customers?

We're hearing the same thing you are. Everybody's concerned in Asia, Beijing, Tokyo last week, and I could have very well been sitting down with customers in New York or Chicago or Los Angeles. Everybody's concerned. As Reagan said, we're not seeing the downturn necessarily and we're not going to go out on a limb and predict our Q2. Reagan, I think, did a nice job saying that we position the Company for profitability and cash flow under most scenarios that we can see going forward and that's all we're really prepared to say.

Okay, great. That's helpful. Thanks a lot guys.

There are no additional questions at this time.

Okay then, so thank you everybody. Thank you, operator. We'd like to -- we're grateful for your participation on our call today and we look forward to speaking with you next quarter.

Thank you.

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