Good day, ladies and gentlemen, and welcome to the Q2 Fiscal Year 2012 Lantronix Inc. Earnings Conference Call. My name is Josenia [ph] and I will be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I will now turn the presentation over to the host of today's conference, E. E. Wang. Please proceed.

Thank you, Josenia [ph] . Good afternoon, everyone, and thank you for joining Lantronix Fiscal 2012 Second Quarter 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 through February 16 by dialing (888) 286-8010 in the U.S. or for international callers, (617) 801-6888 and entering passcode 17177530. As a reminder, during the course of this conference call, management may make forward-looking statements in their prepared remarks and in response to your questions and statements regarding product strategy, marketing plans and future financial metrics, including revenue, profitability, operating expenses, cash flow and working capital. These forward-looking statements are based on Lantronix's current expectations and are subject to a number of risks and uncertainties. Actual results could differ materially as a result of several risk factors. For a more detailed discussion of these risk factors and other risks and uncertainties, read the company's recent SEC filings, including its annual report on Form 10-K filed for the fiscal year ended June 30, 2011 and its quarterly reports on Form 10-Q filed for the fiscal quarters ended September 30, 2011, and December 31, 2011, which are available through the Investor Relations portion of our website at www.lantronix.com. Readers and listeners are cautioned not to place undue reliance on any forward-looking statements, speak only as of the date hereof and the company undertakes no obligation to update these forward-looking statements to reflect subsequent events or circumstances. If the company were to update or correct one or more of these statements investors or others should not conclude that the company will make additional updates or corrections I would now like to introduce Jeremy Whitaker, Chief Financial Officer of Lantronix. Jeremy?

Thank you. In addition to GAAP results, we report adjusted net income which is referred to as non-GAAP net income or loss and non-GAAP net income or loss per share. We also report adjusted operating expenses referred to as non-GAAP operating expenses. Please refer to our second fiscal quarter 2012 news release posted in the Investor Relations section of our website where we have provided the definitions and reconciliations for the non-GAAP financial measures that we use. We believe that the presentation of non-GAAP financial measures when presented in conjunction, the corresponding GAAP measures provides important supplemental information relating to the company's financial condition and results of operations. Non-GAAP financial measures disclosed by Lantronix should not be considered as substitute for or superior to financial measures calculated according to GAAP. Management believes that non-GAAP operating expenses, non-GAAP net income or loss and non-GAAP net income or loss per share are important measures of the company's business. Management uses the aforementioned non-GAAP measures to monitor and evaluate ongoing operating results and trends and to gain an understanding of our comparative operating performance. In addition, certain of our stockholders have expressed an interest in seeing financial performance measures exclusive of the impact of matters such as decisions relating to the restructuring, which while important, are not central to the core operations of our business. Non-GAAP financial measures used by Lantronix may be calculated differently from, and therefore may not be comparable to similar non-GAAP information provided by other companies. All financial results and reconciliations should be evaluated carefully. Now turning to our financial results for the 3 and 6 months ended December 31, 2011. Net revenue for the 3 months ended December 31, 2011, was $10.5 million, a decrease of 18% compared to $12.7 million for the 3 months ended December 31,…

Thank you, Jeremy. Jeremy has just spent the last few minutes giving you the financial details of what occurred during the 3 and 6 months ended December 31, 2011. Since joining the company a little more than 5 months ago, the new management team has embarked on an aggressive plan to create long-term value for our shareholders. As discussed on previous calls, 4 key elements of our plans are to: hire and integrate the right leadership and resources to execute on our strategy; increase margins, decrease inventory and ensure strong financial discipline is in place; develop a new product strategy that is intended to provide innovative new products that will increase market share, as well as expand the markets lead address; take action to create a strong market-driven product development machine. While our financial results for the first half of fiscal 2012 were disappointing, I would like to emphasize that we have made and continue to make progress in all of our goals. In the past 150 days, a little more than 5 months time, the company has achieved the following: we rebuilt, recruited and retained the management team more than 150 years of experience in the M2M and communication technology sectors; we filled all open senior staff positions before the end of the December quarter. As of January, we have a new opening in the role of Vice President of Operations and I expect to fill that position soon. All of these leaders have hit the ground running. The energy and commitment and enthusiasm they have brought to Lantronix has translated itself across the entire organization and increased discipline and a renewed focus on execution in all functional areas that I believe will ultimately lead to enhanced value for our shareholders. We've implemented actions to bring greater financial discipline.…

[Operator Instructions] Your first question comes from the line of Paul Johnson from Nicusa Capital.

Kurt, if I could, I'd love to run through a couple of different questions. Starting with the management team, obviously, you've only been there 5 months give or take and I know there were some open wrecks when you got there and some upgrade. Can you just give us this -- just kind of order or magnitude how many people you've changed, brought in and we should really view as part of the new management team?

Yes. So as the executive, or at least, my direct staff, I brought in a new CFO, Jeremy Whitaker, a new head of Product Management, Mak Manesh, who has a long history of M2M Communications, a new Vice President of worldwide sales who again, has a long history of worldwide -- of M2M Communications, Rob Robinson. I brought a new head of HR, a new head of corporate counsel -- or a new corporate counsel, as well as a new head of North American Sales who is a returning Lantronix employee that was previously our number 1 salesperson. So we're quite happy that he has come back to Lantronix. And I think the that pretty much rolls out the full executive staff. The only position I have not replaced is the head of engineering and I'm quite happy that the engineering team has maintained stability. We actually have had very little turnover in that department.

When you say that the management team is very excited, it's pretty easy to say since they're all new, they've all elected to come to help you turn this around in a fairly short order.

Yes, that's correct.

Shifting over to products for a moment. I know in your presentation in New York and in some of your the other presentations. In the conference call, you've talked about the second half of calendar '12, the most important to new efforts are cellular, which sounds like it would be a -- bringing cellular to the current product line, extending it over time but bringing the cellular communication to the current set of products to complement what you have in wireless and wired line, is that the best way to think about the cellular effort?

Yes, that's our real good way of describing it so the main Lantronix IP and it's -- pretty much our special sauce is on the serial communication and that communication over the network. So here, we are enhancing the network interface to be cellular as opposed to wired or wireless.

Is it easy to think that you're expanding the market by 50% because you're adding a new interface or is cellular much bigger than what you address now? How important...

We feel that it's approximately the same size to slightly bigger and we also feel that it is a growing segment.

And since the secret sauce is behind the interface, I assume the idea that once you offer cellular, you offer your whole -- a series of products over time that you've demonstrated are very powerful in the wireless and in the wireline. You're now adding just a new interface so presumably they should be fairly easy to get design wins over time?

Yes, that's definitely our hope.

All right. now sensors I understand, is completely different though. Because sensor is going after a market that you've never really addressed and although in a sense, it's just a different interface, you're really talking about bringing a whole new capability to a market that's probably been underserved over the years.

Yes, that is our feeling. We do feel that from a technology standpoint, the serial communication IP that we've developed at Lantronix is very applicable to sensors and it is effectively, just a new network interface or a different new machine interface, if you will, where serial was the old machine interface and sensor is now the new machine interface. But the market that we're addressing is a totally new market and it's a market of people that want to make decisions over the network based on some physical stimuli whether heat, light, sound, pressure or motion. So we're quite excited about the opportunity to enter the sensor space.

Just as I -- it really prompted because you guys started talking about it and I started to do a little bit of work in that area and the observation I'm making is that, that market appears to be much larger than what you've addressed historically.

We definitely would hope so. I mean, this is a new step for us and we look forward to introducing products into that market.

Second observation is that it appears to be somewhat underserved by advanced communication technology.

We would agree with you.

Third is that the competitors that you have gotten to know very well on your core, historical markets, no one appear to be anywhere near this market. So if there's a competitor, it's brand new people. And sense is if you can really pull this off, you'll be the -- you'll have first mover advantage in some of these markets.

Yes, we certainly hope so.

You have a large market underserved and I assume it's attractive because you feel can get there soon with technology that nobody else is offering.

That's correct.

And should we anticipate at least an initial effort before the end of the calendar year?

Yes, before the end of calendar 2012, we'll be offering both cellular and sensor products to the market place.

Terrific. And then without -- we can't not talk about products without talking about the flagship products, xPrint. Can you talk -- can you -- flesh out -- it's been out in the market I know, only for a few days now. Can you just talk a little bit about commercial receptivity. You've always said spectacular editorial receptively. What are you hearing in the market? Do people know about it? Are you starting to see traction? Are people starting to sell these?

Yes, we're actually seeing a lot of interest on the enterprise side. Though I can't comment on any kind of volumes but we have heard from people that are in this particular space say they get that particular question, how do I print from my iPad in an enterprise environment. And we understand or are talking to people that serve this market that say they get that question daily. So we are again, quite excited about the response that we have received for the xPrintServer.

As I understand that this thing, literally, you plug it in and your iPad recognizes it all within seconds or certainly, no more than a minute and then you can start printing shortly thereafter. I assume that has great appeal in the enterprise world?

Yes, it is a very, very simple, very simple solution.

If I understand it, this is something that was conceived of after you got there and executed since you've been there?

Yes. That's exactly right. We had the idea at my second week here at Lantronix.

And then finally on this, product. Everything I read about it, that's issued -- they keep saying that this is a member of a family of products, should we anticipate that there'd be more xPrintServers? Brothers, sisters, aunts, uncles?

Yes, most certainly, Paul. The xPrintServer again, did a very simple but we believe, needed function in allowing a iOS device such as an iPad or an iPhone to talk directly to a network printer. We have -- since announcing the products, we have a lot of feedback for additional types of products with additional kinds of features that I look forward to announcing in the next quarters or so.

Your new management -- you're 5 months old and your management team is obviously less by definition. The good news about your product portfolio is they're sort of the land of the living dead, it's sometimes impossible to kill these products. You don't -- the revenues you had in December quarter are a function of decisions you made long before you arrived, there on your watch, I understand. And you guys are doing your best to watch the operating expenses which you have a lot of control over and refreshing the product line and making sure that sales is executing well and all of that. So you're going after the opportunity and servicing your customers. So they like buying from you and all those sorts of things. But we as we look over the March quarter, June quarter, September quarter, what metrics should we be tracking from the outside? Because I know you can only have so much influence on revenues over a short period of time. Obviously the operating expenses, you've set some goals by reducing operating expenses. But what are the metrics that we should track quarterly where we get the sense that in fact, you guys are really executing against your plan? You got the 1 new product a quarter, we've got that, but some -- throw out some more things that we should be tracking.

I would definitely say the -- probably the most important metric for future growth of Lantronix is the 1 new product per quarter. And I think that new product introductions are really what is going to accelerate the growth of Lantronix. There is a number of other goals that we have stated such as reducing our inventory and increasing our margins. I also think they're our key metrics to show that the operations of the company is being done in an efficient manner.

The blocking and tackling of -- on the margin. We shouldn't expect gross margin to pop several percentage points a quarter but we should see steady improvement there, we should see working capital improvement. You obviously have set the bar for lower operating expenses. So all those metrics are fair game for us to watch?

Absolutely.

And then the new products. I assume that -- not to get ahead of yourself and I know you were out on a limb when you made the prediction or I think it was a promise that you would introduce a new product every quarter. But is that -- as your R&D operation continues to execute, I assume your goal is more than 1 a quarter as we get out? I'm not going to tie you to a timeframe but if that's really going to be the goal of growing at 1 a quarter is going to be fine for the next couple of quarters. But I assume you're going to start to raise that bar internally.

I mean, I think that's typically how you manage any organization, Paul. But the 1 new product a quarter is something that we can achieve with current operating expense and we have plans as we grow revenue to reinvest in R&D and we expect to be able to accelerate the product introductions that we do.

And now I'd like to turn the call over to Kurt Busch for closing remarks.

Thank you, operator. I'd like to thank you all for participating on today's call. We look forward to updating you on our progress, achievements and actions when we report on our fiscal third quarter results in May.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.