Neonode Inc (NEON) 2004 Q1 法說會逐字稿

At this time I like to welcome everyone to the SBE first quarter 2004 results conference call. (OPERATOR INSTRUCTIONS) Thank you. Mr. Heye, you may begin your conference.

Thank you and welcome to SBE's first quarter 2004 conference call. We appreciate your joining us this morning. Dave Brunton, our Chief Financial Officer, is with me, and I'm going to ask Dave to start the discussion today by reviewing our financial results, and then I will discuss other significant events of the Company. And with that, I will turn the call over to Dave.

Good morning. This is Dave Brunton, and thank you for joining us today for SBE's first quarter 2004 earnings conference call.

If you would like to receive a fax or email copy of the full earnings press release, please feel free to contact Judy at 925-355-7602 and she will be happy to send 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, 2003 and subsequent filings filed with the Securities and Exchange Commission. Actual results may differ materially from those described during the call.

I'm going to start with a review of our results for our first quarter ended January 31, 2004.

Our net sales for the first quarter of 2004 were $3 million, compared to 1.9 million in the first quarter of 2003 and 2.2 million in the last quarter, which was our fourth quarter 2003.

For the quarter we shipped $1.3 million of VME products to the Hewlett-Packard Company, compared to 800,000 in the first quarter a year ago and 500,000 in the fourth quarter of fiscal 2003. We shipped an additional $700,000 of VME products in February 2004. The February shipment closed out the latest purchase order for VME products from HP. We continue to ship other adapter products to HP.

In addition, we saw an increase in our shipments of our adapter products to Nortel. In the quarter we shipped 600,000 in adapter products to Nortel, compared to 250,000 in the first quarter last year. Our current sales backlog for Nortel is currently $350,000, compared to 109,000 at the same time last year. In the near-term we expect to see our quarterly shipments to Nortel to be approximately 4 to $500,000.

Two of our newer adapter products have been designed into a new family of Nortel router products that is expected to go into production in the latter part of this year. If the rollout of this new family of routers is successful, we could see some increases in our expected revenue in the latter part of fiscal 2004 to early 2005.

Also during the quarter we shipped $314,000 of Antares Ethernet and storage products, and ended the quarter with a sales backlog for Antares adapters of about $133,000. Bill will talk more about customer specifics later.

For the quarter we reported net income of $527,000 or 11 and 9 cents per share basic and diluted, compared to net income of 91,000 or 2 cents per share basic and diluted in the first quarter of 2003.

For the quarter just ended we did record a $239,000 reversal of a loan valuation allowance that was booked in fiscal 2002. The principal interest balance associated with this note have been paid in full and the note has been retired. Excluding this item, our net income for the quarter would have been $288,000 or 5 cents per share diluted.

Our gross profit margin for the quarter was 55 percent, compared to 61 percent gross profit margin for the first quarter of 2003. The decrease in our gross profit margin in fiscal 2004 compared to 2003 is partially due to the inclusion of $100,000 in non-cash intellectual property amortization expense that is included in our cost of goods in the first quarter of fiscal 2004. In the fourth quarter of fiscal 2003 we recorded intellectual property assets related to the current and future product designs we acquired when we purchased the assets of Antares Microsystems. We will continue to amortize the intellectual property at the rate of $100,000 per quarter for the next ten quarters. Excluding the amortization expense, our gross profit margin would have been 59 percent.

As you know, our gross profit margin is highly dependent upon our product mix, raw material pricing and production department utilization rates. We expect our future gross profit margins to settle in the mid-50 percent range.

Our total operating expenses for the first quarter '04 were 1.1 million, compared to $1 million in the first quarter of 2003. Excluding the $239,000 reversal of the loan valuation allowance discussed previously, our operating expenses would have been $1.4 million, which is comparable to our last fiscal quarter. As you may remember, in the fourth quarter of fiscal 2003 we added approximately $300,000 in ongoing quarterly operating expense related to the Antares acquisition. At the end of the first quarter, in order to keep up with the increase in our customer development activities, we hired three additional software engineers, and as a result we expect to see a slight increase in our future operating expenses.

We ended the quarter with cash and cash equivalents of $1 million, no debt, and working capital of 4.9 million, compared to cash of 1.4 million and working capital of 3.9 million at October 31, 2003. The reduction of our cash balance is primarily due to an increase from 1.8 million to 3.3 million in our trade accounts receivables from the previous quarter to the end of our first quarter. The increase in our trade AR is due to the increase in sales activity during the first quarter as compared to the fourth quarter of last year. We shipped a significant amount of product in the last month of the quarter and as of quarter-end had not yet received any payment from our largest customers. During the first three weeks of February we did receive substantial customer payments related to the first quarter shipments. We also saw an increase in our trade accounts payable from 700,000 at October 31 to 1.4 million as of January 31. The increase is due primarily to our receipt of finished goods inventory from our contract manufacturers during the mid to latter part of January 2004. In these instances we actively manage our working capital to best match cash payments to vendors with cash receipts from customers.

We ended the quarter with a sales backlog of 3.6 million, compared to 1.2 million at the same time last year. A substantial portion of this backlog will be shipped during our second quarter. Our customers continue to focus on the near-term, with very little ordering activity going out beyond to three months in the future.

We expect our working capital will be sufficient to fund our ongoing operations and the growth of the Company. We do have a working capital line of credit with a bank if needed. However, our current plans and projections do not include any requirements to draw down on this available credit line.

That concludes my comment on the historical and quarterly information for the first quarter of fiscal 2004. At this point I want to share some guidance information for the remaining part of fiscal 2004.

Based on our current visibility into the state of our business and the overall marketplace, we continue to expect revenue growth and profitability through the remainder of 2004. Based primarily on the strength of our legacy customers, we anticipate net sales for fiscal 2004 to range between 12 million and $14 million and diluted earnings per share on common stock equivalents of 6.1 million shares for the year will range between 17 cents and 30 cents.

Until our backlog of customer design wins reaches production volumes our customer ordering patterns will remain inconsistent, at times causing fluctuations in our quarter-to-quarter revenue and results from operations. Although we only provide guidance in terms of annual results, we will update our performance against this annual forecast on a quarterly basis. Based on sales activities, current backlog and forecasts, we are on plan.

As always, we remain committed to taking the actions necessary to remain profitable to in the near-term, while positioning the Company for long-term growth. This guidance is based upon the current backlog, forecast and expense levels, keeping in mind that visibility into the future remains poor, and in this difficult business climate forecasts change frequently. This guidance is our best estimate for fiscal 2004.

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

Thank you. We feel very good at SBE coming off a solid and profitable first quarter of 2004. The important indicators of basic demand, such as spending by businesses, have been pointing upward for about two quarters now and we are seeing the results of this as our customers in telecommunications security and in storage for off-site data security are ramping up. We see continuing expansion of cellular infrastructure as Motorola wins large contracts on a continuing basis for their CDMA systems in China, also as Nextel adds highest capacity around the US, and as almost every cellular service provider is adding data transmission features to phone service. As you know, we sell both VME and PMC-based products into HP and from there into Motorola cellular.

VoIP -- or Voice over IP -- is a hot topic, not only to the many upstart service providers, but also with established firms such as Verizon. Verizon recently ordered $1 billion contract to Nortel for network upgrading including VoIP. SBE sells both WAN and LAN cards to Nortel for their VPN -- virtual private network -- family of products. VPN is required in most VoIP systems to provide encrypted tunneling for voice and data.

In a major move to bring down the cost for telephone voice channel we at SBE introduced in this just completed quarter of fully channelized T-3 card that outputs the full 672 channels of a T-3 line. This card has been sampled to Nortel for their newest model of VPN product.

WiFi demand is also up. We are selling to both traditional WiFi equipment providers, as well as another firm that furnishes WiFi to the home. The volumes with both of these categories of customers have been rising.

In spite of these pockets of hot activity, some of our customers remain cautious in their buying. Design wins that we won last year have been slow ramping up. Customers are cautiously building and selling. Everyone wants minimum inventory, but they expect immediate availability.

In this last quarter we in turn at SBE are finding lead-times for our components dramatically lengthening from the one and two week levels to eight and twelve and sixteen weeks. We consider this to be a sure sign of a pick up in the market, but it does pose near-term problems as we scramble to meet customer requirements.

In total we remain confident that our large backlog of design wins, combined with the growth in the edge of the network demand, will continue to propel SBE.

Let me turn for a moment to Antares. With two quarters of operation under our belt, we're very pleased with our Antares line of business and enterprise IT customers we now ship to. We do have crossover products moving in both directions. We are converting Antares Gigabit Ethernet and SCSI Fibre Channel products and Fibre Channel products to PMC format for our OEM customers. Dan Grey, our sales and marketing vice president, continues a stepped-up marketing program to get expanded SBE recognition among the many VARs who service and upgrade SUN and Linux equipment.

In addition to the 672 channel T-3 card I just mentioned, development activities moved forward in our TCP/IP Offload Engine or TOE product. We anticipate field testing of the product with numerous customers later this quarter.

Work has also progressed on a PCI encryption board that will provide both SSL and IP sec (ph) processing. That product will also be in customer hands this quarter.

In all segments of our OEM embedded business we're having good success with our HighWire processor platform, upon which can be fit any of our PMC cards -- T-1, T-3, serial. Applications here include the conference call center equipment that we are likely talking to you over this morning. In this application we have a HighWire 400 CM card plus channelized T-3s. Another application for this set of cards is the FAA's next generation air-to-ground voice data communications system that will be installed in all aircraft and in all traffic control centers within the next years. Our partnership with TimeSys Corporation in Pittsburgh has supplied the real-time operating system for many of these design wins. And as you have seen, we've recently announced another software partnership that will shorten our customers' design cycle, this with NComm of Salem, New Hampshire which provides WAN access device management codes that fits on top of SBE cards.

So in conclusion, this morning I would have to say that I'm cautiously optimistic as we move into our second fiscal quarter. We are seeing good signs of business activity and have high hopes that they will continue.

Thank you for joining us and Dave and I will now be glad to answer your questions or address your comments.

(OPERATOR INSTRUCTIONS) Austin Lewis (ph).

Great quarter. Could you talk -- I missed a little bit of the first part of the call, but could you talk a little bit about what's going on on the storage side of the business with design opportunities there?

As I had indicated, we're seeing increased demand in the storage side, given the move to network storage that is being made by a large number of firms, based partially on business reasons, but an awful lot on a security basis.

We are selling both SCSI and Fibre Channel products into that market today. And our products are mostly tuned at this point in time to the Sun Solaris customers that have large data centers and large systems. But we also supply the same cards to Linux customers.

So that part of the business is expanding for us and is part of what we're doing to increase our reach among the distribution VAR segments, how we do distribute that product. So that is our situation on the storage side.

Anything in the Serial ATA area that's exciting or new?

We see more of an activity that will happen in Serial Attached SCSI than we do in Serial ATA. We have a product that would fit both of those new serial storage applications that. But we believe that our market will consist primarily in the Serial Attached SCSI side. We have designs working both of those products and we would anticipate being able to talk about them in the latter part of this year.

Everything with TOE is on schedule?

Yes. One last comment on the storage side -- we do anticipate shipping about 750,000 to $1 million worth of storage product in this fiscal year.

In the TOE side, our TOE product continues to make progress and it's on plan. The product as it sits today is being tested internally at SBE, and we anticipate being able to test in Sun Labs in the latter part of this month of February. We do anticipate, as I indicated, before the quarter is over that we will have product in customer field trial. And at this point we have no reason to believe that the thing will not perform at the high count level for simultaneous conductivity that we had designed it for.

Great. Thanks a lot.

Jeff Childe (ph).

Could you tell me if Advanced TCA is something that is on your roadmap products that relate to that and whether the success of Advanced TCA platforms -- how it affects your business, whether it's successful or not?

Advanced TCA is a design which is primarily suited for large carrier applications and is more suited towards the center of the network than it is towards the edge of the network.

In the conference that we attended here within the last month -- the Bus and Board Conference [h -- Lucent and the larger carriers -- suppliers to the large carriers have all been pushing Advanced TCA for some time. They had a strong push on this last year. Given the slowness and that segment of the market, I don't think an awful lot of progress has been made, but more people are producing cards.

Our play in that area is going to be in the PMC or in the carrier card that will be mounted onto those Advanced TCA cards as opposed to the large cards themselves. We made contact at the conference in San Diego or in Long Beach with the people that are in that segment of the market.

So the next generation of PMC, which is like XMC, the upgrades to those form factors are the type of things you guys will be playing in?

That is correct. That form factor is slightly larger than the current PMC format. We can adapt easily to that. So the same products that we're supplying into other persons' large boards with our PMC cards is what we will play in that segment of the market.

Could you expand more about -- you mention the technology that's going to be used on almost every aircraft and aircraft traffic control systems. Can you expand on that a little bit?

Yes. We're dealing with and working with ITT in the Northeast. There are competing designs between ITT and Harris at this point in time. We won the design at ITT for this product. The product we will use -- and I have visited their lab and talked to their engineers on the subject -- the product will use the same frequency spectrum as the current aircraft communication in the 108 and up MHz range. It will provide voice and data over the same links today and will provide a data rate which will be sufficient for transmitting such things as clearances to the aircraft so they can get that off the voice channel.

And this product is caught up in a little bit of the funding issues and the political issues that are wrapped up with airlines themselves having to retrofit airplanes. At this point in time they expect to have a shoot out between the two competing designs -- ITT and Harris -- in the fall of this year, September through the end of the year, with some decisions presumably being made in the early part of '05. That business looks like one that will be a very long time in being installed around the world. It probably lasts for 10 to 15 years once it gets started.

Thank you.

Taylor Tompkins (ph).

Good quarter. The guidance, does that include any of the new routing products, Dave, that you mentioned?

The which?

The routing products you expect to sell later in the year.

No.

Do you still feel pretty good about future fallow-on orders, maybe from HP, for other VME products due to all the activity in China?

We have been alerted by the HP people and have had that question asked to us about the inventory levels we have of critical piece parts for that product line. So we believe that people are somewhat anticipating additional volumes there. The CDMA product which Motorola has been selling into China is encouraging. And the Nextel product, as they have expanded that throughout the US into the consumer segment of the market, has also been encouraging. So we are awaiting some kind of word that might come out of that.

Okay. I just wanted to get -- as far as the guidance, I know it's hard to tell, but the 12 to 14 million, can you give us an idea as to what would make you hit a higher end of that?

The kind of things that hit the higher end certainly include the two largest customers we have -- HP and Nortel. But it also would be increased by a more frantic activity in the design win categories that we've already been into. Many of those customers are cautious today, as many are small customers supplying the edge of the network products. On the other hand, some of them have started taking off. If more of them take off, we will be on the higher end of that. We have also anticipated low volumes in the numbers that Dave gave as guidance for the total product. If that product moves faster, then that would also have an impact on the upside.

Okay. Keep it up.

At this time there are no further questions. Mr. Heye, are there any closing remarks?

Gentlemen, we appreciate your joining us this morning, and we certainly look forward to talking to you again next quarter. Thank you.

Thank you. This concludes today's SBE first quarter 2004 results conference call. You may now disconnect.