Neonode Inc (NEON) 2005 Q2 法說會逐字稿

Good morning and welcome to the second quarter 2005 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. (OPERATOR INSTRUCTIONS).

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

Good morning. This is Dan Grey, President and CEO of SBE. I would like to welcome shareholders, prospective shareholders, employees, and partners to SBE's second quarter fiscal 2005 investor conference call.

I'm with Dave Brunton, our Chief Financial Officer, and we are going to review SBE's financial results, product, and customer activities of the past fiscal quarter, future product directions, then open the floor for your questions.

To start I'd like to ask Dave to cover the financials.

Good morning. This is Dave Brunton and thank you for joining us today for SBE's second quarter conference call. 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, 2004, 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 reviewed the press release I would like to review our results for the 3 and 6 months ended April 30, 2005. To briefly summarize the quarter, we have begun to feel the effects of no longer shipping VME and adapter products to HP. In addition we are seeing weakening demand for the Antares adapter product line and we do not expect demand for these products to recover. A couple of bright spots have been the sales growth in our HighWire and non HP WAN product lines.

Our net sales for the second quarter 2005 were 1.7 million compared to 3 million in the second quarter 2004. And our net sales for the 6 months just ended was 4.5 million, compared to 5.9 million in the same period last year.

Last year, the second quarter included over 1 million in sales of VME and adapter products to HP and the 6 month period included over 2.5 million in sales of the same products to HP. As we have reported many times in the past, HP is no longer taking any of these products. We did have one final shipment of VME products to HP in our first quarter that totaled $1 million. We also saw the overall demand for our Antares adapter products drop significantly.

For the first 6 months last year we sold over $800,000 of Antares products, compared to only $330,000 for the 6 months just ended. The decrease in demand for these adapters is directly tied to the financial problems faced by Sun Microsystems and the fact that we are no longer investing in upgrading the designs or software for these adapters. Demand has dried up and it is not expected to recover.

We are pleased to see that the sale of our HighWire products continue to increase. Sales of HighWire increased from 320,000 in the second quarter last year to 680,000 for the quarter just ended, and from 476,000 to 1.3 million for the comparable 6 month periods. Dan will talk more about products and specific customers later.

Our gross margin for the second quarter 2005 was 37% compared to 52% for the same quarter in 2004 and our gross margin for the 6 months just ended was 49% compared to 54% last year. In both cases, the decrease in gross margin in fiscal 2005 compared to fiscal 2004 is due to a combination of lower revenue levels not efficiently absorbing the second line cost of our production department and the decrease in shipments of very high margin products to HP.

The VME products, which made up a large percentage of our total shipments last year, carried a gross margin in the 70% range and our newer WAN and HighWire products sold to other customers generally have gross margins ranging from 55% to 60%.

Our total operating expenses in the second quarter 2005 were 1.6 million compared to 1.5 million in the same period last year. For the 6 months just ended our operating expenses were 2.9 million compared to 2.6 million in the same period last year. This slight increase in our operating expense is primarily due to increases in the staffing levels of our engineering group and the initiation of some product marketing programs, particularly in the iSCSI software product line. Dan is going to fill you in on our iSCSI strategy later.

We continue to pursue a policy of aggressive investment in new product development, particularly in the areas of VoIP, AMC adapter products, and iSCSI storage software. We have added engineering staff and contracted with third parties to execute this strategy. We have also increased our advertising and marketing initiatives and have been setting the stage to highlight our iSCSI product rollout.

The decrease in revenue and gross margin, combined with a slight increase in operating costs, resulted in a net loss of $936,000 or $0.18 per share basic and diluted compared to net income of $54,000 or $0.01 per share in the second quarter of 2004.

For the 6 months we had a net loss of $760,000 or $0.15 per share compared to net income of $581,000 or $0.12 per share basic and $0.09 per share diluted for the same period last year.

Now I'm going to move to liquidity. During the 6 months just ended the Company's operations used just under $550,000 in cash. During the period, we also used approximately $190,000 in cash to purchase software and engineering equipment and for payments of an outside company to engineer our first two VoIP DSP products. With the proceeds from the recently announced private placement of our common stock, we will have sufficient liquidity to fund our business plan.

We ended the second quarter of fiscal 2005 with cash of $1.2 million, no debt and working capital of $3.2 million, compared to cash of $1.8 billion and working capital of $3.9 million at October 31, 2004.

We are proceeding with both the acquisition of PyX Technologies that we announced on March 28 and the $5.1 million private placement funding announced on May 5. We will be mailing out proxy material to all of our shareholders in the near future and we will have a shareholder meeting in late June or early July to allow our shareholders the opportunity to ratify both of these initiatives.

The acquisition allows the Company to actively participate in 2 large commercial markets. Embedded systems for communications most notably the VoIP Gateway products and iSCSI, a new high-growth storage software product that uses the ubiquity of ethernet to provide the backbone for a high-speed, highly secured data storage and retrieval system.

With the acquisition of PyX we will own the intellectual property associated with their iSCSI software storage and the 5.1 million in cash from the Private Placement financing provides a liquidity, so we can position the Company to take advantage of this burgeoning iSCSI storage market that IDC projects will grow to over $5 billion by 2007 from less than $100 million today. Both the PyX acquisition and Private Placement are thoroughly discussed in proxy materials that we will be sending to all shareholders. We urge you as shareholders to approve both of these transactions.

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

Thanks Dave. SBE continues with its product strategy to strengthen its OEM business model and present unique solutions for 2 key impact technologies today -- VoIP and iSCSI. I will share my thoughts on both of those in a few minutes.

For the second quarter, we saw more growth of core products. These products include Wide Area Network, ethernet modules and HighWire intelligent processors. These products accounted for 88% of second quarter revenues highlighted by the increase in SS7 T1/E1 business and DCL Metaswitch -- as well as orders from two recent design wins for development product -- amounted to about $200,000.

HighWire shipments for this quarter are roughly 125% over the same quarter last year. We expect excellent future growth from our core products' customers as past design wins gain traction in their particular markets. Our HighWire products offer customers a complete Linux environment with the flexibility to interchange I/O modules as they need. Our recently announced development of a VoIP module follows into that strategy, allowing current HighWire customers to mix and match VoIP with T1, T3 for the most powerful blade solutions available in the embedded communications marketplace today.

You may have heard me mention details about our VoIP initiatives; and I would like to explain the basis for the excitement. Using Texas Instruments' latest DSP technology along with the TI Telogy (ph) (indiscernible) software, SBE will provide over 2000 digital voice channels on a very small PTMC form factor. This density is greater than our competition. and by using the latest technology, allows for a very aggressive cost per channel. Selling for up to $10,000 MSRP, the new product increases both topline revenue and gross margins in the future. Added to the HighWire platform with a 24 port T1/E1 module, the Intelligent Package will sell for as much as $15,000 equating to a considerable revenue increased forecasted over the next couple of years.

Yesterday, we booked our first order for prototype DSPs which will ship this summer. That said, however, the communications marketplace continues to show slow growth in general. Our customers don't provide much forecast visibility resulting in hesitancy throughout the supply chain. We monitor our competitors' success and enjoy our design wins, yet we wonder why all of us aren't doing a little bit better.

SBE completed its co-anti (ph) iSCSI benchmark testing and remains engaged with several large OEM prospects interested in the 20% to 50% offload, available on Itinium (ph) and Operon (ph) based systems. Although the sales of the tow (ph) have been modest we still believe that this product will solve unique OEM problems for the future.

We are also pleased to say that after signing the agreement and plan of merger and reorganization with PyX, we successfully locked up $5 million of funding to provide the cash necessary to execute our future rollout plans. We continue to work closely with PyX and included them last week in our national sales meeting. Ongoing marketing feedback confirms that PyX has a unique edge in standards-compliant iSCSI features.

So our approach as a business and a company will include hardware-only sales, software-only sales and the middle Best of Breed tune solutions for ethernet, Tow, security adapters and -- in the future -- a unique combination of our hardware and iSCSI expertise.

One of the largest OEM prospects is a telecom equipment provider interested in both embedded Tow and iSCSI on PCI and AMC form factors. So we are seeing leveraged opportunities for iSCSI with existing communications customers. PyX has recently completed contract negotiations with two customers, one -- a Fortune 1000 HBA manufacturer with global distribution and sales -- and second a NAZ (ph) Gateway manufacturer.

Sales opportunities are increasing as many large companies adopt and validate iSCSI in their Storage Area Networks. Our activity in storage industry trade shows is producing many valuable contacts and opportunities for sales in the future.

SBE's Board of Directors carefully considered the proposed merger and Private Placement and recommends that you vote in favor of these transactions in the forthcoming proxy. So to summarize the past quarter's activity, SBE remains focused on our twofold strategy to maximize short-term opportunities with core products and investing in impact technologies that position us for growth.

At this time, we will be happy to open the floor for questions.

+++ q-and-a.

(OPERATOR INSTRUCTIONS) At this time, there are no questions.

Dave, should we wait about 10 more seconds in case someone comes in?

Sure.

I guess the call answered the questions.

Yes.

So I guess thank you for joining us on the call.

Thank you.

This concludes the SBE conference call. You may now disconnect.