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Lantronix, Inc. (NASDAQ:LTRX)

F3Q13 Earnings Call

May 2, 2013 5:00 pm ET

Executives

E.E. Wang Lukowski – Investor Relations

Kurt F. Busch – President and Chief Executive Officer

Jeremy Whitaker – Chief Financial Officer

Analysts

Krishna Shankar – Roth Capital Partners, LLC

Operator

Good day, ladies and gentlemen, and welcome to the Third Quarter 2013 Lantronix Earnings Conference Call. My name is Keith, and I'll be your operator for today. At this time all participants are in a listen-only mode, later on we will conduct a question-and-answer session (Operator Instructions). As a reminder today’s conference is being recorded for replay purposes.

And with that, I would now like to turn the conference over to Ms. E.E. Wang. Please go ahead.

E.E. Wang Lukowski

Thank you, Keith. Good afternoon everyone, and thank you for joining Lantronix's third quarter fiscal 2013 conference call. Joining us on the call today are Kurt Busch, Lantronix’s Chief Executive Officer; and Jeremy Whitaker, Lantronix’s Chief Financial Officer.

A live and archived webcast of today’s call will be available on the company’s website at www.lantronix.com. In addition, a phone replay will be available starting at 7 p.m. Eastern, 4 p.m. Pacific today through May 9, by dialing 888-286-8010 or for international callers 617-801-6888 and entering passcode 39420444.

During this call, management may make forward-looking statements which involve risks and uncertainties that could cause Lantronix’s results to differ materially from management’s current expectation. We encourage you to review the cautionary statements and risk factors contained in the earnings release which was furnished with SEC today and is available on our website and then the company’s SEC filings such as its 10-K and 10-Q.

Lantronix undertakes no obligation to revise or update publically any forward-looking statements to reflect future events or circumstances. Also please note that during this call, the company will discuss some non-GAAP financial measures, today’s earnings release which is posted in the Investor Relations section of our website at www.lantronix.com describe the difference between our non-GAAP and GAAP reporting the present the reconciliation for the non-GAAP financial measures that we use.

I would now like to introduce Kurt Busch President and CEO of Lantronix.

Kurt F. Busch

Thank you E.E., and thank you to everyone joining us this afternoon. During the March quarter, we continue to make progress in our fiscal 2013 plan. Our results included the following continued execution on new product development, which included, the release to production of the xSenso controller, the second addition to our new analog sensor product family and at our largest trade show presence the Embedded World in Nuremberg, Germany announced the xPico Wi-Fi, a highly anticipated and well-received second edition to our newest embedded product family.

I would like to add that I am very encouraged by the initial response to this product. On the marketing and sales front, we continue to expand our reach by growing Lantronix’s distribution and sales channels worldwide. Despite macro conditions that continue to affect our industry, I am pleased to report that Lantronix continue to achieve growth in new product revenues. The cumulative effect of our actions has resulted in a 5% year-to-date revenue growth and significantly improved financial and operational performance.

I believe strongly that our strategy will lead us to greater success and enhance value for our shareholders. Before I go into more detail on our progress, I would like to turn the call over the Jeremy to go over our financial highlights for the third quarter ended March 31, 2013, Jeremy.

Jeremy Whitaker

Thank you, Kurt. Please refer to the financial information in the Investor Relations section of our website for additional details that will supplement my financial commentary. Now, I'd like to take a few minutes to go over the highlights of our results for the third quarter of fiscal 2013. Net revenue for the third quarter of fiscal 2013 was $12.2 million, relatively flat with both the third quarter of fiscal 2012 and the second quarter of fiscal 2013. We believe that our sequential results for the fiscal were affected by the continuing economic situation in Europe, as well as the timing of project rollouts and OEM production schedules which can create quarterly fluctuations in our sales, our fiscal year-to-date results have been positive with 5% growth in net revenue and we remain optimistic on the long-term market outlook for our new products, sequentially, net revenue from embedded products increased 14% and we experienced growth in each of our reported geographic regions, compared to the year ago fiscal quarter, net revenue from embedded products was flat.

Net revenue from our external products decreased by 19% and 12% as compared to the second quarter of fiscal 2013 and the third quarter of fiscal 2012 respectively, this was primarily due to a slowdown in project rollouts in the U.S. sequentially net revenue from management products decreased by 3%, primarily due to decline in console server sales.

Following the December quarter, we also experienced some decrease in xPrintServer sales as post holiday demand for the home edition declined. However this was offset by growth in sales of our higher end version of the xPrintServer, the office edition, compared to the year ago fiscal quarter, net revenue from management products was up approximately 14%, primarily due to an increase in xPrintServer and SLC sales.

Net revenue in the Americas region was $6.5 million for the third quarter of fiscal 2013, a decrease of approximately 5% from the second quarter of fiscal 2013, compared to the year ago fiscal quarter, net revenue in the Americas increased approximately 2% from the third quarter of fiscal 2012. Net revenue in EMEA region was $3.6 million and relatively flat with the second quarter of fiscal 2013. Compared to the year-ago fiscal quarter, net revenue in EMEA region declined approximately 9%. Net revenue in APAC region was $2.1 million for the third quarter of fiscal 2013, an increase of approximately 19% from the second quarter of fiscal 2013. And compared to the year-ago fiscal quarter, net revenue increased approximately 14%.

Gross profit as a percentage of revenues for the third quarter of fiscal 2013, was 46.2%, compared with 48.8% for the third quarter of fiscal 2012, and 49.6% for the second quarter of fiscal 2013. Sequentially the decline in our gross profit margin was primarily due to an increase in manufacturing cost and overhead. This was primarily driven by a reduction in purchase volumes with some of our contract manufacturers which resulted in increased product costs. We expect to have similar costs during the June quarter. Looking beyond the June quarter, we believe that our gross margins should improve as our purchase volumes return to normal levels.

Selling, general and administrative expenses for the third quarter of fiscal 2013 were $4.7 million compared to $4.1 million for the third quarter of fiscal 2012 and $4.7 million for the second quarter of fiscal 2013. The year-over-year increase in SG&A expenses was primarily due to costs related to a marketing plan we initiated to promote growth in new product sales. Our third fiscal quarter SG&A expenses included cost related to the Embedded World Conference and Macworld trade shows, which from a spending standpoint of the two most significant trade shows that we participate in each year.

Research and development expense for the third quarter of fiscal 2013 was $1.7 million, compared to $1.8 million for the third quarter of fiscal 2012 and $1.7 million for the second quarter of fiscal 2013. GAAP net loss was $801,000 for the third quarter of fiscal 2013 or $0.05 per share, compared to a GAAP net loss of $41,000 or $0.00 per share for the third quarter of fiscal 2012.

And sequentially a GAAP net loss of $412,000 or $0.03 per share for the second quarter of fiscal 2013. Non-GAAP net loss for the third quarter of fiscal 2013 was $388,000 or $0.03 per share compared to non-GAAP net income of $471,000 or $0.04 per share for the third quarter of fiscal 2012. And sequentially, non-GAAP net income of $70,000 or $0.00 per share for the second quarter of fiscal 2013.

This represents the first time and more than a year that the company has reported a non-GAAP net loss, we expect SG&A spending to come down over the next few quarters which should bring our operations closer to our expected non-GAAP breakeven point.

Now turning to the balance sheet, cash and cash equivalents as of March 31, 2013 were $7.2 million compared to $11.4 million as of June 30, 2012 and $8.5 million as of December 31, 2012. The fiscal year-to-date decrease in cash was primarily due to an increase in inventory levels. In addition we continue to make scheduled payments on our term-loan and investing capital assets to support product development and manufacturing.

Net inventories as of March 31, 2013 were $9.2 million compared to a nine year historical low of $6 million as of June 30, 2012. The increase in inventories was primarily to support new product releases and buffer stock for anticipated customer demand, sequentially, we reduced netted inventories by $0.5 million. Working capital was $10.6 million as of March 31, 2013 compared to a $11.9 million as of June 30, 2012.

I'll now turn the call back to Kurt.

Kurt F. Busch

Thank you, Jeremy. As I stated at the beginning of this call, we continue to make progress in the key elements of our 2013 plans, we executed on our product development plan with a target of one new product launch per quarter. During the March quarter we met our target with a production release of the xSenso Controller, the newest edition of our new analog sensor product family designed specifically for use in rugged and harsh environments, the xSenso Controller’s analog and relay outputs provide the ability to take action by controlling industrial processes and equipment based on sensor readings and predefined thresholds to solve real-time problems.

In addition, we announced the xPico Wi-Fi, a wireless version of our newest embedded product family. The xPico Wi-Fi is a low power embedded wireless solutions provides both client and access point functionality as well as advanced security features in a module approximately the size of a quarter, the combination of the xPico Wi-Fi size is state-of-the-art security and management features, make this solution ideally suited for machine-to-machine environment. As stated on our last call, the launch of new products and platforms is critical to our business and our long-term vision to become the preferred leader in delivering secure, feature-rich and simple to deploy M2M solutions.

Over the next few quarters, we expect to launch new products that will further enhance our offerings in the wireless device networking and mobile printing markets.

In addition, we planned to introduce next-generation versions of some existing Lantronix solutions that are directed at expanding both the market applications for our technology to new potential customers and increasing the strength of our relationships with existing customers.

During the quarter, we continue to invest in advertising and marketing to enhance awareness and expand sales of our new and existing products. Our two largest trade shows occurred during the March quarter, in early February Lantronix was the featured mobile printing sponsor at Macworld in San Francisco.

In addition to demonstrating the xPrintServer Office Edition at the Mac IT event, Lantronix partnered with Adobe to support its iPhoneography event, demonstrating the intersection of art and technology. The response for the xPrintServer at this conference was very positive and I believe we made significant progress in integrating the Lantronix solutions into the Apple iOS ecosystem.

In late February, Lantronix participate as an exhibitor at the Embedded World in Nuremberg Germany, which is the largest Global Embedded Technologies Conference, at this conference we announced the xPico Wi-Fi our newest embedded device enablement solution.

Based on the feedback from potential and existing customers our distributors and VAR partners as well as my own first hand experience the response to the xPico Wi-Fi has been very positive. We are currently pursuing many design win opportunities with this product and judging by the initial response, we believe there will be a significant revenue growth driver for the company in the long-term. The xPico Wi-Fi is sampling now and we expect to release to production this summer. To monetize the excellent work done by our development team, we must be where the customers are. In the March quarter, we continue to make progress in expanding our sales and distribution relationship to worldwide, particularly in the EMEA and APAC regions where historically Lantronix has had lower market penetration.

In January, we announced an agreement with long time partner Arrow Electronics to expand their distribution of our embedded M2M products beyond the U.S. We believe that this relationship will be particularly helpful as we work to deepen our sales channels into China and other parts of Southeast Asia. In February, Lantronix announced the expansion of our distributor relationship with Mouser Electronics, one of the fastest growing and largest global electronics distributors in the world today and a recognized top resource for engineering design.

Under our new agreement with Mouser, they are expanding their distribution of our M2M solutions from the U.S. to include Europe and Asia. Over the next several quarters, we will continue to aggressively pursue efforts that will further expand our sales and distribution worldwide. A key element of this strategy is establishing a sales office in Mainland China, which we plan to have up and running in the fall timeframe. Based on our initial progress in China, we believe that there are significant opportunities for us in this region. Finally, as Jeremy stated during his remarks, we continue to carefully and aggressively exercise strong fiscal and operational discipline.

On the year-to-date basis, we have increased revenues by 5%, reduced our GAAP net loss by 43% reduced our non-GAAP net loss by 68% compared to the same nine month period and fiscal 2012. With this means as we’re moving closely to long-term profitable growth per shareholders while continuing to accelerate new product development.

In summary we’ve continued to make progress on our plan. Increased new product revenue, continued expansion of our sales and marketing efforts worldwide, continued execution on our new product development strategy, careful fiscal management and strategic investments that are in line with our plan. As we continued to focus on execution we believe our efforts will accelerate new product revenue and position Lantronix as the leading provider of delivering secure, feature-rich and simple to deploy M2M solutions.

Before I turn the call over for questions, I'd like to thank my Lantronix colleagues, our shareholders, our partners and our customers for your ongoing support. Operator, we'd like to open the call for questions.

Question-and-Answer Session

Operator

Yes sir. (Operator Instructions). Your first question comes from the line of Krishna Shankar of Roth Capital. Please go ahead.

Krishna Shankar – Roth Capital Partners, LLC.

Yes, Kurt and Jeremy congratulations on the new product momentum, and can you give us a sense for how these new products such as xPico Wi-Fi in extent so what kind of demand trends you are seeing there, and what the potential slope for revenues for those two new product lines could be?

Unidentified Company Representative

So, Krishna, our three main new areas that we’re expanding in are the mobile printing solutions such as the xPrintServer, the wireless solutions such as our PremierWave XC Cellular solutions as well as the xPico Wi-Fi embedded solution and then the analog device servers such as xSenso and the xSenso controller.

And we talked a lot about the xPrintServer it’s going quite well for us, on the wireless side both the PremierWave-XC Cellular products and the xPico Wi-Fi wireless products are very much really in the Lantronix warehouse, these are products that are continuing basically expanding the type of products that we had and the xPico Wi-Fi, the response has been very, very good I mean this is an embedded product, much like a chip and obviously takes, whatever year and a half to two years to ramp, but the initial response that I have seen has been very, very good in the company. In fact the response I’ve heard from our sales guys is one of the best early responses that we’ve seen, I also like to state the xPico Wi-Fi is probably the most significant development we’ve done in the last year and a half, this is a new platform for us the new OS as well as a new processor and we planned to build a lot of derivatives from this platform, so it’s quite a significant development for Lantronix.

On the sensor side this is really a new area for us and I think this is a wildcard in our whole new development, we sell a lot of industrial automation parts today, but the sensor part is the new part for that, we are starting to see some initial traction and we expect that to continue probably over the next year

Krishna Shankar – Roth Capital Partners, LLC.

Thank you. And then on the distribution channel initiative, how’s that coming along both with Arrow and with Ingram Europe, and when do you expect to see some of the fruits of that distribution channel efforts in terms of revenues in those regions?

Unidentified Company Representative

Sure, as you know in Europe we sell primarily our embedded products today and we recently signed an agreement with Ingram Micro to be selling both our external box products as well as our IT and our device management product, we are starting to see initial traction from that now, as it really turned into revenue at this point, but we are seeing a lot of interest and we’ve received some of our first orders on the APAC region the agreement with Arrow is primarily on the embedded side and again embedded takes a year-and-a-half to two years before we start seeing revenue, but we’re starting to see interest there in the APAC region.

Krishna Shankar – Roth Capital Partners, LLC.

Great, thank you.

Kurt F. Busch

Yeah, thank you, Krishna.

Operator

(Operator Instructions) It looks like we have no other questions. I’ll go and turn the call back over to Kurt Busch for any closing remarks.

Kurt F. Busch

Thank you, operator, I'd like to thank you all for your participation on our call today. We look forward to updating you on our progress, achievements and actions when we report our fourth quarter and year end results for fiscal 2013 in late August.

Operator

Ladies and gentlemen, that will conclude today's conference. Thank you very much for joining us and you may now disconnect. Have a great day everyone.

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