創力 (LTRX) 2009 Q2 法說會逐字稿

Good day ladies and gentlemen and welcome to the second-quarter 2009 Lantronix Inc. earnings conference call. My name is Kenisha 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 this conference. (Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to your host for today's call, Mr. Reagan Sakai, Chief Financial Officer; and Jerry Chase, Chief Executive Officer. Please proceed sir.

Thank you. 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 4. The number to call for the replay is 888-286-8010 or 617-801-6888 for international callers with pass code 93573343.

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 plans for future product introductions, our estimated non-GAAP profitability breakeven midpoint, upcoming planned product releases, the implementation of new corporate marketing messages and marketing techniques and statements regarding future financial metrics including non-GAAP profitability and cash flow. These forward-looking statements are based on Lantronix's current expectations and are subject to a number of risks and uncertainties.

Actual results could differ materially as a result of several factors. For a more detailed discussion of these and other risks and uncertainties, see the Company's recent SEC filings including its Form 10-K for the fiscal year ended June 30, 2008 and Form 10-Q for the fiscal quarter ended September 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 CEO of Lantronix. Please go ahead sir.

Thank you and good afternoon everyone. While we experienced a decrease in net revenue largely as a result of the global economy, our restructuring last summer and ongoing cost cutting efforts have created a leaner more responsive Lantronix and improved gross margins.

Consequently we are pleased to report non-GAAP earnings of $1 million and a $934,000 increase in our cash balance for the second fiscal quarter ended September 31, 2008. In addition to our focus on profitability and positive cash flow, we continue to improve to expand and our product lines.

We are excited about our recently announced EDS 8 and 16 port device servers. Our product pipeline is robust and we look forward to launching new customer driven products throughout calendar 2009. Reagan and I will cover these topics and others during today's call. Reagan?

In addition to GAAP results, we report adjusted net income and adjusted operating expenses referred to as non-GAAP net income or loss and non-GAAP operating expenses, respectively, and non-GAAP net income or loss per share. Please refer to our earnings release posted in the investor relations sections of our website where we have provided the definition for these non-GAAP financial measures.

We believe that the presentation of non-GAAP financial measures provide 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.

In 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. My following comments relate to the six months ended December 31, 2008.

Net revenue was $27.1 million for the six months ended December 31, 2008; a decrease of $1.2 million or 4% compared to $28.3 million for the six months ended December 31, 2007. Device networking net revenue was $25.9 million for the six months ended December 31, 2008; a decrease of $53,000 compared to $25.9 million for the six months ended December 31, 2007.

Device enablement or DeviceLinx net revenue was $21.7 million for the six months ended December 31, 2008; an increase of $561,000 or 3% compared to $21.1 million for the six months ended December 31, 2007. Device management net revenue was $4.2 million for the six months ended December 31, 2008; a decrease of $614,000 or 13% compared to $4.8 million for the six months ended December 31, 2007.

(inaudible) net revenue was $1.2 million for the six months ended December 31, 2008; a decrease of $1.2 million or 49% compared to $2.4 million for the six months ended December 31, 2007. Net revenue for the Americas region was $16 million for the six months ended December 31, 2008; a decrease of 5% compared to $16.8 million for the six months ended December 31, 2007.

Net revenue for the EMEA region was $7.5 million for the six months ended December 31, 2008 compared to $7.5 million for the six months ended December 31, 2007. Net revenue for the Asia-Pacific region was $3.6 million for the six months ended December 31, 2008; a decrease of 8% compared to $4 million for the six months ended December 31, 2007.

Gross profit margin was 53.4% for the six months ended December 31, 2008 compared to 50.5% for the six months ended December 31, 2007. The increase in gross profit margin percent was in primarily attributable to lower personnel costs as a result of restructuring activities and lower inventory reserve costs.

Selling, general and administrative expense was $10.5 million for the six months ended December 31, 2008; a decrease of $1.1 million or 9% compared to $11.6 million for the six months ended December 31, 2007. Research and development expense was $3.1 million for the six months ended December 31, 2008; a decrease of $474,000 or 13% compared to $3.5 million for the six months ended December 31, 2007.

GAAP operating expenses were $14.3 million for the six months ended December 31, 2008; a decrease of $840,000 or 6% compared to $15.2 million for the six months ended December 31, 2007. GAAP operating expenses for the six months ended December 31, 2008 included restructuring charges of $721,000.

Non-GAAP operating expenses were $12.3 million for the six months ended December 31, 2008; a decrease of $2.1 million or 15% compared to $14.3 million for the six months ended December 31, 2007. GAAP net income was $36,000 or $0.00 per share for the six months ended December 31, 2008 compared to GAAP net loss of $670,000 or $0.01 per share for the six months ended December 31, 2007.

GAAP net income for the six months ended December 31, 2008 included restructuring charges of $721,000. GAAP net loss for the six months ended December 31, 2007 included other income on the sale of an investment of $104,000 and a benefit for income taxes of $147,000.

Non-GAAP net income was $2.3 million or $0.04 per share for the six months ended December 31, 2008 compared to non-GAAP net income of $90,000 or $0.00 per share for the six months ended December 31, 2007. Now turning to the three months ended December 31, 2008 which represents our second fiscal quarter.

Net revenue was $12.9 million for the second fiscal quarter of 2009, a decrease of $2.4 million or 16% compared to $15.3 million for the second fiscal quarter of 2008. Device networking net revenue was $12.4 million for the second fiscal quarter of 2009, a decrease of $1.8 million or 13% compared to $14.2 million for the second fiscal quarter of 2008.

Our device networking business is comprised of device enablement products and device management products. Device enablement or DeviceLinx net revenue was $10.1 million for the second fiscal quarter of 2009, a decrease of $1.2 million or 10% compared to $11.3 million for the second fiscal quarter of 2008.

Device management net revenue was $2.2 million for the second fiscal quarter of 2009, a decrease of $641,000 or 22% compared to $2.9 million for the second fiscal quarter of 2008. Non-core net revenue was $529,000 for the second fiscal quarter of 2009, a decrease of $588,000 or 53% compared to $1.1 million for the second fiscal quarter of 2008.

Net revenue for the Americas region was $7.5 million for the second fiscal quarter of 2009, a decrease of 16% compared to $8.9 million for the second fiscal quarter of 2008. Net revenue for the EMEA region was $3.7 million for the second fiscal quarter of 2009, a decrease of 11% compared to $4.1 million for the second fiscal quarter of 2008. Net revenue for the Asia-Pacific region was $1.7 million for the second fiscal quarter of 2009, a decrease of 25% compared to $2.2 million for the second fiscal quarter of 2008.

Gross profit margin was 53.9% for the second fiscal quarter of 2009 compared to 51.5% for the second fiscal quarter of 2008. The increase in gross profit margin percent was primarily attributable to lower personnel related costs as a result of restructuring activities and lower inventory reserve costs.

Selling, general and administrative expense was $5.3 million for the second fiscal quarter of 2009 compared to $5.3 million for the second fiscal quarter of 2008. Research and development expense was $1.5 million for the second fiscal quarter of 2009 compared to $1.8 million for the second fiscal quarter of 2008. GAAP operating expenses were $7 million for the second fiscal quarter of 2009 compared to $7.1 million for the second fiscal quarter of 2008.

GAAP operating expenses for the second fiscal quarter of 2009 included a restructuring charge of $128,000. Non-GAAP operating expenses were $6 million for the second fiscal quarter of 2009, a decrease of $778,000 or 11% compared to $6.8 million for the second fiscal quarter of 2008.

GAAP net loss was $148,000 or $0.00 per share for the second fiscal quarter of 2009 compared to GAAP net income of $983,000 or $0.02 per share for the second fiscal quarter of 2008. GAAP net loss for the second fiscal quarter of 2009 included a restructuring charge of $128,000.

GAAP net income for the second fiscal quarter of 2008 included other income on the sale of an investment of $104,000 and a benefit for income taxes of $168,000. Non-GAAP net income was $1 million or $0.02 per share for the second fiscal quarter of 2009 compared to non-GAAP net income of $1.2 million or $0.02 per share for the second fiscal quarter of 2008.

Turning to the balance sheet. Cash and cash equivalents were $9.2 million as of December 31, 2008; an increase of $934,000 compared to $8.2 million as of September 30, 2008; an increase of $1.7 million compared to $7.4 million as of June 30, 2008. Total receivables which includes accounts receivable and contract manufacturers receivables were $3.3 million as of December 31, 2008; a decrease of $400,000 compared to $3.7 million as of September 30, 2008; a decrease of $1.6 million compared to $4.8 million as of June 30, 2008.

Net inventories were $8.1 million as of December 31, 2008 compared to $8.1 million as of September 30, 2008 and $8 million as of June 30, 2008. Accounts payable were $6.5 million as of December 31, 2008 compared to $6.4 million as of September 30, 2008 and a decrease of $1.2 million compared to $7.7 million as of June 30, 2008.

Working capital was $7.9 million as of December 31, 2008; an increase of $487,000 compared to $7.4 million as of September 30, 2008; an increase of $2.2 million compared to $5.7 million as of June 30, 2008. This concludes my prepared remarks. I would now like to turn the call back to Jerry.

Thank you Reagan. As Reagan just described, a slowdown in the global economy affected our topline performance in the December-ended quarter. However the restructuring we implemented last summer coupled with ongoing cost reduction efforts have combined to significantly reduce our quarterly breakeven revenue level allowing us to report strong non-GAAP profitability and cause positive cash flow. I would also like to report progress in another just as important area, product development.

To start, DeviceLinx remains our bread and butter business and has received the bulk of our development effort since last we spoke. We have continued to work closely with our partners and customers from around the world to share our vision, exchange ideas and ensure we're developing the right products.

In fact, just two weeks ago we were very pleased to host our partners from Asia and Japan here in Irvine for a two-day round of discussions and sharing that brought us even closer together. We believe that our partners and customers have helped us develop an exciting product pipeline and road map that will carry us forward for several years.

Just this month we announced the launch of the EDS 8 and 16 port device servers, strong enterprise level security, industry standard management tools and compliance with worldwide environmental standards; this multi-port device server is especially attractive for customers wanting to access and manage medical devices, kiosks and retail terminals via the Internet. We are excited about our upcoming product launches this calendar year.

For example, MatchPort b/g Pro is being augmented with bridging and SmartRoam, our innovative technology for allowing mobile edge device to quickly switch between access points within a wireless infrastructure. We also continue to see strong demand for our XPort and will build upon its success with releases of advanced models this calendar year.

Leveraging the success of the current XPort form factor, we will be addressing the market need for advanced security and enhanced performance. In response to customer demand and implementation experience with ManageLinx, we will be integrating ManageLinx functionality into our other product families such as Spider, EDS, and XPort.

In addition, adoption and acceptance of wireless continues to grow rapidly and with that we will be introducing new embedded and external cellular and WiFi products. And finally as we continue to expand our software solutions, we will introduce tools and architectures that empower developers to quickly tailor our products for use in their specific application.

Now, turning to ManageLinx. ManageLinx continues to gain traction with customers as it proves its ability to enable highly secure remote management of equipment behind firewalls. Customers immediately grasp the implication for cost savings and improved efficiency from reduced truck rolls and personnel deployment. ManageLinx continues to perform very well technically across industries and geographies.

Since last we spoke, we have received a number of small getting-started POs from customers in Europe, the US and Asia from industry segments as diverse as solar energy, industrial controls and industrial machinery. As stated earlier, a number of our customers have asked us to put ManageLinx functionality into other Lantronix products.

While we remain positive about the future of ManageLinx as we mentioned during previous calls, the sales cycle for ManageLinx is lengthy, in the range of 9 to 12 months. Current economic conditions may delay this even further. So we continue to have our work cut out for us before ManageLinx becomes a meaningful part of our revenue profile.

Shifting the discussion to marketing, in the current economic environment companies are even more focused on the bottom line and we believe our value proposition of reducing cost through automation and secure remote management of network equipment is more relevant than ever. As such, we continue to be highly focused on our marketing efforts with budgets at or near their two-year highs.

We continue to concentrate much of our effort on Web and interactive marketing such as interactive ads, pay-per-click campaigns and search engine rankings. These new media tactics allow us to use our marketing dollars more effectively, be more flexible in responding to new opportunities and to reach a more targeted audience.

Our investments in search engine optimization have allowed us to maintain and grow our visibility on the Web even as aggregate search activity on sites such as Google have been drifting downward in recent months. From a public relations perspective, we have seen excellent results from the PR firm we engaged in September.

For example since September, 2.3 million people have been exposed to our messaging through the domestic press. In line with our objective of raising Lantronix's visibility outside the purely technical journals, we have received coverage in publications as diverse as Communication News and the Orange County Business Journal.

We have also received important third party endorsement of some of our strategic products, with ManageLinx receiving a recommended rating from the well-respected CRM (inaudible) and the MatchPort b/g Pro receiving a Readers Choice award from Electronic Component News. As mentioned on our last call, we're continuing to run focused quarterly marketing campaigns which provide information on key products and solutions to targeted audiences.

We are currently seeing good reaction to the campaigns we're running in the security and medical verticals to support new product introductions such as the EDS. Wherever possible, our messaging is solution rather than product oriented and explains how Lantronix's product help companies address pressing business problems.

The messaging in our new campaign has an edgier tone than in the past which we feel drives more interest from line of business decision makers who are not so concerned with simple speeds and feeds. This is an exciting and fun initiative that is driving business for us. So please visit our website to check out what what we are doing at www.Lantronix.com.

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

(Operator Instructions) Winder Hughes, Hughes Capital.

It seems like you all have done a great job at managing the bottom line. So I will segue from there into the topline questions.

Reagan, on the gross margin, the fact that you all had about a 54% margin in the quarter with revenues that weren't all that exciting. Where do you see the boundary of this kind of moving up to once you get some more lift on the topline?

In the past we were comfortable with gross margin in the 50 to 52 point range. I think now what we're seeing from product cost reductions, reduction in our fixed overhead as well as better inventory management which allows more favorable reserves on our inventory, we're comfortable in I would say the 51 to 53 points of margin.

We can certainly see it expanding upwards as revenues increase. It will absorb more of our fixed costs. We are also looking obviously at spending or the discretionary spending as it relates to freight.

We have a couple of key initiatives in our manufacturing area to reduce kind of variable spending if you will, primarily freight via dropship and SKU reductions. And so we believe there is good opportunity for margin expansion into the would I say the mid 50s.

Okay so you said that you thought that would be 51 to 53 but you just did 54 with the $13 million number and I'm assuming there was no software bluebirds or anything like that. So why wouldn't the margin be -- if the numbers start like to come in in the high teens and higher hopefully as time goes on that you wouldn't have something in the 56 to 57 level?

Well first one point of trend does not make (inaudible) we were very happy with the 53.9 but we did have a nice pickup on warranty. We had a nice pickup on inventory reserves. We hope to continue that but to go out and commit to 55, 56 regardless of the revenue level is a bit premature at this point.

For the March quarter, what's your goal there for cash flow generation and what are the order patterns that you're seeing so far in both device enablement and device management?

I'll take the first part and Jerry will take the second part. We are fully committed to non-GAAP profitability on a sustained basis as well as sustained positive cash flow. We realize there are certain areas on our balance sheet that are ripe for reduction or generating of cash certainly in our inventory section. We have done a very good job on AR collections and at the same time driving down our accounts payable both in terms of days payable outstanding as well as just the absolute amount.

So it really as you know, we started off about two quarters ago to kind of this back to basics approach to our P&L and balance sheet. And so we are happy with the restructuring that we did and how that equates to non-GAAP profitability and driving cash. And as it relates to what we're seeing kind of the latter part of the December ended quarter and the March quarter, I will let Jerry talk.

Winder, as you know, we don't give guidance in these current economic conditions. What I will say is we're not losing orders. We're seeing a lot of design activity, a lot of work with our customers.

The orders are taking a little bit longer to come in. They're not as big as we would hope for. But we're confident and as we mentioned, we're launching a lot of products this year.

It's not enough to optimize the income statement. You also have to have a good solid pipeline, customer driven, good products coming out. So we believe we are checking those blocks in a very positive way.

So backing up then to last quarter with device enablement kind of being down and device management being up from the September quarter, that is probably somewhat surprising. So where did you see weakness in device enablement and where were you surprised with device management?

I think all of our comments in terms of traditionally the December-ended quarter is our strongest quarter in the fiscal year which is our second fiscal year. So all of the weakness we saw was in conjunction with the worldwide economy.

So we're not -- I don't think it is -- in other words, I'm not avoiding your question. It's just not -- it wasn't a question of device or secure lengths versus device lengths. Basically we saw weakness across the geographies. We saw customers that were pushing out orders or taking partials. So we didn't see sort of that meaningful breakdown that I think you're asking about. What we saw was just the softness across all geographies and all vertical segments.

So nothing that really jumped out at you like (multiple speakers) so looking forward with device enablement, what would you see -- what would you say -- I know that you touched upon this but what would you say or how would you characterize the leading indicators of new growth in that segment from design win activity or development kits or whatever the metrics that you would use that would say that will start to actually uptick again because folks do want to reduce costs and network things because they can see the advantage of that in this kind of environment?

What we see is despite a down topline, despite softness in the economy, we see as I mentioned a lot of design activity. We are being brought into a lot of opportunities across all of our geographies whether it's Europe, whether it's US, whether it's Asia and Japan.

We are -- I think you might be aware that we put out a press release fairly recently where we expanded our business with a very valuable customer, Mitsubishi. We have been with Mitsubishi for many years in their high-end video projector. And through our very good partner in Japan, Mission Systems, they have been helping us understand more how to do business with our larger Japanese customers.

So here we are taking our products and expanding them with existing customers and to new opportunities. It is, again, we're seeing an overall softness due to the economic conditions but we don't see any fundamental weakness in our products, quite the contrary.

We see a lot of strength, we see expansion, we see activity. The products that we're launching are customer driven products, products that customers told us that they want. So we would expect that that would continue to be favorable for us but we are swimming in the overall economic ocean that everyone else so I don't want to go too far out on a limb there.

Two more questions there and then one on ManageLinx. How would you characterize the design wins and the market opportunity around the new MatchPort stuff? And then the new Linux product line that is coming out in the spring, how large of a market there that you believe exists that we haven't really stepped into yet?

Okay, so on ManageLinx, the last time we talked we had said that we were expecting three or four purchase orders and some small purchase orders coming up as a result of successful trials. And that indeed occurred with us during the December-ended quarter.

So we were very pleased. As I mentioned in the prepared remarks, we sold it to the solar energy market in Germany. We sold into industrial applications here in the United States and we're selling into some heavy industry applications in Asia.

So we're quite pleased with how that is going. ManageLinx is performing very well technically. We have a number of trials going. We don't -- as we mentioned, ManageLinx is a new product introduction for us. We are healthy in our core businesses.

We're quite pleased with how it is going. One of the things that the customers have told us is we really like ManageLinx but we really like DeviceLinx and we would really love to ManageLinx working on your DeviceLinx platforms. So we have a release coming out in the middle of the summer for ManageLinx and internally the engineers called it the DeviceLinx release which is going to put ManageLinx capability on our EDS platform as well as Spider as well as one of our Xports. So pretty fun stuff.

One of the versions of Xports that's coming out later on this year is going to have Linux capability on it. And as we've discussed in the past, basically it just opens up our platform for all those thousands and thousands of Linux developers out there around the world.

So we would expect that it would augment and strengthen sales of our products. So we're not expecting rapid growth there. We are expecting that this will make our products and our technology more accessible to a common operating system.

Okay, thank you.

Thanks Winder. Always good to hear from you.

(Operator Instructions) At this time there are no questions in queue. I would now turn the call back over the Mr. Jerry Chase for closing remarks.

Thank you operator. I would like to thank all of you for your participation on our call today and we look forward to speaking with you next quarter.

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