Neonode Inc (NEON) 2003 Q3 法說會逐字稿

Good morning. My name is April and I will be your conference facilitator today. At this time I would like to welcome everyone to the third quarter 2003 earnings conference call. (OPERATOR INSTRUCTIONS). I would now like to turn the call over to Mr. Bill Heye, President and CEO of SBE Incorporated.

Thank you all for joining us today. Dave Brunton, our Chief Financial Officer, is with me and we will follow our usual format of having Dave review our financial results for the quarter, and then I will comment on the Company's activities. With that, here's Dave.

Good morning. This is Dave Brunton. And thank you for joining us today for SBE's third quarter 2003 conference call. By now you should have all seen the full release. If you have not, please feel free to contact Judy at 925-355-7602, and she will be happy to fax you a copy.

As a reminder, this conference call may contain forward-looking statements that are subject to risks and uncertainties, including among others, those described in the annual report on Form 10-K for the year ended October 31, 2002, and subsequent filings filed with the SEC. Actual results may differ materially from those described during the call.

I'm going to start with a quick review of our results for the three and nine months ended July 31, 2003. Our net sales for the third quarter of 2003 were 1.6 million compared to 2.8 million in the third quarter of 2002, and 1.8 million last quarter. For the quarter, our sales to the Hewlett-Packard Company of VME products were $803,000 compared to $1.1 million a year ago, and $963,000 last quarter. Bill will discuss HP in more detail during his presentation.

We did see a reduction in our adapter sales compared to a year ago, primarily due to a reduction in the shipments to Nortel. Last year Nortel purchased a total of $414,000 in the third quarter compared to $180,000 for the quarter just ended. Our adapters are designed into the new Nortel routers and VPN boxes for the edge of the network enterprise marketplace. The decrease in sales to Nortel is indicative of the continued sluggishness of sales of equipment to the business customers. We did recently received a purchase order for approximately $135,000 for shipments of adapter products to Nortel's contract manufacturer in our fourth quarter.

We also saw a decrease in sales to Lockheed Martin. In the third quarter of fiscal 2002 we shipped $415,000 in the VME products to Lockheed Martin for the FAA control tower color display systems, compared to just $39,000 this past quarter. Lockheed continues to deploy the systems, but the velocity of deployment has slowed considerably.

The topline revenue stream from Antares, the recent Antares acquisition, has been averaging around a $500,000 for the past couple of quarters. As recently as 2001 Antares sold approximately $5 million per year in products, primarily ethernet and storage products to the Sun marketplace. For the past year the Antares sales effort has been hampered by a lack of capital. The technology underpinnings of the Antares products are excellent. And we're in the process by resurrecting the sales and marketing programs to return to previous sales levels. Bill will further discuss the Antares acquisition in his section.

For the quarter we reported net income of $141,000, or 3 cents per share, compared to a net loss of 188,000, or 4 cents per share, in the third quarter of '02. Net sales for the nine months just ended were 5.2 million compared to 5.8 million for the same period last year. We reported net income of $284,000, or 7 cents per share, in the first nine months of fiscal 2003 compared to a net loss of 2.4 million, or 64 cents per share, for the same period last year.

Our gross profit margin for the third quarter just ended was 66 percent compared to a gross profit margin for the third quarter of 2002 of 61 percent, and compared to 62 percent gross profit margin last quarter. Our gross profit margin for the nine months was 62 percent compared to 57 percent for the same nine month period it in fiscal 2002. Our gross profit margin is highly dependent upon our product mix, raw material pricing and production department utilization rates.

During the quarter just ended, we were able to sell some VME products to HP that we wrote off last fiscal year, at the time HP placed its end of life order in October of 2002. The resultant sale of this 100 percent gross margin product increased our overall profit margin for the quarter. The older VME products tend to have a higher gross profit margin, and we expect over time these products will be phased out and they will be replaced with a higher concentration of adapter and ethernet products with a gross profit margin in the 55 percent range. The Antares gross profit margin has traditionally been in the 55 to 58 percent range.

Total operating expenses for the third quarter of 2003 were $922,000 compared to 1.9 million in 2002. In the third quarter just ended we recorded an adjustment to previously expensed restructuring charges that is related to an over accrual of expected leased and common area maintenance charges associated with previously vacated leased office space. The adjustment reduced our overall operating expenses by $154,000 for the quarter. Without this adjustment, our operating expenses would have been 1.1 million, virtually unchanged from last quarter.

With the Antares acquisition we hired six of their personal, primarily marketing and engineering professionals. And expect the overall operating expenses associated with these new employees to be approximately 200,000 to $250,000 per quarter.

Total operating expenses for the nine months ended July 31, 2003 were $3 million compared to 5.8 million in 2002. Without the previously discussed onetime adjustment, our operating expenses would have been 3.2 million. We ended the third quarter 2003 with cash and cash equivalents of $2 million, no debt, and working capital of $4 million compared to cash of 1.6 million, and working capital of 3 million last quarter.

This concludes my comments on the historical and quarterly information for the third quarter of fiscal 2003. At this point, I want to share with you some guidance information for the remainder of fiscal 2003. Assuming current market conditions continue, we anticipate our total sales of SBE products, including 400 to $500,000 of products from the Antares acquisition, for our fourth quarter to range between 2.2 and $2.4 million. For the longer-term, we are dependent on renewed spending by business on data and telecommunications, and at this point we have poor visibility into our customers' future order patterns.

For the next quarter we do expect our gross profit margin will range between 58 percent to 61 percent of sales, and our quarterly operating expenses, including the operating expenses related to the Antares acquisition, to range between 1.3 and $1.4 million. We remain committed to taking the actions necessary to remain profitable in the near-term, while positioning for long-term growth. This guidance is based upon our current backlog, forecasts and expense levels. Keeping in mind that visibility is poor, and in this difficult business climate, forecasts change frequently. This guidance is our best estimate for the fourth quarter of fiscal 2003.

That concludes my comments. I will turn the call back to Bill. Bill?

Thank you, Dave. I know that comments about the telecom market are sounding like a broken record these days. We're seeing an awful lot of design activity as our customers bring out new equipment, but they are not leading to production in a fast manner. Our customers' customers of the business community, which is still hesitant to spend capital on upgraded equipment except in a few circumstances. I will comment on some of those.

In clarification of design activity, we shipped to 14 new customers this quarter, which compares favorably to 16 new customers in the prior quarter. Four of these in this quarter qualified for our definition of design wins, which is $400,000 minimum annual revenue. Another four of them showed strategic value, which means that we think they have good volume behind them, just less than the $400,000. These are the end-user applications where this activity is taking place.

The first of these is fixed wireless. A customer of ours is using Wi-Fi, 802.11, to deliver broadband to the home; a novel approach and one that could lead to some pretty good volume. Second, is an emergency 911 system, which is location finding for cellular providers, which is due to be in place in the fourth quarter this year based on legislation that has been passed at the federal level. The third is a high-performance low-cost Linux router, where the Linux system is being used to beat out Cisco in many applications.

The next is a banking and financial gateway. The end customer of this is one of the top 20 banks in the U.S., and the product here will be used to connect all branches into a central system. The next one is a VoIP product, that is voice over Internet protocol, which is a VoIP gateway in Australia. The next one is an upgraded call concentrator for telecom service providers. And the last one, which I am citing here, is Tetra equipment for Europe. Tetra is a fire, police, emergency services communication system that is used in multiple European countries that allows frequency sharing.

As I mentioned, we're very pleased with our wins in the new design activity, and we're patiently waiting for businesses to spend money to spark telecom. With our design win backlog in breadth as well as in numbers, we feel confident that we will see good volume when spending reoccurs by the business community.

Let me make a comment about our largest customer, HP. Although HP end of lifed one of their NonStop computing systems earlier this year, they came back to us in July and indicated that their customer had a large cellular production order for China that would use them, that is HP, to cause them to buy additional equipment from SBE. We're currently waiting on this multi-million dollar order placement which has not arrived yet.

Now to the bright light this quarter, and that is Antares. As previously announced, we acquired the assets of Antares Microsystems of Campbell, California on August 7. We're particularly pleased with this because the people of Antares developed and sold an impressive product line into the enterprise and IT marketplace, specifically into high-end servers. This is a market in which SBE has not participated significantly in the past.

Antares product have a strong presence in both Sun Solaris and in Linux, but their relationship with Sun has been a great close one. The large installed base of Sun servers has been fertile ground for Antares' gigabit ethernet and storage adapter products. Storage adopter shipping today includes SCSI and Fibre Channel, with serial SCSI and serial ATA and development not far behind. Antares technology shipping today includes a software feature of port aggregation and failover which comes standard on all multiport Antares product.

An exciting product slated for release later this year is Antares' TOE product. TOE stands for TCP/IP offload engine. While there are products on the market today with TOE functionality, the Antares product raises performance to multiples of what exists currently in the market. Antares' TOE is specifically designed for server to server ethernet communications.

The IT administrator at the user shop has simply to remove current gigabit ethernet cards from a server, and substitute the Antares' TOE ethernet card. Server capacity, or throughput, is immediately increased by a significant factor, allowing the most significant part of this thing, and that is the postponement of additional server buys by the administrator. At this point in the Antares TOE product had been sampled to selected customers for evaluation. Evaluation at this point in time has proceeded quite well.

And I'm pleased to say that Carl Munio, one of the principles of Antares, has joined SBE as Vice President of Engineering reporting to me. Of the six person joining SBE from Antares, four are from Carl's engineering group, one is from marketing, and one from production. You'll also recall that Yee-Ling Chin came to SBE recently as our Vice President of Marketing. Yee-Ling comes from one of our competitors with great experience in the very marketing areas that will be utilized as we mount a distribution push on Antares products, as well as additional marketing pushes on SBE's OEM products.

We anticipate very good cross fertilization of both customers and products between SBE and Antares. At this time we believe that SBE's strong sales and support organization will shortly add at least a third to Antares' current revenue. As Dave mentioned, Antares' current revenue run rate is between 2 and $3 million annually. In our next fiscal year we expect between 3 and $4 million revenue from Antares' current products. And TOE and other new products should add substantially to that, but we have not estimated that amount.

So in summary, we're pleased to see good market activity in enterprise and IT today. This market is characterized by quick closure of winning a piece of business to seeing revenue, which is quite a contrast to what our current OEM market, where revenue takes six to eighteen months to materialize. So we expect to, by next quarter when we report on the business, to have more to report on our WAN, LAN and storage products business.

Thank you. And Dave and I will now be glad to answer questions.

(OPERATOR INSTRUCTIONS). Your first question comes from Evan Greenberg (ph).

A question about the new products of Antares. Would this entail having an entirely different sales force? It sounds like a lot of the clients -- some of the clients are the same, because I know there is a lot of storage in telco applications. But you've got a lot of NAS and SAN products from different types of vendors, like the network appliances and the Dot Hill's and companies like that, leading to an almost entirely different sales force. It is there overlap there? Can you deploy your current salesforce in that area, or is it different expertise?

We will use our current sales force, which consists of two people in the field today. And we're actually adding a third person to that organization. The distribution of the Antares products is different from our OEM products in that they are sold typically to distributors and to resellers. The resellers and the value added resellers are the people that service the IT centers and the server farms are out there. So Antares has already built that channel. And although they did not have people in the field, they had relationships with a number of the significant distributors in the U.S, as well as in Europe, and a couple of distributors in Japan. We anticipate continuing that and will, in fact, be able to expand on it because of the -- our putting our own sales people into the middle of it.

Dan Grey, our VP of Marketing and Sales, has had experience with the distribution channel that Antares uses in some of his prior experience before coming back to SBE. So his personal relationships with many of the larger distributors, we feel quite confident will be moving us along rather rapidly into their channel.

All right. Thanks a lot.

There are no further question at this time. I'm sorry, you do have a question from of Obsheen Alp (ph).

What is the name?

Obsheen. Hi gentlemen.

Please go ahead.

My question is about the evaluation of Antares. How did you value Antares Microsystems, and what is the EBITDA multiple that you paid for this company?

Well, that is an interesting question because, if you saw the 8-K or some of the press releases, Antares was a company that was having some financial difficulties. And they ultimately assigned their assets to under an assignment for benefit of creditors, which is a, I will call it a short form California statute for short form bankruptcy filing. So we actually paid $75,000 for the assets of Antares.

And what we purchased were obviously some computer hardware, intellectual property, but really the engineering and the customers for that. Now there are the other costs associated with concluding this transaction, such as audit costs to fulfill our SEC requirements, legal and some other things. So the total cost included in all of our expenses and the initial purchase price is probably around $500,000 to 600,000, probably at the top end. So you can see that on a projected 3 to $4 million revenue stream out of their base business, it is a pretty low multiple.

And also in your guidance you said there were 4 or $500,000 of revenue is going to come from Antares. And do you expect your gross margins to be around 58 to 61? That means Antares has a gross margin around 60 percent or something?

No. now I'm talking about the total company, right? And so, Antares' gross margin will be in the 55 to 58 percent range. But the combined mix of the total product sales will be in the 58 to 61 percent range.

Okay. All right. Thank you.

Your next question comes from Ray Cachopa (ph).

Hi guys. Congratulations on the Antares purchase. I was wondering if you could talk a little bit about the production, how that is done is done? What is done outside, what is done inside? What the utilization rates are today? And if business does ramp up going forward, how will you handle that on a personnel basis, and as you need more people and even working capital?

Okay. I would glad to answer that. The situation with regard to our production is that we outsource to contract manufacturers here in the Bay Area. That has been our model, and is also the model for the Antares side of the business. So we will continue doing that. I have visited our major contract manufacturer last week. And they are currently running at probably 30 to 40 percent capacity in their facility. They're located in Santa Clara. They have the capability, both from a technical point of view to do the assembly as well as test of both SBE's LAN products and the Antares acquired LAN and SCSI products. So we do not anticipate any problems in that regard.

With regard to the financing of this, we're going to be adding a little bit more inventory than what Antares has been able to afford in the past. So we will be adding to that side of our business as we move forward. But that will give us availability, which should provide some fairly quick revenue. Therefore, I do not anticipate any problems at all in ramp up.

We're not having difficulty right now with any lead times on piece parts. That could change as the industry starts moving in terms of volume, but we're not having any difficulty with either production capacity or piece parts today. So quick turns should not be a problem. And the nature of the distributors that Antares has used in the past is that they are typically stocking distributors, so there is some amount of inventory that they carry to handle immediate shipments to their customers.

And on the personnel side, can you talk about that as far as bringing people on as you ramp up, if necessary? And does the two salespeople include the new marketing person that you brought in?

No. When I'm talking about sales people, those are in the field; one person on the East Coast and one in the central area. The new person that we're hiring is for the Western area. The person that we're hiring in the Western area will undoubtedly have more pointed distribution experience, as well as OEM selling capability.

On the manufacturing side, we don't have to ramp up people. We essentially have two to three test technicians and one semi production person in the shop here today. One came from Antares and we had the other two people. So that is all we need from a production point of view, as well as somebody to do purchasing, and somebody to run the entire part, our VP of Operations. But we don't need to ramp up people in order to ramp up production.

So the production capabilities are just waiting in the wings, and with a little extra working capital you can ramp up on inventory and meet any future demand.

That's correct.

And we have a line of credit with Silicon Valley bank right now. And we are in full compliance with all of the covenants and everything, that if we need to draw down for short-term purposes to build some inventory for shipments, it is available. It is currently a $1 million line, but I can expand it to 3 million if need be. I've never drawn down on it. It has been sitting out there for a couple of years at this point, primarily for this gross spurt whenever it takes place, if we need to.

Ray, we would love the challenge of having to meet production ramp up, I can assure you.

Got you.

It does not look like it is a major problem with regard to either the people or the financing side of it.

Excellent, thank you.

By the way, I will make one comment about what I found at our contract manufacturer last week. He indicated that the big guy across the street, which happened to be an Intel facility, and he wouldn't mention it by name, but obvious to all of us that were in the room. It started ramping up their production. And I said, what does that mean? He says, I never know what it means about leading indicators, but he said when Intel starts moving their border level products, he said that is usually some sort of a sign to them that their business is going to be picking up.

So I have no idea what Intel products were in that range of what they produced there, whether they happened to be in the telcom side, communications, whenever. But it was encouraging to hear that kind of comment from somebody who had been in a relatively starved position, that is our contract manufacturer out there.

Okay, great. Thanks, guys and congratulations.

There are no further questions at this time.

Okay. With no further questions, we will conclude the call. We appreciate your interest in SBE, and look forward to speaking with you in the future. Thank you.

Thank you for joining today's conference call. You may now disconnect.