Lantronix's (LTRX) CEO Kurt Busch On Q4 2014 Results - Earnings Call Transcript

Aug.21.14 | About: Lantronix, Inc. (LTRX)

Lantronix, Inc. (NASDAQ:LTRX)

Q4 2014 Earnings Conference Call

August 21, 2014, 05:00 PM ET

Executives

E.E. Wang Lukowski - SVP, PondelWilkinson Inc

Kurt Busch - President and Chief Executive Officer

Jeremy Whitaker - Chief Financial Officer

Analysts

Krishna Shankar - ROTH Capital

Operator

Ladies and gentlemen, welcome and thank you for joining the fourth quarter 2014 Lantronix earnings call. My name is Ryan, I'll be the operator on the event. (Operator Instructions) Now, I'll turn the call over to Ms. E.E. Wang.

E.E. Wang Lukowski

Thank you. Good afternoon, everyone, and thank you for joining the Lantronix fourth quarter and fiscal year 2014 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 09:00 PM Eastern, 06:00 PM Pacific today through August 28, by dialing 888-286-8010 in the United States or for international callers, 617-801-6888 and entering passcode 16447251.

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 the SEC today and is available on our website, and in the company's SEC filings such as its 10-Ks and 10-Qs. Lantronix undertakes no obligation to revise or update publicly 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, describes the differences between our non-GAAP and GAAP reporting and presents reconciliation for the non-GAAP financial measures that we use.

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

Kurt Busch

Thank you, E.E., and thank you to everyone joining us this afternoon. During fiscal 2014, I am happy to report, we made substantial progress on the core elements of our strategic growth plan that help to offset the decline of our mature products.

First, we continued discipline and innovative product development. We released to production five new offerings, which included Enterprise Solutions that address remote management, cellular and mobile printing needs. OEM Modules for both wired and WiFi secure device networking. And to complement our product offerings, we launched our M2M Professional Services to facilitate the product development of custom IoT applications and solutions.

Second, we continued expansion of our sales efforts worldwide. In FY '14, we deepened distributor and borrower relationships in the EMEA, APAC and Japan region, which led to an 11% growth in international Enterprise Solution sales. We expanded sales coverage in the Americas with the addition of manufacturers' representatives and key North American territories.

We opened our first office in Mainland, China. And we achieved early results from focused engagements with Tier 1 customers, as we had several wins begin to generate revenue. These wins were in the areas of medical devices, data center, hospitality, security and telecommunications.

Third, we continue to exercise financial and operational discipline, which resulted in a non-GAAP income of $948,000 in FY '14, reversing FY '13's non-GAAP loss of $935,000. This represented a $1.9 million improvement in non-GAAP profitability. In short, we did what we said we would do.

Now, we are entering FY '15 with a strong pipeline of opportunities. And as we continue to focus on engagements with both new and existing Tier 1 customers, we believe that we are well-positioned to achieve long-term profitable growth.

Before I go into more detail on our progress and expectations, I'd like to turn the call over to Jeremy to go over our financial highlights. Jeremy?

Jeremy Whitaker

Thank you, Kurt. Please refer to today's news release and 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 fourth quarter of fiscal 2014.

Net revenue for the fourth quarter of fiscal 2014 was $11.1 million compared to $11.1 million for the fourth quarter of fiscal 2013 and $11.6 million for the third quarter of fiscal 2014. The sequential decrease in net revenue was impacted by an expected decline in sales of mature products, which were partially offset by increased sales of new Enterprise Solutions.

As discussed on previous calls, our revenue has a history of fluctuating from quarter-to-quarter due to the nature of our project-based sale cycle that often times has a significant impact on quarterly operating results.

For the fourth consecutive quarter, we achieved gross profit margin within our target model range of 49% to 51%. Gross profit margin for the fourth quarter of fiscal 2014 was 50.1% compared to 44.7% for the fourth quarter of fiscal 2013 and 50.9% for the third quarter of fiscal 2014. The year-over-year increase in gross profit margin was primarily the result of lower manufacturing overhead.

Selling, general and administrative expenses for the fourth quarter of fiscal 2014 were $4.1 million compared to $4.3 million for the fourth quarter of fiscal 2013 and $4.2 million for the third quarter of fiscal 2014. Research and development expenses for the fourth quarter of fiscal 2014 were $1.7 million compared to $1.8 million for the fourth quarter of fiscal 2013 and $1.8 million for the third quarter of fiscal 2014.

GAAP net loss was $213,000 for the fourth quarter of fiscal 2014 or $0.01 per share compared to a GAAP net loss of $1.1 million or $0.08 per share for the fourth quarter of fiscal 2013, and sequentially a GAAP net loss of $130,000 or $0.01 per share for the third quarter of fiscal 2014.

Increased revenue from new products and continued operational and financial discipline contributed to our fourth sequentially quarter of non-GAAP income. Non-GAAP net income for the fourth quarter of fiscal 2014 was $206,000 or $0.01 per share compared to a non-GAAP net loss of $665,000 or $0.05 per share for the fourth quarter of fiscal 2013, and sequentially non-GAAP net income of $331,000 or $0.02 per share for the third quarter of fiscal 2014.

Now, turning to our fiscal year results. Net revenue for fiscal 2014 was $44.5 million compared to $46.7 million for fiscal 2013. As discussed on previous calls, we continued to experience a decline in our mature products. A large portion of this decline was offset by our focused engagements with Tier 1 customers that resulted in several wins with new products during fiscal 2014. In addition, our sales expansion efforts contributed to an 11% increase in international Enterprise Solution sales during fiscal 2014.

Selling, general and administrative expenses for fiscal 2014 were $16.4 million compared to $18 million for fiscal 2013. During fiscal 2014, we invested in research and development at a similar pace to fiscal 2013. Research and development expenses were $6.7 million during fiscal 2014 and 2013. GAAP net loss for fiscal 2014 was reduced to $933,000 or $0.06 per share from a GAAP net loss of $2.8 million or $0.19 per share for fiscal 2013.

Contribution from new product revenue and continued operational and financial discipline resulted in an improvement to our fiscal 2014 operating results as compared with fiscal 2013. During fiscal 2014, we generated non-GAAP income of $948,000 or $0.06 per share, representing a complete reversal from fiscal 2013, when we recorded a non-GAAP net loss of $935,000 or $0.06 per share.

Now, turning to the balance sheet. Cash and cash equivalents as of June 30, 2014, were $6.3 million compared with $5.2 million as of June 30, 2013. Net inventories were $8.4 million as of June 30, 2014, compared with $8.7 million as of June 30, 2013. We believe that net inventories could increase over the next few quarters, as we transition a portion of our Enterprise Solutions products to a new contract manufacturer.

For the upcoming first quarter, we expect operating expenses to increase slightly as a result of our annual audit that takes place during the first quarter. That said, we expect to continue to manage our spending based upon revenue expectations, with a primary focus on driving long-term revenue growth, while preserving working capital and maintaining financial discipline.

I'll now turn the call back to Kurt.

Kurt Busch

Thank you, Jeremy. Our results reflect the steady progress we made throughout fiscal 2014 in executing on our strategic plan to drive Lantronix towards long-term profitable growth through disciplined and innovative product development, expansion of sales channels worldwide and continued financial and operational discipline.

At it's foundation, our product development philosophy is based on close collaboration with Tier 1 lead customers. These early engagements with market leaders have driven innovative product definitions and enabled many of our most successful new product launches. As we move into fiscal 2015, our focus will be on deepening these relationships to define and introduce industry-leading solutions that will allow our customers to meet the growing demand of the Internet of Things.

During FY '14, we released to production five new products. On the OEM Module side, our focus was enabling our customers to shorten their time-to-market with easy-to-use module supporting updated communication standards, while incorporating advanced security and manageability features.

These products include the xPico Wi-Fi, our first new OEM Module platform, designed specifically to service the needs created by the convergence of mobility and the Internet of Things; and the XPort Pro LX6, next-generation of our award winning XPort line of Ethernet device servers.

On the Enterprise Solution side, we released to production new management mobile printing and cellular solutions. These new products included, the PremierWave XC HSPA+, a 3.5G cellular solution for enabling secure, robust, global connectivity for remote and mobile devices.

The xPrintServer Cloud Print Edition, the first Google certified print server and our next-generation management solution, the Lantronix SLB 8824, which allows for secure, real-time access in management of global IT resources. This is the international version of our new SLB branch office manager, which has had good success in the U.S. market.

In mid FY '14, we launched our Lantronix M2M Professional Services offering, and with the objective of existing customers and developing custom IoT solutions. This new offering was instrumental in bringing our first significant new OEM Module design into production during the third fiscal quarter and is currently a key part of several Tier 1 engagements.

The core part of our strategy is to establish and expand partnerships and alliances with key industry players to provide solutions aimed at delivering seamless integration into the Internet of Things. During Q4, we deepened our relationships with Cisco Systems in server technology, which we expect will further enhance our presence in the management space.

In the areas of IoT data and services, we're aiming to provide our customers with simple connections to wireless service, device cloud and analytics engines, and are offering solutions with Wyless for network service, Axeda for device cloud and Google for Universal Analytics.

On the mobile printing front, we are collaborating with BIXOLON on retail deployments and Google on Cloud Print solutions for enterprise and education. Moving forward, we plan to expand our network of partners to include both industry leaders as well as innovative newcomers to bring best-of-breed solutions to our customers.

On the sales front, we continue to expand our efforts during fiscal 2014. These efforts included a focus on international Enterprise Solution sales, opening our first office in Mainland China and expanding distribution relationships worldwide. We began to see early results in FY '14, as we recorded 11% growth in international Enterprise Solution sales. As we've deepen our relationships in Europe and Asia, we expect Enterprise Solutions from these regions to continue to grow.

To accelerate sales of our OEM Modules, we began expanding our sales force to include manufacturer's representatives in key North American territories. These reps are independent firms authorized to sell Lantronix products and will greatly increase the number of sales people presenting our solutions.

In FY '14, we added reps in several key regions in the U.S. and Mexico. And we plan to continue to bring on representatives in other geographies in FY '15. We believe the added sales coverage will substantially increase the number of opportunities for our OEM Modules.

We continue to manage our revenue and product development efforts with strong financial and operational discipline. These efforts resulted, Lantronix, hitting its target gross margin model and achieving non-GAAP income for the fourth quarter in a row and finishing the fiscal year with positive cash flow from operations.

By implementing our plans, today Lantronix has a solid portfolio of new products that are gaining traction in the marketplace and expanding presence within the worldwide market that includes key relationships with Tier 1 customers and leading industry partners and operational and financial discipline that has delivered four consecutive quarters of non-GAAP profitability.

With this foundation, we believe that continued execution of our strategy will translate into: increased topline growth in Enterprise Solution business; new OEM Module revenue that will grow to reverse the revenue declines from our OEM Module product line; increased engagement with larger sales opportunities; and ultimately, long-term profitable growth and enhanced value for our shareholders.

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 question.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes through from Krishna Shankar with ROTH Capital.

Krishna Shankar - ROTH Capital

Kurt and Jeremy congratulations on good disciplined execution during the fiscal year. I wanted to get a sense for the decline of the legacy products, where we are with respect to that cycle? And when we might see kind of an inflection from the new product design wins and revenue ramp offsetting the decline of the legacy products?

Kurt Busch

So we're basically seeing a decline in legacy products in both our Enterprise Solutions as well as our OEM Modules. We've been able to counteract the decline in Enterprise Solutions with products that we launched in the marketplace effectively engaged with large Tier 1 accounts that generated early revenue.

On the OEM Modules, being that it's much like a semiconductor sell, it's a much more longer sales cycle. And we are expecting those revenues to start ramping in later '15 to counteract the decline of those OEM Modules. So if we're not at that critical math now, I mean it feels like we're very close to it, when with the new OEM Modules starting to ramp later this year and the enterprise stuffs basically counteracting the decline today.

Krishna Shankar - ROTH Capital

And then how much of the sequential slight decline in revenues was due to seasonality in places like Europe?

Kurt Busch

You know, I'm not really sure about from a seasonality point of view for this quarter, typically at least last year we saw more of the seasonality with Europe actually in the September quarter and not so much in the last quarter that we closed out.

Krishna Shankar - ROTH Capital

And then, the new M2M Professional solutions business, what type of hardware and software are you deploying within that sort of vertical? And what's your business strategy there versus the Enterprise Solutions and the OEM Module business-wise, that sort of carved out as a separate business for you?

Kurt Busch

Sure. So it's not so much a separate business, but it's a way of enhancing both the OEM Modules and the Enterprise Solution. When we have look at that the Internet of Things instead of looking at one big market, it's really a collection of a whole bunch of smaller markets, and each one of those smaller market has specific needs and customizations required.

So last year we had a relatively large OEM in the security space needing a custom design to go for an access control. And then, right now, we're working on a number of Tier 1 opportunities, where we are taking Lantronix technology and building custom products through our Professional Services organization that would basically be, what's the best way to describe it, basically be mass market products or at least versions of mass market products, but the Professional Services is designed to do the customization on our technology to get our customers from concepts to production.

Krishna Shankar - ROTH Capital

And I guess, you get professional service revenues associated with this customization also, right?

Kurt Busch

Yes, we do. And typically we see it as, is kind of around 10% of the product revenue. So it's really not substantial from a revenue standpoint, but it definitely is quite critical in getting the revenue from the concepts point over the finish line into production.

Krishna Shankar - ROTH Capital

And Jeremy, I saw this new products ramp up, especially in the second half of fiscal year '15. Do you feel that you have enough resources on the balance sheet in terms of cash and then inventory built? Can you talk about some of the cash requirements for the next 12 months as you ramp up some of these new products significantly?

Jeremy Whitaker

We currently believe that we have sufficient working capital for our current growth plan. So at this point, we don't view any difficulty from a working capital standpoint.

Krishna Shankar - ROTH Capital

And then, I guess, gross margins, kind of in your target range already. Well, how much more upside could there be to gross margins? You had a very nice bump from fiscal year '13 to '14, what's the longer-term trajectory of gross margins with some of these new products?

Jeremy Whitaker

Longer-term, we still think that our target model is where we'll be operating.

Krishna Shankar - ROTH Capital

So where you are now already in terms of gross margin is kind of the target model for gross margin?

Jeremy Whitaker

So our target model was 48% to 51% in the last few quarters, at least four quarters, we've been operating in that range.

Operator

And we have no other questions in the queue. So I'll pass it back for any closing comments.

Kurt Busch

Thank you, operator. I would 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 on our fiscal 2015 first quarter results in late October.

Operator

Thanks everyone for your time and your participation. And have a great rest of the day.

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Lantronix (NASDAQ:LTRX): FQ4 EPS of $0.01 beats by $0.03. Revenue of $11.1M (-0.3% Y/Y) misses by $0.35M.