Lantronix Reports Q4 Results; Shares Remain Undervalued

| About: Lantronix, Inc. (LTRX)

Last month, we initiated coverage of Lantronix (NASDAQ:LTRX) in the Seeking Alpha article entitled Shares Of Lantronix Are Poised To Triple. Following up, on Wednesday evening, LTRX announced fourth-quarter revenue of $11.6 million and profitability of 3-cents per share. Sales were a little shy of estimates, but net income ramped ahead of plan, leading to a two-cent beat on the bottom line. Management was understandably upbeat about its progress.

"In eight months Lantronix launched an unprecedented seven new products into production, improved gross margins from 46.1% for the fourth fiscal quarter of 2011 to 50.7% for the fourth fiscal quarter of 2012, and achieved two consecutive quarters of non-GAAP net income," said CEO Kurt Busch.

LTRX's new management team is only a year into its turnaround plan, but has already succeeded on two fronts that prior management did not:

1. Establishing a profitable level of operations.

2. Creating an efficient new-product development machine.

Of course, revenue growth is the real goal. LTRX's new product releases will drive that. In their industry, most new products can take up to 18 months to ramp up, even as some (like xPrintServer) take off immediately. With several legacy products and seven new ones, investors have many moving parts to assess. The following chart can help to understand the ongoing development of LTRX's long-term revenue stream:

Current Revenue Producers

Product

% of Revenue

Characteristics

Device Enablement (Embedded)

50%

Semiconductor-like business;12-18 month ramp time, but huge revenues with 6+ year life cycles.*

Device Enablement (External)

30%

Same as above, but with 5+ year life cycles.

Device Management (SLC)

15%

Lumpy business, but tied to the positive long-term trend of Data Center build-outs.

Other Device Mgt (xPrintServer / SpiderDuo)

5%

Already 5% of revenue with high upside; Just starting to contribute.

Click to enlarge

* LTRX's most successful product ever took 12-18 months to ramp.

Future Revenue Producers

Product / Category

Time Needed to Ramp Revenue

Characteristics

xPrint Server Network Edition

Immediate

xPrint family can become 10%+ of company revenue.

xPrint Server Home Edition

Immediate

See above.

New xPrint Server product (coming in FY13?)

Immediate

Market Size = $100M+

SpiderDuo

Released 2 years ago…starting to ramp

Should become a solid contributor.

PremierWave EN

Has been building traction for over 12 months. Needs 6 more months to ramp.

Great potential, like its other embedded products. Will exhibit long life cycle.

xSenso

Announced on July 31, 2012; Needs 9-12 more months to ramp

Connects sensors (i.e. temperature sensors) to networks; Part of a $1.5B opportunity.

Device Enablement (xPico); Started sampling in Feb '12

Have been building traction for 6-months. Needs 12 more months to ramp.

An equivalent current product = ~30% of revs; The new version will only create a small amount of cannibalism.

Future External Device Enablement products

Will require 6-9 months to ramp

Same as above, but with slightly shorter life cycles.

Wireless xPico (possible product in 2-3 quarters?)

Will require 18-months to ramp

Could be bigger than wired xPico (see above)

Click to enlarge

Source: Pipeline Data, LLC

As you can see, LTRX's legacy products still represent the lion's share of revenue, with embedded Device Enablement products leading the way. Investors should understand that the company's reliance on a few product lines can result in lumpy results. However, xPrintServer and SpiderDuo are just starting to contribute (currently just 5% of revenue) and should experience strong growth going forward. PremierWave EN should start contributing in 6 more months, while xSenso should start adding to the top line 3-6 months after that. xPico, which holds the promise of becoming a major revenue driver, should ramp soon after xSenso does.

If all goes according to plan, this transformation will make LTRX a much more formidable competitor to Sierra Wireless (NASDAQ:SWIR), which is 15 times larger and commands 10 times the market cap. Those metrics provide an enticing picture of LTRX's potential.

In the meantime, it's clear that xPrintServer and SpiderDuo will need to hold down the fort for the next 6 months until PremierWave EN ramps up. After that, the company will enjoy several years of revenue contribution from these new offerings even as it continues to rapidly increase the size of its product portfolio.

To confirm this view, I asked Kurt Busch about slide 13 of LTRX's new investor presentation. It depicts LTRX's addressable market doubling over the next year. I asked if he expects to maintain/grow market share in their current segments. He said yes. Then I asked him to confirm the obvious assumption that they will maintain/grow market share in their future segments. Again, he said yes.

That led to my last question, which was basically, "If you maintain or grow market share across your target markets ... and your target markets double in size ... the company will double in size, right?" His answer, again, was basically yes. It's just a matter of time.

As for the remainder of the year, all eyes will be on xPrintServer. Building its sales channels will be of the utmost importance. For LTRX, growing its sales channels is another time-intensive process that will bear similarly long-term fruit. For example, getting into the Apple Store is long and arduous process. However, with xPrintServer's unique value proposition, I suspect that the company is far along the path.

Conclusions

Shares of LTRX are hovering around $2, and the company now has a strong and stable balance sheet. Its share price reflects skepticism and the risk that its new products don't deliver revenue. However, if successful, investors stand to be paid handsomely. Of course, the company needs to continue rebuilding and ramping its product portfolio. As it does, it should be noted that LTRX's product-planning process includes an assessment of whether a new product holds the potential of being attractive to a potential acquirer, (like SWIR). This could put LTRX in play long before the company reaches its full potential.

In closing, there are risks in every story. In this case, LTRX's challenges appear to be baked into its share price, while its opportunity is being heavily discounted. Indeed, management has executed against every major objective since taking over several quarters ago. They will be presenting this story to institutional investors today, making their first appearance at the Southern California Investor Conference at 2PM Pacific Time. Clearly, management is confident in its path. Accordingly, we continue to believe that shares of LTRX are poised to triple.

Disclosure: I am long LTRX, SWIR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.