Neonode Inc (NEON) 2004 Q2 法說會逐字稿

At this time, I would like to welcome everyone to the SBE second-quarter 2004 conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there be a question-and-answer period. (OPERATOR INSTRUCTIONS).

Thank you. Mr. Heye, you may begin your conference.

Thank you, and welcome to SBE's second-quarter 2004 conference call. We thank you for joining us this morning. With me today is David Brunton, our Chief Financial Officer. I will ask Dave to start the discussion by reviewing our financial results. I will follow Dave, and discuss significant events of the quarter.

With that, here is Dave.

Good morning. This is Dave Brunton. Thank you for joining us today for SBE's second-quarter conference call. By now, you should have received a e-mail of the full release. If you have not, please feel free to contact Judy at 925-355-7602, and she will be happy to fax or e-mail a copy to you.

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. For the benefit of those who have just received the press release, I would like to quickly review our results for the three and six months ended April 30, 2004.

Net sales for our second quarter of 2004 were $3 million, compared to $1.8 million in the second quarter of 2003, and sales for the six months just ended were $5.9 million, compared to $3.6 million for the same period last year. In the quarter, we shipped $811,000 in VME products and $235,000 of our C4 adapter products to our largest customer, HP, compared to shipping $900,000 of VME and no adapter products to HP in the second quarter of last year. We also shipped in excess of $400,000 of adapter products to Nortel, compared to $86,000 in the same quarter last year. We do expect shipments to Nortel to be slightly lower next quarter, before picking up again in our fourth quarter, as their newest high-end router product family comes online.

HP and Nortel also constituted a substantial portion of our sales during the six-month period, as we shipped a total of 2.2 million of VME products to HP and approximately 900,000 of adapter products to Nortel in the six-month period November 2003 through April 30, 2004, compared to 1.6 million to HP and 300,000 to Nortel in the same six-month period last year.

In April 2004, we did receive another purchase order from HP for 2.9 million of VME products, of which 110,000 was shipped in the quarter just ended, with the remaining 2.8 million to be shipped over the next three quarters. At some point, orders from HP for our legacy VME products will come to an end. However, as long as HP continues to receive orders for their products, we will continue to supply them with the VME boards.

We continue to actively pursue a strategy of customer diversification, and are beginning to see our efforts pay off. Over the last 12 months, we have added 46 new customers, and in the last quarter we had eight customers purchase more than $100,000 in products, compared to only two in the same quarter last year. We also saw 12 customers moving to the $20,000 to $100,000 sales category, compared to seven in the second quarter of last year.

Our stocking distributors are also beginning to see an upsurge in their customer demand. This quarter saw a 250 percent increase in sales, from 102,000 to 361,000, to our distributors of WAN and LAN products, compared to the fourth quarter of fiscal 2003, when we first started shipping products to stocking distributors.

These are all encouraging signs that a heartbeat does exist in the communications industry. Although our legacy products and long-time customers continue to account for the majority of our revenue, we are beginning to see the signs that our newer products and design wins are starting to achieve market acceptance and move into production quantities. Our gross margin for the second quarter of 2004 was 52 percent, compared to 62 percent for the same quarter in 2003. Our gross margin for the six months just ended was 54 percent, compared to 61 percent last year. In both cases, the decrease in gross margin in fiscal 2004 compared to 2003 was partially due to the inclusion of $102,000 of quarterly non-cash intellectual property amortization expense in our cost of goods in fiscal 2004.

As you may remember, in the fourth quarter of fiscal 2003, we recorded intellectual property assets related to the current and future product designs acquired when we purchased the assets of Antares. We will continue to amortize the intellectual property at the rate of $102,000 per quarter for the next nine quarters. Excluding this non-cash amortization expense, the gross margin would have been 56 and 57 percent for the three and six months ended April 30, 2004. We have also seen some erosion in gross margin, due to slightly higher raw materials and manufacturing costs. Last quarter's cost of goods also had some one-time manufacturing tooling startup costs associated with our Antares product line.

As the overall demand for the embedded board-level products increases, we are beginning to see an increase in the order fulfillment leadtimes for some critical components such as memory, crystals, PCBs, et cetera. We are also seeing some of our vendors using this period of increased demand and short supply as an opportunity to push through some price increases. To help counteract the leadtime and price increase issues, we have decided to purchase certain critical components ahead of our customer orders. Although we continue to have limited visibility into our customers' product demand, our critical inventory purchase plan is based on our best estimate of current customer demand and their past ordering patterns. Because we have decided to take this inventory position in critical components, we could see some increases in our period-ending inventory amounts over the short run.

Our total operating expenses for the second quarter '04 were 1.5 million compared to 1.1 million in the same period of fiscal '03. For the six months ended April 30, 2004, operating expenses were 2.6 million, compared to 2.1 million for the same period last year. The increase in our operating expenses is primarily due to increases in our staffing levels of our engineering group and the initiation of some product marketing programs. We continue to pursue a policy of aggressive investment in new product research and development, and have ended engineering staff to execute this plan. Bill is going to talk a bit more about this later.

We are pleased to report that we have just completed our seventh consecutive quarter with net income. We had net income of 54,000 or 1 cent per share basic and diluted, compared to net income of 51,000 or 1 cent per share basic and diluted in our second quarter 2003. For the six months, we generated net income of 581,000 or 12 cents basic and 9 cents diluted, respectively, compared to net income of 143,000 or 4 cents per share basic and diluted for the same period last year.

During the first six months of fiscal 2004, employees exercised 185,000 stock options, with exercise price of $305,000. In addition, investors exercised 70,000 warrants to purchase stock at an exercise price of 116,000. Common stock equivalents, including both in-the-money vested (ph) employee stock options and investor warrants for the three and six months just ended, included in our calculation of diluted net income, were a little over $1 million for the three months and a little over $1.1 million for the six months.

Now, I'm going to move to liquidity. During the six months just ended, the Company's operations generated just under $600,000 in cash. The Company was also the beneficiary of just under $600,000 in cash proceeds from financing activities such as employing (ph) investors, exercising stock options and warrants and the repayment of a stockholder note. During the period, we used approximately 130,000 in cash to purchase software and engineering design and test equipment. This is quite an improvement from the 73,000 generated from operations and 51,000 from financing activities in the same six months last year. We continue to be in good standing related to our $1 million bank working capital credit facility. During the past year, we have not drawn down on the credit line, nor do we see a near-term need to do so. However, the credit line is available if we need cash to fund inventory purchases or fund other working capital requirements.

We continue to generate adequate cash flow and have sufficient liquidity to fund our business plan. We ended the quarter of fiscal 2004 with a sales backlog of $4.8 million, cash of $2.4 million, no debt and working capital of $5.1 million, compared to a backlog of $4.1 million, cash of $1.4 million and working capital of $3.9 million at October 31, 2003.

This concludes my comments on the historical three- and six-much information for the first two quarters of fiscal 2004. At this point, I want to share with you some guidance information for the remaining portion of fiscal 2004. Based on our current visibility into the state of our business and the overall marketplace, we expect revenue growth and profitability to continue for the remainder of fiscal 2004. Based primarily on the strength of our legacy customers, we anticipate net sales for 2004 to range between $12 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 23 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 our current sales activity, current backlog and forecast, we are on plan. As always, we remain committed to taking the actions necessary to remain profitable in the near term, while propositioning the Company for long-term growth.

This guidance is based on current backlog forecast and expense levels, keeping in mind that visibility continues to be poor in the difficult business climate, and the forecast could change frequently. This guidance is our best estimate for the remainder of fiscal 2004.

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

Thank you. This was a good quarter for SBE, and we're feeling positive as we enter the third quarter. We are profitable and generating cash, while spending the right amounts of product development and marketing sales activities. Our new products are coming along nicely, and I will talk more about that in a minute. On the customer side, we have been pleased to see the strong demand that HP is getting from Motorola Cellular. That produced the 2.9 million VME dollar (ph) order, and there are indications that additional units may be required as a follow-on to that. This is for VME product.

As I mentioned before, we shipped two different SBE products to HP. The second product is a PMC adapter card which goes into Motorola's phone system for Nextel. That program, too, has experienced a nice upturn in volume. As a result, our legacy business is showing a real plus at SBE.

Nortel, our second-largest customer, is on plan and meeting expectations on volume. It will be introducing new higher-capability VPN equipment this summer, which will utilize additional SBE adapter cards. Our third-largest customer is a European manufacturer of soft switches for small to medium metro central offices. To this customer, we sell a HighWire 400 processor platform card and a T1/E1 connectivity card which does SS7 processing. This customer has doubled their orders, and is forecasting -- experiencing strong demand and forecasting a doubling of their orders. As David just mentioned, we are also seeing expansion from our mid-sized customers, as prior design wins move into production.

On the marketing side, over the past six months, we have moved to an active program of product advertising an industry trade show participation. We have participated in multiple shows, including RTC real-time conferences around the country, the Sun Computer Conference, the CBIT (ph) show in Europe, the Embedded System Conference and, most recently, the Interop show in Las Vegas, and we will be at the SUPERCOMM in Chicago next month.

These marketing initiatives are providing opportunities for us to highlight new product rollouts, and to get in front of additional customers. We were also pleased during the quarter to have added a new European distributor for SBE products, which will significantly broaden our coverage in that market.

On the product side, our new fully channelized T3 card is finding new applications. One customer is utilizing the 672 channels of connectivity for their emergency 911 equipment that is being added to cellular locations around the country. Mandated by Congress, E-911 must be installed by all cellular providers by the end of this year.

We're selling a combination of our HighWire processor platform plus T3 PMC card to a vendor of voice conferencing equipment. For this application and other VoIP, voice over Internet protocol, applications are also investigating the addition of a DSD module that would give us a full range of capability.

Over the last several months, our TOE, which is the TCPIP offload engine card, has been thoroughly tested internally, and in a computer vendors lab, with very positive results. The card has performed beautifully, with a significant offloading of the CPU and the raising of data rates to line speed on Gigabit Ethernet connections. We also demo'd our TOE card in an iSCSI application at the just-completed Interop show in Vegas. As mentioned in our recent press release, SBE has partnered with PyX Technologies of Concord, California, who provides the software that runs on the initiator and target sides for iSCSI. Used in conjunction with SBE's TOE card, this provides for large data rates of transfer between remote locations. At the show, we demonstrated the capability of moving iSCSI over Wi-Fi back to the SBE location in our labs here in California, with full-frame video moving flawlessly from storage in California to the show. This hardware-software combination also provides full recovery from line interruptions on IP. This now expands our TOE market to the iSCSI side, as well as the server-to-server applications that we have previously targeted.

So, in conclusion, I'd like to say that we're optimistic about the telecom market. We are seeing better signs of business activity, and have expectations that they will continue. We expect to show continued progress on our new products and the progress of moving those into the market in the latter part of this summer and early fall.

Thank you, and Dave and I will now be glad to answer questions or address comments you may have.

(OPERATOR INSTRUCTIONS). There are no questions at this time.

Okay. I guess Dave and I covered it adequately. We would be glad to entertain any calls and questions that you might have during the quarter, with calls to either Dave or me, back here at SBE. So, if there is nothing further, we will be glad to conclude the call. Thank you. Thank you all for joining us.

This concludes today's conference call. You may now disconnect.