Neonode Inc (NEON) 2006 Q1 法說會逐字稿

Good morning. My name is Jody, and I will be your conference operator today. At this time, I would like to welcome everyone to the SBE first-quarter 2006 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 session. [OPERATOR INSTRUCTIONS]. Thank you. I would now like to turn the conference over to Mr. Dan Grey, President and CEO. Please go ahead, sir.

Good morning, this is Dan Grey. I would like to welcome you to SBE's first-quarter fiscal 2006 investor conference call. I am with Dave Brunton, our CFO, and we're going to address SBE's financial results and activities over the past quarter. At the end we'll take your questions. To start I would like Dave to cover the financials.

Good morning, this is Dave Brunton, and thank you for joining us today for SBE's first-quarter conference call. If you would like a copy of our full quarterly press release, please contact Judy at area code 925-355-7602, and she would be happy to send you one. 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, 2005, 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 off with a review of our results for the first quarter ended January 31, 2006.

Our net sales for the quarter were 1.4 million, compared to 2.8 million in the first quarter of 2005. Our revenue for the quarter is derived almost exclusively from the sales of our hardware products. Last year in the first quarter, we shipped $1 million of VME communication controllers to Hewlett-Packard for use in their cellular base-station systems that has since been end-of-lifed. In addition to the reduction in revenue attributed to the final sales of product to HP, sales of our adapter products decreased by 24% during the quarter just ended, as we shipped $737,000 of adapters, compared to $965,000 in the same quarter last year. The decrease in the sales level of our adapter products is related to lower sales volumes to two of our largest customers, Nortel Networks and Lockheed Martin. Both companies have resumed purchasing at previous levels in the quarter that we're currently in, our second quarter. In fact, as we speak, we have already received purchase orders for second-quarter shipments to these companies. And sales of our HighWire products increased slightly to $592,000, compared to $585,000 in the first quarter of 2005.

Our total operating expenses for the first quarter of 2006 were 2.3 million, compared 1.4 million in the first quarter of 2005. As we discussed on previous calls, we hired sales and engineering staff when we acquired PyX Technologies in our third quarter ended July 2005. The increase in our headcount is necessary to continue to develop and market our iSCSI and VoIP products. In addition to the headcount, the costs associated with the headcount increases, the quarter just ended includes $346,000 of non-cash stock compensation expense related to the adoption of the new accounting standard that now requires us to expense stock options, plus another 100,000 in stock compensation expense related to paying our employees and directors with stock instead of cash. More on that later. In the future, we will continue to record approximately $600,000 per quarter in non-cash, stock-based compensation expense. So for the quarter we reported a net loss of $2.7 million or $0.28 per share basic and diluted, compared to net income of $177,000 or $0.03 per share basic and diluted for the first quarter of 2005. I want to remind you again that our loss for the quarter includes $1.5 million of non-cash expense including a $1 million of software amortization expense related to the PyX acquisition last year. And as I just mentioned a $0.5 million of stock-based compensation expense. We ended the quarter with cash of 2.8 million, no debt and working capital of 4.3 million, compared to cash of 3.6 million and working capital of 5.5 million at October 31, 2005.

I want to talk briefly about the cost-cutting program that we initiated in the quarter. In light of the pushout in our topline revenue from sales of our storage software products, we felt it necessary to take immediate action to return -- to reduce our cash burn rate. Effective with our January 31st payroll, all employees agreed to take a 30% reduction in the cash portion of their pay and agreed to be paid with a combination of cash and SBE stock. In addition, our Board of Directors is now paid 100% with SBE stock. At current stock prices we expect to issue approximately 100,000 shares of stock each month to cover employee and director compensation under our stock-for-pay plan. We are also controlling other noncritical cash expenses and expect to realize an approximately $550,000 reduction in our quarterly cash expenses. With these actions, we have aligned our cash expenses with our short-term revenue expectations and expect our working capital to be sufficient to fund our ongoing operations and the growth of the Company. That concludes my comments, and I'll turn the call back to Dan. Dan?

Thanks, Dave. We were surprised when two of our most consistent customers skipped shipments in the month of January. SBE gets combinations of customer purchase orders and forecasts from our customers that provide planning for our hardware builds during any given quarter. So compared to both historic trends and forecasts, we fell short on the expected shipments, thus we have a higher inventory level, higher inventory levels than expected. Both Nortel and Lockheed Martin have placed orders for the current quarter, as David said, and we are back on track. Today one-third through the quarter we have shipped or have backlog for $1.5 million already. So looking at this current quarter I believe that the past quarter was an anomaly and it is not a trend.

As I have shared in the past the future embedded business will be relatively flat at previous levels until the new DSP products take hold. Our VoIP Gateway Engine is expected to be completed next month and we have several small purchase orders for development units right now. Due to the lengthy development cycle involved with OEMs we don't expect significant revenue impact from DSP products until 2007. So for the remainder of this year, we'll see a bunch of small design win development units going out the door.

Now for iSCSI comments. We've been seeing iSCSI market adoption growing but at a very modest pace. Our steady progress encourages us to continue pursuing OEMs directly and through works channel. New OEM customers over the past couple of months include Genstor Systems, Silicon Mechanics, Open Source Storage, OSS, and YMI, who have chosen to license our products and integrate them into their targets -- their storage network systems. Our European value-added distributor, Option+, has started to ship a service with SBE's iSCSI software ready for easy and convenient activation and deployment. Last quarter SBE broadened its sales channel of manufacturer reps that provide extended coverage throughout regions of North America. And the reps I'm referring to are Centaur, Fourfront, PSI Solutions, ION Systems, and Spectro Associates.

So to summarize the quarter, based on our current visibility into bookings and marketing conditions, we expect our embedded product revenues to improve in the second quarter. We expect to continue to build on the momentum that our iSCSI software generated to date by continuing to expand our distribution reach and close new business opportunities with storage OEMs. On the VoIP side our team will continue to develop the product and to release the DSP as we expected, which helps penetrate voice/video and data application markets for DSP and VoIP solutions. Our cash conservation plan allows us to have the necessary resources in place when our products do take off. We appreciate our investors' patients through this difficult period for SBE. That concludes our comments. Now Dave and I will be happy to answer your questions at this time.

[OPERATOR INSTRUCTIONS]. Your first question comes from [David Gorman] of Benchmark.

Good morning.

Good morning.

Question, number one, your stocking program that you're going to be -- that you're instituting, I guess, is there any restrictions on the length of period that the individuals will have to hold the securities?

No.

So basically you can issue the stock today and they can be in the market selling it tomorrow?

Yes. In fact, that's what's been happening since January 31st. So we've already had three issuances of -- so the January 31st payroll, our February 15th payroll, and our February 28th payroll. Typically most -- obviously, Section 16 Officers like myself and Dan, we can only sell during windows, and we haven't sold anything at this point. Most -- depending on the pay level of the employee, you're going to see people forced to sell some of that just to survive because they did take a 30% pay cut. So I would expect to see on every couple of weeks somewhere between 15 to 20,000 shares fitting the market. It's about -- I'm going to say about a third of the people are not selling their stock, and two-thirds are at this point.

Well, I mean obviously, it's not great for your existing shareholders and I realize you're trying to accomplish something to keep your Company going. But how do you bring in new shareholders to buy the stock, I mean where are you going to find the support for it?

Well, the -- they're just -- they're going out into the marketplace and selling it, and that's probably one of the reasons why you're seeing the stock price go down a little bit. It does create downward pressure. And we had a decision to make here and revenues were pushed out. It's a new market for iSCSI and it's hard to predict when it's going to take place. We do know, as Dan said, we are picking up OEMs that are designing in the software and we had a decision to make on our cash side, and we felt the best decision was even though it is -- provides some delusion to the existing shareholders it does preserve cash and allows us not to have to go into the market and raise additional equity.

Hey, David, this is Dan and I'll comment a little bit on that. We are close to having the VoIP stuff done and the iSCSI products are gaining traction. We believe that this is a short-term program that helped get us over the hump to cash neutrality or profitability. So we believe that within a short period of time the revenues will get up there and we'll be able to get out of this program. It's really important during this period of time that the team players and the key employers that we've got remain intact and motivated to keep going.

Okay. So second question then, so you're going to grow revenues. I mean just looking at your earnings for the last couple of years, even with 8 to $11 million in revenues you had -- you didn't show any profits. I mean, so you grow revenues, are you going to be able to show us some profits?

What we're focused on, David, is more cash at this point because we do have, as I said, a lot of non-cash expenses and we have a couple of things happening. One, is the amortization of the PyX Software, which is about $1 million a quarter, so that's a $4 million a year of non-cash expense, and now with the stock option expensing you have another $1.5 million worth of expense. So $5.5 million worth of non-cash expense related to those things. And at the same time with software revenue recognition issues, we have to defer the software sales and not recognize revenue on it, although, you'll see a build-up in our deferred revenue account, and we do get the cash. So right in the short-term here we are focusing more on cash generation and cash neutrality. And we will have, from an income statement perspective, net losses just because of all the non-cash amortization expense that we have.

Got you. Okay. All right, guys, thanks.

Okay.

Thank you.

[OPERATOR INSTRUCTIONS]. There are no further questions, sir, at this time.

Thank you very much for joining us. See you next quarter.

This concludes today's SBE first quarter 2006 results conference call. You may now disconnect.