創力 (LTRX) 2009 Q3 法說會逐字稿

Ladies and gentlemen, welcome to the third quarter 2009 Lantronix, Inc. earnings conference call. I will be your coordinator today. (Operator Instructions). I would for you like to turn the presentation over to your host for today's call, Mr. Reagan Sakai, Chief Financial Officer. Mr. Sakai, please proceed.

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 at the company's website at www.lantronix.com. An audio playback will be available through June 13th. The number to call for the replay is 888-286-8010 or 617-801-6888. For international callers with pass code, 9184-1924. Please be reminded that during the course of this conference call, management will be making forward-looking statements in their prepared remarks and in your response to your questions concerning among other matters our plans for future product introductions, upcoming plan product releases, the implementation of new corporate 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 of a number of risks and uncertainties. Actual results could differ materially as a result of several factors. For more detailed discussions of these and other risks and uncertainties, see the company's SEC filings including its form 10-K for the fiscal year ended June 30, 2008, and form 10-Qs for the fiscal quarters ended September 30, 2008, and December 31, 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. For the March ending quarter, we saw downward pressure on our top line primarily as a result of global economic conditions. However, for the third consecutive quarter and for what is seasonally our slowest quarter we were non-GAAP profitable. This was attributable to our continued focus on expense management and margin improvement. Correspondingly, we generated $1 million in positive cash flow from operations during the nine months ended March 31, 2009. In addition, we increased our gross margins by nearly two points year over year, we continued to optimize our expense structure, we introduced a number of new products and we will continue to launch exciting new products throughout the rest of the year. And we were very pleased to add Jeff Kost to the executive management team as the Senior Vice-President of Worldwide Sales. Reagan and I will cover these topics and others today during this call. Reagan?

In addition to GAAP results we reported 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's relations section 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 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 investors relations section of our website we have provided reconciliations of the non-GAAP financial measures to the most directly comparable GAAP financial measures.

My upcoming comments relate to the nine months ended March 31, 2009, compared to the nine months ended March 31, 2008. Net revenue was $37.8 million for the nine months ended March 31, 2009, a decrease of $5.1 million or 12% compared to $42.9 million. The vice networking net revenue was $36.2 million for the nine months ended March 31, 2009, a decrease of $3.4 million compared to $39.6 million. Our device networking business is comprised of device enablement products and device management products. Device enablement or DeviceLinx net revenue was $30.4 million for the nine months ended March 31, 2009, a decrease of $6.2 million or 8% compared to $33 million. Device management net revenue was $5.8 million for the nine months ended March 31, 2009, a decrease of $773,000 or 12% compared to $6.6 million. Noncore net revenue was $1.5 for the nine months ended March 31, 2009, a decrease of $1.8 million or 54% compared to $3.3 million. Net revenue for the Americas region was $21.7 for the nine months ended March 31, 2009, a decrease of 14% compared to $25.1 million. Net revenue for the EMEA region was $10.7 million for the nine months ended March 31, 2009, a decrease of 9%, compared to $11.7 million. Net revenue for the Asia-Pacific region was $5.4 million for the nine months ended March 31, 2009, a decrease of 11% compared to $6 million.

Gross profit margin was 53.1% for the nine months ended March 31, 2009, compared to 50.5%. The increase in gross profit margin percent was primarily attributable to lower inventory reserve costs, a reduction in certain product costs and lower personnel related expenses as a result of restructuring activities in the first fiscal quarter ended September 30, 2008. Selling, general and administrative expense was $15 million for the nine months ended March 31, 2009, a decrease of $2.6 million or 15% compared to $17.6 million. Research and development expense was $4.4 million for the nine months ended March 31, 2009, a decrease of $814,000 or 16% compared to $5.2 million.

Operating results across all functional areas were positively impacted by the company's previous restructuring efforts, stringent control on discretionary spending and a company-wide furlough program that was taken in response to the economic down turn. GAAP operating expenses were $20.1 million for the nine months ended March, 31, 2009, a decrease of $2.8 million or 12% compared to $22.9 million. GAAP operating expenses for the nine months ended March 31, 2009, included restructuring charges of $698,000.

Non-GAAP operating expenses were $17.6 million for the nine months ended March 31, 2009, a decrease much $4.1 or 19% compared to $21.7. GAAP net loss was $209,000 or $0.00 per share for the nine months ended March 31, 2009, compared to a GAAP net loss of $1.1 million or $0.02 per share. GAAP net income for the nine months ended March 31, 2009, included restructuring charges of $698,000. GAAP net loss for the nine months ended March 31, 2008, 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 $2.6 million or $0.04 per share for the nine months ended March 31, 2009, compared to non-GAAP net income of $167,000 or $0.00 per share.

Now turning to the three months ended March 31, 2009, compared to the three months ended March 31, 2008, which represents our third fiscal quarter. Net revenue was $10.7 million for the third fiscal quarter of 2009, a decrease of $3.9 million or 27% compared to $14.5 million. Device networking net revenue was $10.4 million for the third fiscal quarter of 2009, a decrease of $3.3 million or 24% compared to $13.7 million. Device enablement or DeviceLinx net revenue was $8.7 for the third quarter of 2009, a decrease of $3.1 million or 26% compared to $11.9 million. Device management net revenue was $1.6 million for the third fiscal quarter of 2009, a decrease of $166,000 or 9% compared to $1.8 million. Noncoordinate revenue was $309,000 for the third fiscal quarter of 2009, a decrease of $579,000 or 65% compared to $888,000.

Net revenue for the Americas region was $5.7 million for the third fiscal quarter of 2009, a decrease of 31% compared to $8.3 million. Net revenue for the EMEA region was $3.2 for the third fiscal period of 2009, a decrease of 24% compared to $4.2 million. Net revenue for the Asia-Pacific region was $1.7 million for the third fiscal quarter of 2009, a decrease of 15% compared to $2 million.

Gross profit margin was 52.3% for the third fiscal quarter of 2009, compared to 50.4%. Increase in gross profit margin percent was primarily attributable to product mix and decrease in inventory reserve costs. Selling, general and administrative expense was $4.4 million for the fiscal third quarter of 2009, compared to $6 million. Research and development expense was $1.4 million for the third fiscal quarter of 2009 compared to $1.7 million. As stated before offering results were positively impacted by the company's previous restructuring efforts, stringent control on discretionary spending and a company wide-furlough program that was taken in response to the economic down turn.

GAAP operating expenses were $5.8 million for the third fiscal quarter of 2009 compared to $7.7 million. Non-GAAP operating expenses were $5.3 million for the third fiscal quarter of 2009, a decrease of $2 million or 27% compared to $7.3 million. GAAP net loss was $245,000 or $0.00 per share for the third fiscal quarter of 2009 compared to GAAP net loss of $464,000 or $0.01 per share. Non-GAAP net income was $265,000 or $0.00 per share for the third fiscal quarter of 2009 compared to non-GAAP net income of $77,000 or $0.00 per share.

Turning to the balance sheet. Cash and cash equivalents were $9.2 million as of March 31, 2009, and December 31, 2008, and an increase of $1.7 million compared to $7.4 million as of June 30, 2008. Total receivables, which includes accounts receivables and contract manufacturers receivables, were $1.9 million as of March 31, 2009, a decrease of $1.4 million compared to $3.3 million as of December 31, 2008, and a decrease of $3 million compared to $4.8 million as of June 30, 2008. Net inventories were $8 million as of March 31, 2009, compared to $8.1 as of December 31, 2008 and $8 million as of June 30, 2008.

Accounts payable were $6 million as of March 31, 2009, a decrease of $500,000 compared to $6.5 million as of December 31, 2008, and a decrease of $1.7 million compared to $7.7 million as of June 30, 2008. Working capital was $7.6 million as of March 31, 2009, a decrease of $253,000 compared to $7.9 million as of December 31, 2008, and an increase of $1.9 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. In previous calls we have committed to our shareholders, partners and customers that Lantronix would deliver sustained non-GAAP profitability and positive cash flow despite a difficult economy and during what is traditionally our slowest quarter, we've kept our commitment and we will continue to do so. However, we know and you know that this is not enough. Through technology, leadership, product development and providing what our customers need, Lantronix must deliver consistent, healthy top-line growth. Consistent with this goal during the economic downturn, we have continued and will continue to invest in targeted product development and innovative go to market solutions.

You may recall that for the March ended quarter we augmented MatchPort, our wireless imbedded device server product with advanced networking enablement. We also augmented it with SmartRoam, our innovative technology for allowing mobile edge devices to quickly switch between access points within a wireless infrastructure. For MatchPort AR, our wired imbedded device server product, we announced support for Linux. This offering caters to the growing Linux development community, expanding the market opportunity for the product and unleashing the capability for new and innovative applications.

We also announced that Mitsubishi Electric selected Lantronix's award winning XPort embedded networking connectivity module to further provide remote management and monitoring capabilities for its high volume projectors. Xport allows Mitsubishi's customers to access, monitor and control equipment from any location via the internet providing an unprecedented level of realtime business intelligence. In February we announced the availability of our newest hybrid ethernet device servers. The 8- and 16-port EDSPS. Using industry standard management tools, these desktop, multiport device servers allow serial equipment such as medical devices, kiosks and retail terminals to be securely accessed and managed via the Internet.

For the remainder of calendar 2009, we will launch the next generation of Xport, the Xport Pro, while keeping the popular form factor of our flag ship Xport product, the next generation Xport will have significant processor enhancements along with robust flash and ram. With the increasing demand for leading edge secure communications, we are including IPB 6 and our innovative ManageLinx VIP access within this product. Expansion of our Xport product family will allow to us better serve our demanding customers with the most powerful device server in the smallest package available on the market.

Our popular EDS server family will also be enhanced with increased processing and security features along with ManageLinx's VIP access. Our introduction of the EDS 1100 and 2100 will address the growing demand for advanced connectivity applications for networking and devices. We believe these features will have significant desirability for the medical, security and retail markets. A Linux software development kit to develop applications on our MatchPortAR Is due out this summer. Built upon the stable 2.6 Linux Kernel, all the components for building secure network-enabled products are included. In addition to the proven MatchPortAR secure networking module, this software development kit provides validated set of Linux-based applications, an extensive software library, and device drivers to allow quick customization for a unique environment. Sample applications are provided allowing developers to jump start their applications development and accelerate their time to market.

Our newest member of the Spider family, the SpiderDuo, is a 0RU remote keyboard video mouse KBM product which will offer both local and remote access of equipment, even at the Bios level. SpiderDuo will support IPB6 and ManageLinx VIP access which is being eagerly awaited with a number of our customers in trial with ManageLinx. SpiderDuo will be available in the fall of 2009.

ManageLinx software version 2.0 will be available in early fall 2009 as well. This newest version supports VIP access on a number of our DeviceLinx and Spider products. Version 2.0 is a significant release which represents the integration of features and operational inputs from the demanding being requirements of key market applications. As customers have gained experience with ManageLinx, they have asked us to layer on functional enhancements that provide a more robust and valuable business solution. These are just some of the exciting products we are currently set to launch in calendar 2009 and we look forward to providing you additional updates.

Matching investments in our product pipeline, we also continue to invest in sales and marketing to better connect with our customers and partners. As such, in April we were very pleased to announce that Jeff Kost joined us as the Senior Vice-President of Worldwide Sales. Jeff's most recent position was Senior Vice-President and General Manager of the mobile consumer solutions division at Sandisk We hired a senior seasoned sales professional who knows how to lead a sales force and attract and engage large customers. We feel fortunate to have someone of Jeff's caliber join our executive team.

On the marketing front 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. As a result of these efforts, we have seen a 300% increase in our aggregate visibilities scores on search engines such as Google compared to last year. We have also seen a seven-fold improvement in the number of targeted key words that appear in the top five listing in the web search results. As mentioned on our last call, we are continuing to run focused quarterly marketing campaigns which provide information on key products and solutions to targeted audiences. For example, this quarter we are running a campaign on our imbedded solutions that promotes Xport and MatchPort sample kits for use in medical, points of sale and security equipment applications, and a medical case study campaign that promotes our recent success with Lehigh Valley Hospital and their selection of our EDS intelligent multiport device server as an integral part of their implementation of a clinical information system in their intensive care units.

Turning to plans for the September-ended quarter, we will be launching campaigns to support product launches and to build on the success we have seen in the medical vertical. Programs will include campaigns on Xport Pro, ManageLinx 2.0., SpiderDuo, and the new Linux software development kit for MatchPortAR. We continue to see good responses to our marketing campaigns and our messaging continues to focus on solutions rather than products. Our new marketing approach drives more interest from decision makers who are not as concerned with speeds and feeds. Please visit our website to check out what we are doing at www.Lantronix.com. We believe that continuous focused investments in our product pipeline and sales and marketing have positioned Lantronix well for sustainable growth in the future. This concludes our prepared remarks but before moving to Q&A, I would like to thank our customers and partners for their business, efforts, and loyalty during a difficult period. I'd also like to thank our employees for their hard work and sacrifice. You're all doing a great job and I'm very grateful. Tonya, I'd like to turn the call over to questions at this point.

Thank you. (Operator Instructions). Your first question will come from the line of Winder Hughes with Hughes Capital. Please proceed.

Hello, Jerry, how are you?

Good, Winder. Thank you for joining us.

I had one question originally but based on the quarter I now have two questions. I will point the first question to Reagan because it relates here to the first quarter which was extremely disappointing and the $8.7 million in device networking really raises a lot of questions about the integrity of the installed base that we had because this kind of a fall-off is something that one would see with like GM and Chrysler but certainly that didn't happen at Dell and Cisco and these other players. So I'd like to get kind of the month-by-month and the play-by-play as to what happened in first quarter and what have you seen in April and what is May looking like and then I will ask the second question after that. But I just have to get over kind of what just happened here.

It was kind of a multi-pronged question. We do believe that our decline year-on-year was comparable to others in the space.

No, it was not. It was much worse.

Okay. Well, I mean, we both have our opinions on that. As you know, our device enablement products go into other devices and those devices also saw a fall off in their revenue. So to the extent that it is not in our field but when GM sees a decline in their revenues due to lack of sales certainly the guy selling tires to GM also sees a decline in sales and that was what we experienced that the end user demand for the finished product, not necessarily our Xport, but the alarm panels and security panels, test equipment, those manufacturers saw a decline in their demand and that is reflected upon our results.

So walk me through, though, January, February, March, April, May. Is it still happening now? I mean, has it bottomed out? Where are you within that cycle?

We don't release monthly results but I can tell you that coming out of December, as other companies experienced, the worldwide economic backdrop, we also see a weakening of orders in the December time frame and it continued into January. In February and parts of March, or most of March, we saw a strengthening of orders and backlog. And then entering FQ-4, this current quarter, we certainly had entered the quarter with much better backlog than we did entering the March-ended quarter. April, if you compare the first month of April or the first month of the quarter with the first month of the prior quarter, orders are up and shipments are up. However, that is not an indicator of where the quarter is going to end but we are hopeful for the end result.

So with receivables which are virtually nothing which is just so surprising there's just no receivables here. I know this is not a restaurant business but just wonder why these are so low. I know you guys have a revenue recognition policy but that seems incredibly onerous.

Part of that was timing. The invoice clock starts at time of shipment. So when we ship to a distributor, their terms are typically net 30 so they pay us in net 30. We recognize revenue on sell-through so there's a delay factor there where you'll see the cash coming in and you may not see the corresponding revenue. So that's very conservative accounting policy on our side. The fact that we do have a low balance, it was a quarter in totality that was 27% lower than it was one year ago.

So you are going to see a lower receivable balance. It is also from a timing perspective. We were able to collect on quite a few of the larger outstanding invoices before the end of the quarter. At the same time we did take that cash and pay down our accounts payable. So, yes, we did enter the new quarter with lower receivables. We are building that up with sales or shipments this month. But we also entered the quarter FQ4 with a much lower accounts payable base as well too.

Well, I mean, a spade is a spade. The quarter was very, very poor obviously. But y'all know that and I don't want to hammer that point.

Just to add, we had $3.7 million in deferred revenue.

winder, Jerry here. I'm sorry, I can't agree with you on that. We have not seen a deterioration in market share. Our products continue to be well received. We are doing quite well across a number of our traditional customers, Japan, the PRC, Europe. We experienced as many companies did a severe economic turn down and I'll have to remind you that our cash is up, our profitability is up. We continue to launch new products. Certainly we would all like to see a better top line but given the economic situations we believe we had a solid quarter and a good quarter.

On a positive point. So there is no doubt that you've done a yeoman's job during the last year in sellers of right sizing of the company and getting the balance sheet in shape and expense structure and building your team and rethinking the product line and your strategies. From there the company has kind of been locked in this $55 or-so-million run rate for the last six years. Of course, this quarter brings that average down. But during the last six years, the company has lost about $18 million of legacy revenue and so you've replaced that with the growth rate from device enablement. So where you are today with the expense structure and your margins there's a lot of operating leverage from this $50 million to $55 million zone into the next level. We always thought that that next level was going to be $100 million, $100 and a quarter, and that's not something we think about now.

So my question is, is in my view is that next zone, I would think would be in the $70 to $75 million range which from there you're looking at a pretax earnings number of $0.15 to $0.18 a share, and from that you have a valuation that allows you to do like a lot of things. You can raise money. You can buy somebody. You can sell the company. You can choose to do nothing and just keep growing. So my question is, and rank these in say your top four to five, is what do you see as the contributors in the growth rate from this $50 to $55, say, like the $40 run rate that we just went through, to the $75 range? Is that going to be, A, more effective sales penetration with your current line of products? B, will it be from product enhancements from the current line of products like you've just added Linux and something that already exists? C, will it be from ManageLinx? And D, will it be from something like an Ipod where it is something absolutely new, out of the box that it is something absolutely new, out of the box that nobody has yet? So how would you handicap that next zone that I would think that that would be like a level that you all are going to aspire to?

Clearly enhancements to our existing product line is a big chunk of that. I would say that to just to put this within the framework of an overall context. We have positioned the company well for the current economic situations we are in. We believe our overhead structure is pretty sticky. So as we grow the top line we believe a lot of that will flow down through the income statement as you pointed out. No excuses here but we do have to pay attention to what's going on. We do have about 55% of our revenue here in the United States, about 30% or so in Europe, middle East, Africa, the remainder in Asia. So we are exposed to global markets for the most part the better. But during the current situation like this certainly we are exposed. We do see ourselves continuing. I think the best companies in the world invest during times like this and we have continued to invest in our product road map with some pretty fun stuff that's been driven by customer requirements as you mentioned, Winder. Linux putting VIP access which is the ManageLinx component that goes into our network edge products, FormFactor, so a lot of exciting stuff that's customer driven.

So is it fairly even?

So as it comes online, it is clear we need to develop some partnerships with larger customers. We are seeing attraction in the industrial market, in the medical market, in the security market. So we have have to address those customers at the VP level, at the general manager level and increase that component of our sales. So that's something that you'll also see us doing. And we are very pleased with the addition of Jeff Kost, for example, to the executive team to that end. I don't see us coming up with with an Ipod-like product certainly when that happens, I think that is sort of a hail Mary play. If it happens we are pleased but we position the company to be successful under all circumstances and we would certainly appreciate that but we're not counting on it.

And your next question will come from the line of Mark Newman with Atlantic Capital Corporation.

Hi, Jerry and Reagan.

Hi, Mark.

Given the circumstances, I think you guys did a really good job so congratulations on that. A little bubble gum questions for you. If somebody looked at your management team and your board and didn't know Lantronix's name was next to it they would think the company was doing $5 million in sales. So having set you up for that, let me ask you this. Once the economy gets good, whatever that means, or better, how are you gearing the company in sales? Are you gearing it and how is the market conducive to that gear up? Is it conducive to a 10% growth rate? Without pinning you down. But 10%, 20%, 30%, 50%, 60%? Can you have one of those hyper growth rates? Because it appears that all these products are there and ready to roll and it is just a matter of the economy getting good so I'd like to get your thought process as to what type of, not an estimate of your sales growth but if the market is conducive to any one of those type of sales growths once everything gets better.

We believe so, Mark. Our continued investment in our DeviceLinx product line is going to position us very well for economic growth and recovery. We also have just to tell a little story here from a products standpoint but our Xport product is our flag ship product. We ship hundreds of thousands of these every quarter. It has been around for about four years. We continue to do the things that customers want us to do to make sure it is reliable and has the latest features and functionality. But it is also been around for four years. Now, we are launching Xport Pro, as I mentioned, with significantly enhanced processing power, flash, ram, Linux, VIP access. It is in the identical form factor as Xport Pro. So of course price, normal price value expectations are in place.

We would expect that Xport would continue to be out there but would compete a little bit more on price and that we would come in at the top of the market with Xport Pro. This is identical form factor but with a lot of enhanced features and capability. This is something our customers have told us is very important, that we keep that identical form factor. So back to your question, this particular example as well as other examples that we mentioned during the call to put Linux on platforms, to put VIP access on platforms, it is going to position us very well for healthy growth before the economic downturn, we believed we were growing faster than our market segment, we have every expectation that we will continue to grow that way.

Adjunct to that, the market is conducive, assuming you hit the ground running, it is conducive once it does well to what type of growth rate? And number 2, if you're able to achieve that growth rate, can you keep your costs in line so your margins can stay in line?

We believe that we will be able to achieve that growth rate or better and our cost structure is very sticky. We don't see us growing costs commensurate with sales. For example, we just started drop shipping from our contract manufactures in the far east to customers in the far east, to customers in Europe, so this is something new for us. But we rely heavily on our contract manufacturers. We have a good engineering department here that we rely on and we keep full. We don't see us adding to that, however, so our cost structure is very sticky.

I'm not trying to pin you down but I was a little confused as to the response. Are you saying that once everything gets well that the market is conducive to a 25% to 50% yearly growth rate?

Oh, sorry, I didn't catch that. So I will differentiate. On the DeviceLinx product line we were seeing growth in the mid-teens before the economic downturn and then with ManageLinx, of course, we are going to be, instead of selling point products, if you will, we will be selling more business solutions. We will be selling to larger customers. We would expect larger POs, and we will be cutting into the dollars that are currently spent on truck rolls as well as skilled technicians to send on the road. So we continue to be in those evaluation cycles. They are moving along well but we think that we are positioned well on our traditional products as well as our new products.

All right. Thank you very much.

Thanks, Mark.

Thanks, Mark.

(Operator Instructions). And there are no further questions at this time.

Thank you, Tonya. I'd like to thank everyone for your participation on our call today and we look forward to speaking with you next quarter. Thank you.

Thank you.