Neonode Inc (NEON) 2004 Q3 法說會逐字稿

Good morning, my name is Nicole, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the SBE third quarter 2004 results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. If you would like to ask a question during this time, simply press star and then the number 1 on your telephone keypad.

If you would like to withdraw your question, press the pound key. I would now like to turn the conference over to your moderator, Mr. Bill Heye. Sir, you may begin.

Thank you, and thank all of you for joining us this morning. David Brunton, our Chief Financial Officer is with me, and we'll start the format this morning by having Dave discussing our financial results, and then I will follow that with significant events of the quarter. With that, here's Dave.

Good morning. This is David Brunton, and thank you for joining us today for SBE's third quarter earnings call. By now, you should have received a fax or seen the full release on the website. If not, please feel free to call Judy at 925-355-7602 and she'll be happy to fax you one right away. As a reminder, this conference may contain forward-looking statements that are subject to risks and uncertainties including, among others, those described in the [inaudible] report on 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'd like to quickly review our results for the 3- and 9-months ended July 31, 2004. Net sales for the third quarter of 2004 were 2.9 million, compared to 1.6 million in the third quarter of 2003. And net sales for the 9 months just ended were 8.8 million compared to 5.2 million for the same period last year. During the quarter, we shipped 1.2 million of VME products and 400,000 of our C-4 adapter products to our largest customer, HP, compared to shipping 800,000 of VME and no adapter products to HP in the third quarter of last year.

We will be shipping an additional 1.6 million of VME products to HP, split approximately even over our fourth quarter of 2004 and the first quarter of 2005. Our gross margin for the fourth, third quarter of 2004 was 53% compared to 66% for the same quarter in 2003. And our gross margin for the 9 months ended July 31, 2004 was 54% compared to 62% reported for the same period in 2003.

The decrease is due to an overall reduction in the gross margin attributable to the sale of VME products to HP, combined with approximately $102,000 of noncash quarterly amortization of the intellectual property acquired in the Antares acquisition in the fourth quarter of fiscal 2003. Our gross margin on the VME sales to HP for the quarter was 72% compared to 100% in the same quarter in 2003. Due in part to sales of, in 2003 of previously written down inventory.

As you may remember, we wrote down the entire HP inventory that we had on hand when we received the end-of-life purchase order from HP in 2002. Subsequently, over fiscal 2003 and 2004, we received additional purchase orders from HP, and over that time have shipped most of the written-down inventory. We have also seen some slight erosion in gross margin due to higher raw material and manufacturing costs. Last quarter we spoke about the need to take an inventory position on certain critical components to help counteract component delivery lead time and price increase issues.

Because we decided to take this inventory position in critical components, we have seen increases in our inventory balances - balance at the end of this quarter. We continue to have limited visibility into our customer product demands, so our critical inventory purchase plan is based on our best estimates of current customer demand. Total operating expenses in the third quarter of 2004 were 1.5 million, compared to 1 million in the same period of fiscal 2003.

For the 9 months ended July 31, '04, operating expenses were 4.1 million compared to 3 million in the same period 1 year ago. The increase in operating expenses is primarily due to increases in the staffing levels of our engineering group and the initiation of product marketing programs. As I stated in last quarter's investor call, we are pursuing a policy of investment in new product research and development, and have added engineering staff to execute this plan.

In addition, we have an ongoing program of product advertising and industry tradeship participation. In the last 9 months, we have participated in numerous industry shows, including RTC shows around the country, the Sun conference, [Sea Bit] in Europe, Embedded Systems Conference, NetWorld, Interop, Supercom and most recently at the Linux show last month. With our operating expense levels running at approximately 1.5 million per quarter, our projected operating cash flow break-even point is approximately 2.4 to 2.6 million in top-line revenue, and our quarterly net income break-even point is approximately 2.7 to 2.8 million in net sales at a projected gross margin ranging from 53 to 55%.

Our operations continue to generate a modest net income. For the quarter, we had net income of $79,000 or 2 cents per share basic and 1 cent per share fully diluted. Compared to net income of 143,000 or 3 cents per share basic and diluted in the third quarter of 2003. The net income for the third quarter last year included a $154,000 reversal of previously-recorded restructuring expenses.

For the 9 months, we had net income of $660,000 or 13 cents basic and 11 cents diluted, respectively. Compared to net income of 284,000 or 7 cents per share basic and diluted for the same 9 month period in the previous year. We have approximately 6 million diluted shares outstanding, compared to 4.3 million last year at this time.

During the nine months just ended, the Company's operations used approximately 270,000 in cash. We saw an increase in our quarterly ending trade receivables because of large shipments to HP at the very end of the quarter. We also purchased some inventory during the quarter to help hedge against key component price increases and to have product available for shipment to our distributors in the fourth quarter.

During the same 9 month period, the Company was the beneficiary of just under $600,000 in cash proceeds from financing activities such as employee and investors exercising stock options and stock warrants, plus the repayment of an officer shareholder note. During the period, we used approximately $200,000 in cash to purchase software and engineering design and test equipment. In May, we renewed our $1 million bank working capital credit facility for a 1 year period.

We have not drawn down on this credit line, nor do we see in a near-term need to do so. However, the credit line is available if we need cash to fund inventory purchases or to fund other working capital requirements. We continue to generate adequate cash flow and have sufficient liquidity to fund our business plan.

We ended the third quarter of fiscal 2004 with a sales backlog of 3.9 million cash on hand of 1.5 million, no debt, and working capital of 5.3 million; compared to a backlog of 4.1 million, cash of 1.4 million in working capital, 3.9 million at October 31, 2003. This concludes my comments on the historical information for the 3 and 9 months period for the first - fiscal 2004. At this point, I want to share with you some guidance information for the remainder 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 be at the lower end of our previously-communicated range of 12 million to $14 million for the year.

And diluted earnings per share on a common stock equivalence of 6.1 million shares for the year will range between 12 and 14 cents. This EPS guidance is a reduction from our previous guidance of 17 to 23 cents per share due to a combination of lower than projected revenues and a higher than projected number of shares that are included in our diluted EPS calculation.

Until our backlog of customer design wins reaches production volumes, our customer ordering patterns will remain inconsistent. At times, causing fluctuations in our current quarter-to-quarter revenues and results from operations.

This guidance is based on, upon the current backlog, forecast and expense levels, keeping in mind that visibility is poor and forecasts are subject to frequent changes. This guidance is our best estimate for the remainder of fiscal 2004.

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

Thank you. To start, I'd like to comment on SBE's strategy. We're actively pursuing the strategy of nourishing our core business in the embedded telecom market space while expanding into the [inaudible] space.

Let me talk first about our base embedded telecom business. We continue to supply a lot of product to HP, which goes into Motorola's cellular systems. Much of this is VME-based, but a rising percentage is in our newer PMC format cards. This latter category has been increasing over and above what we had expected, indicating that Motorola's newer systems are gaining in volume.

Other based business for us lies in what we shipped in Nortel for their VPM, which is Virtual Private Network equipment, in addition to the wide variety of connectivity cards that we currently shipped to them, we're engaged with them on new designs that are security-based. Success here will lead to an expansion of our business with them and will connect us with additional Nortel sites.

A third leg of our current business is our shipments to a customer that provides class 5 switches that enable service providers in small communities to deliver a wide range of VoIP, Legacy TDM and next-generation telephony services. This business has been picking up for us and here again, we're engaged in new designs with them that will expand our volume there, especially in VoIP.

In the embedded telecom space, we registered a design win this quarter with the wireless direct provider on the East Coast. In this equipment we will provide our both our base processor platform, which is the Highwire card, as well as various Wan connectivity of T1/T3 capability. So, in summary, regarding our base business, we're doing well in those pockets of the telecom market that are alive and expanding. These include the already-mentioned cellular, VPM, data voice gate raise, but also include other customers in [inaudible], VoIP media gateways, emergency 911, and voice conferencing.

We continue to bring out new products and having introduced this quarter a 24-channel T1 card that integrates seamlessly with our Highwire processor card. We continue spending a large percentage of revenue - a large percentage of our revenue on R&D in our base business, and it is well-prepared for wider expansion of demand in this market when it occurs. Now, let me turn to our work in the TOE and ISCSCI space. First a word of explanation. TOE stands for TCPIP Offload Engine, and is a PCI card that plugs into both Linux and [inaudible] based server. It is a 2-port special gigabit ethernet card that is used in lieu of a standard gigabit ethernet card and by a special onboard processing, the TOE card offloads the CPU and the server from tedious TCIP protocol processing.

This gives back CPU cycles to the server and in measured tests, our TOE card offloads as much as 77% of the CPUs load, thus giving back a huge amount of capacity to the relatively expensive server in which it operates. TOE cards are applicable to many high-traffic situations. The two of most interest to us are server-to-server and storage.

Server-to-server applications are such that they occur at a Yahoo! or Google server center where they're huge in number of inquiries coming in, or even at a business where there is a high volume of - ORACLE inquiries. The second application of TOE may require even higher volume of units and that is in the storage arena. The technology of ISCSCI is coming to the fore after years of development and perfecting.

The INISCSCI stands for IP, and specifically, ISCSCI provides the ability to transmit data into remote storage via IP lines. This is a major improvement over most installations today where the servers are directly attached to the rotating storage - their disk forms. Now, with ISCSCI, it's possible not only do you have flexibility to local storage - that is in the same building, but also to set up efficient off site storage.

There are multiple demands in the market today that cause a major interest in ISCSCI. The first is massively expanded record keeping--such as caused by Sarbanes-Oxley regulations, and the need to keep many records such as e-mail for extended periods of time. The second is security considerations that require off site storage. Backup systems today are being installed by businesses all the way down to the small shops with 10 or more employees.

And in performing the ISCSCI function, it turns out ISCSCI causes a flood of data to be pushed over in ethernet or other IP pipe, and that is where TOE comes in. Due to the high volume of traffic, ISCSCI really can not operate efficiently without the TOE being in place. Without TOE, ISCSCI is slowed down and never reaches its full transfer rate.

And as we previously announced, SBE has been collaborating with PyX Technologies, who is a local firm, who has developed ISCSCI software with ERL2 capability. ERL stands for Error Recovery Level, and ERL2 is the highest capability in ISCSCI. That is, the ERL 2 software provides the - extremely efficient error recovery, which is an essential ingredient when data is being pumped over IP lines on a remote basis.

SBE's TOE and PyX's ISCSCI are now seamlessly integrated and we have been demoing these in field trials which we have been jointly conducting. Initial results over a small - only a small sample of perspective customers have been very encouraging. The TOE and ISCSCI operate well together. Although SBE's TOE has been utilizing a programmable processor in field trials, we're expecting a delivery of basic versions in the coming month of September. So to summarize this morning, SBE is actively pursuing its strategy of enhancing its embedded telecom business with new products and design wins. At the same time, we're pushing our TOE into new space, and expect to be able to report on our progress in this area in the coming months. Thank you, and I will now turn the call back to the operator who will handle the question side. Nicole?

At this time, I would like to remind everyone if you would like to ask a question, please press star then the number 1 on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Again, to ask a question, press star 1 on your telephone keypad. There are no questions at this time.

Gentlemen, we'd be glad to entertain questions, but if we've answered most of what you were looking for this morning, we'd be glad to talk to any of you that care to call in. We thank you for joining SBE this morning, and thank you, we look forward to talking to you next quarter.

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