Lantronix, Inc. (LTRX) Q4 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. And welcome to the Lantronix Fourth Quarter and Fiscal Year 2012 Earnings Conference Call. My name is Keith and I'll be your operator for today. [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 your host for today, Ms. E.E. Wang. Please go ahead.

Thank you, Keith. Good afternoon everyone, and thank you for joining Lantronix Fourth Quarter and Fiscal 2012 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 September 5 by dialing (888) 286-8010 or for international callers, (617) 801-6888 and entering passcode 65476087. Before we begin, we would like to make our investors aware of some upcoming investor relations events we'll be participating in. Tomorrow, we'll be presenting at the Southern California Investor Conference here in Newport Beach. An audio webcast of our presentation will be available via our website tomorrow starting around 2 p.m. Pacific. On September 5, we'll be participating at the ROTH Semiconductor Corporate Access Day in San Francisco. And on September 10, Lantronix will also be presenting at the Rodman & Renshaw Annual Growth Conference in New York City. For more information on these events, please feel free to contact me at investors@lantronix.com. 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, operation, inventory 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 substantial risks and uncertainties that could cause the company’s results or future business, financial condition, results of operations or performance to differ materially from its historical results or those expressed or implied in any forward-looking statements made in this conference call. For a more detailed discussion of these and other risks and uncertainties facing our business, see the company’s recent SEC filings, including its annual report on Form 10-K filed for the fiscal year June 30, 2011, and its quarterly reports on Form 10-Q filed for the fiscal quarters ended September 30, 2011, December 31, 2011, and March 31, 2012, which are available through the Investor Relations portion of our website at www.lantronix.com. Lantronix's annual report on Form 10-K for the fiscal year ending June 30, 2012 also will be made available through the Investor Relations portion of our website. Readers and listeners are cautioned not to place undue reliance on any forward-looking statements, which 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. During this call, the company also will discuss non-GAAP financial measures. The company believes that the presentation of non-GAAP financial measures, which when presented in conjunction with the corresponding GAAP measures, provides important supplemental information relating to the company's financial condition and results of operations. The non-GAAP financial measures disclosed by Lantronix should not be considered a 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 these non-GAAP measures to monitor and evaluate ongoing operating results and trends, and to gain an understanding of our comparative operating performance. 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. Please refer to our fourth quarter and fiscal year 2012 news release where we have provided the definitions and reconciliations for the non-GAAP financial measures that we use. I would now like to introduce Kurt Busch, President and CEO of Lantronix.

Thank you, E.E. Before Jeremy gets into the details regarding our financial performance for the fourth quarter ended June 30, 2012, I wanted to share with you a few thoughts on Lantronix performance since I joined the company a year ago, as well as give some insight on where we are headed. As outlined in our previous conference call, the key elements of our fiscal year 2012 plan were to recruit the right leadership and resources, improve margin, decrease inventory and ensure that strong financial discipline is in place, put in place a new product strategy and culture that's focused on delivering innovative new products that would increase Lantronix market share as well as expand the markets we address. Today, Jeremy and I are pleased to report that we've executed on each one of these elements. Specifically, we've put in place a world-class management team that in less than 1 year, delivered measurable, significant results, including delivering 4 sequential quarters of gross margin improvement, bringing operating expenses in line with our non-GAAP revenue breakeven target of approximately $11 million, achieving non-GAAP net income in 2 quarters in a row, reducing net inventory by more than 1/3, reducing accounts payable by more than half, stabilizing working capital and at the same time, reenergizing and refocusing the company's R&D resources and substantial IP portfolio to launch 5 new products into the -- into production during fiscal 2012 and a total of 7 since the new strategy was put in place. Over the past fiscal year, our focus was on creating a solid foundation or platform for the future of Lantronix. In fiscal 2013, our focus will be on continuing to aggressively execute on our development plan and increase our marketing and sales efforts to drive towards profitable growth. Before I go into the details of our plans for fiscal 2013, I'd like to turn the call over to Jeremy to go over our financial highlights for the fourth quarter ended June 30, 2012. Jeremy?

Thank you, Kurt. By now, many of you have seen our Q4 and fiscal 2012 news release, which is available on the Investor Relations section of our website at www.lantronix.com, and provides income statement and balance sheet information on our full fiscal year and quarterly results. I'd now like to take a few minutes to go over the highlights of our results from the fourth quarter of fiscal 2012. Net revenue for the 3 months ended June 30, 2012, was $11.6 million, a decrease of 4% compared to $12.0 million for the 3 months ended June 30, 2011. And sequentially, a decrease of 4% compared to $12.1 million for the 3 months ended March 31, 2012. The year-over-year change was due to decreases in our device enablement and device management product lines, which were partially offset by an increase in our xPrintServer, Spider and PremierWave EN product families. The sequential decrease in net revenue was primarily due to lower sales in our EMEA region that we believe are the result of economic uncertainty and instability in the eurozone. A decrease in sales of SLC console servers, which tends to vary based upon the timing of data center build-outs and projects and the slight decrease in sales resulting from supply constraints. We've made some good progress towards remediating this issue; however, we may continue to see some constraints during the first fiscal quarter of 2013. While our business has traditionally been lumpy, the continuing economic uncertainty combined with a typical summer slowdown in eurozone has further reduced our visibility in the Q1. Gross profit as a percentage of net revenue for the 3 months ended June 30, 2012, was 50.7% compared to 46.1% for the 3 months ended June 30, 2011, and 48.8% for the 3 months ended March 31, 2012. This represents the fourth sequential quarter of margin improvement. While we may experience downward pressure on our gross margins due to product mix as new, lower-margin products start to make up a larger portion of our total sales, we expect our gross margin to remain within the company's target model range during fiscal 2013. Selling, general and administrative expenses were $4.2 million for the 3 months ended June 30, 2012, a decrease of $3.1 million or 43% compared to $7.3 million for the 3 months ended June 30, 2011, and up sequentially by $105,000 or 3% from $4.1 million for the 3 months ended March 31, 2012. The year-over-year decrease in SG&A expenses were primarily due to costs of $2.5 million associated with an independent investigation and severance for former named executive officers during the fourth quarter of fiscal 2011. There were no similar costs during the fourth fiscal quarter of 2012. In large part, the remaining balance of the decrease in SG&A expenses of approximately $600,000 can be attributed to the cost containment activities that management began to implement during the second fiscal quarter of 2012. During the first fiscal quarter of 2013, we may experience a slight increase in SG&A expenses as a result of professional fees related to the timing of our annual audit and proxy statement. Research and development expenses were $1.8 million for the 3 months ended June 30, 2012, and remained essentially flat from the same quarter in fiscal 2011 and the third quarter of fiscal 2012. During fiscal 2013, we expect our R&D expenses may trend upward as we continue to execute on new product development. GAAP net loss was $178,000 for the 3 months ended June 30, 2012 or $0.01 per share compared to a GAAP net loss of $3.6 million or $0.34 per share for the 3 months ended June 30, 2011, and sequentially, a GAAP net loss of $41,000 or $0.00 per share for the 3 months ended March 31, 2012. Non-GAAP net income for the 3 months ended June 30, 2012, was $351,000 or $0.03 per share, compared to non-GAAP net loss of $433,000 or $0.04 per share for the 3 months ended June 30, 2011, and sequentially, non-GAAP net income of $471,000 or $0.04 per share for the 3 months ended March 31, 2011. We expect to maintain a quarterly non-GAAP breakeven point at or below $11 million in quarterly net revenue. This assumes a 50% gross margin and takes into consideration our variable costs such as variable compensation. Now, turning to the balance sheet. Cash and cash equivalents as of June 30, 2012, were $11.4 million, compared to $5.8 million as of June 30, 2011 and $1.8 million as of March 31, 2012. The increase in cash was due to the sale of our common stock in April and May 2012, which generated net proceeds of approximately $9.5 million. During fiscal 2013, we expect to use some of this cash to further execute on our product development plan, including capital expenditures to support this plan and continued payments on our existing term loan. Net inventories as of June 30, 2012, were $6.0 million, a decrease of $3.2 million or 35%, compared to $9.2 million as of June 30, 2011. Based upon our current forecast, we expect to increase inventories over the next year as we put in place stocking levels for product releases and increase buffer stock for projected growth in demand. Accounts payable were $3.6 million as of June 30, 2012, a decrease of $4.8 million or 57% compared to $8.4 million as of June 30, 2011. The decrease was primarily due to paying vendors on a more timely basis and reducing the balance of our net inventories. Working capital was $11.9 million as of June 30, 2012 compared to $5.2 million as of June 30, 2011. While our quarter-to-quarter results may fluctuate based on economic conditions and the timing of end-user orders, we believe that as our new products begin to take hold, we'll be able to achieve our financial targets and drive increased shareholder value. I'll now turn the call back to Kurt.

Thank you, Jeremy. During fiscal 2012, I committed to you that we would build a strong product development machine. Lantronix achieved this goal by launching an unprecedented number of new products, 7 in 9 months, and exceeding our stated objective of on average 1 new product released to production per quarter. I'd like to give you a brief update on the market response we have received on some of these new products. I'll start with our device management products which often generate immediate new revenue as we experienced with the xPrintServer product family as it contributed to the last 2 quarters of fiscal 2012. The launch of the xPrintServer products enhanced the company's visibility in the marketplace, increased visits to our website, pulled through sales on our e-commerce store front as well as overall business opportunities. After launching the network edition, we received considerable customer feedback requesting support for USB printers. Though not part of our original enterprise focus plan, we quickly addressed this request with the release of the home edition. The media response to this member of the xPrintServer family has exceeded our expectations with coverage in New York Times, Wired, InfoWorld and many other publications. To further grow revenue, we are working diligently on expanding the sales channels for our full xPrintServer product line. Our external device enablement product such as the EDS-MD for medical device aggregation, PremierWave XN for industrial wireless and PremierWave XC for managing machines over cellular networks usually involves 9 months or longer sales cycles. These products often provide long-term multi-year recurring revenue once a VAR or OEM buys into the product and bundles it as part of a larger solution such as we experienced today with our EDS and UDS product lines. While revenues from these products are often dependent on the timing of end-user projects and can fluctuate from quarter to quarter, the market longevity of these types of products is often in the range of 5 years and sometimes longer. We recently experienced increased interest in our EDS product line in healthcare environments and expect healthcare to be a driver for the EDS products moving forward. The new additions to the EDS and PremierWave product lines have generated a good pipeline of opportunities in the energy, healthcare and security segments. We are expecting these products to be drivers for increased revenue in the latter part of fiscal 2013. In February this year, we launched xPico, the world's smallest device server and newest embedded member of our device enablement product line. This product line is one that we believe will provide significant long-term value to the company. As an embedded solution, the sales cycles for our products such as the xPico can be anywhere from 9 to 18 months or longer before a customer commits to high-volume purchases. However, the upside of this type of product line is it generates recurring revenue once it is adopted. 6 more years and the increased likelihood that the next-generation version is designed in. Since launching xPico, we are happy with the traction it has generated in several markets, including security, industrial automation and utility segments. As we move forward in fiscal 2013, we can expect to expand the xPico family with new members that can be dropped in to the xPico socket and deliver an almost instant upgrade to future functionality for our customers. Most recently in July, we launched the xSenso, our first analog device server. We believe that the ability to simply and cost-effectively put sensor data on the network is an underserved market with substantial opportunities in a wide range of verticals. We developed and launched the xSenso to address this market allowing organizations to not only collect data remotely from analog sensors, but manage the data collection intelligently and in a wide range of physical environments. Since its launch in late July, we've seen solid interest in this product from customers in industrial automation, manufacturing and energy segments that we expect will translate over the next several quarters into new product revenue. I want to give special kudos to our engineering team for hitting the aggressive schedule for this brand-new and very challenging project. Looking forward to the coming quarters, you can expect to see new members of our cellular, xSenso, xPico and xPrintServer product lines. In addition, we will introduce some enhancements and new form factors to proven and familiar Lantronix products. All these are directed towards expanding our market share and creating long-term growth drivers for the company. Key to the successful ramp of these products will be execution on our sales and marketing plans. During fiscal 2012, we brought greater discipline and accountability to both these fronts. With this foundation, we plan to expand and accelerate efforts throughout fiscal 2013. Last week, we announced the launch of our global sales partner program. In addition to providing an improved and more direct collaboration between our global distribution network and Lantronix in-house and field sales teams, the new program enables our sales partners to develop co-marketing programs, tap into faster business lead dissemination and access to additional tools that we believe will accelerate our global business sales and distribution efforts as we continue to launch new and exciting product solutions. Last year, many of you asked me why I joined Lantronix. At that time, what I saw was a company with an established brand, deep engineering and IT resources, a strong distribution network and a team that was passionate about the company. Today, I can say that in addition to those strengths, we have an energized and focused product development and execution mentality that continues to build momentum. We have a range of new products that provide a solid platform to fulfill the needs of the M2M marketplace. And we are witnessing increased excitement from existing customers, distributors, as well as a growing interest from new channels. In summary, we are pleased with the progress we've made in fiscal 2012 and in fiscal 2013, our focus will be to continue to execute the market-driven product development, maintain financial and operational discipline and aggressively expand our marketing and sales efforts. We remain confident that as our new products ramp over the next fiscal year, that we'll be on track to achieve our previously stated target model and ultimately, to deliver long-term value and growth. Before I turn the call over to questions, I'd like to take a moment and welcome our newest board member, Mr. Paul Folino, a former CEO and currently chairman of Emulex. Paul is an inspiring technology industry veteran and leader and we are thrilled to have someone with his experience on our board. I look forward to working with him and the rest of our Board of Directors as we move forward to create profitable growth for our shareholders. Finally, I'd like to thank my Lantronix colleagues, our shareholders and our partners and our customers for ongoing support. Operator, we'd like to open the call for questions.

[Operator Instructions] And your first question is from the line of Krishna Shankar with Roth Capital.

Looking into September quarter, can you sort of talk about what you see in terms of order activity both from OEM partners and the distribution channel? And how macro weakness, maybe on your results you did indicate that Europe was one of the factors that you saw some revenue weakness in the June quarter, if you could talk about the environment and your order trends that would be helpful.

Yes, I mean, right now, we continue to have poor visibility even into the September quarter, given the macroeconomic situation in Europe as well as the traditional summer slowdown in Europe, has only made our visibility worse. As much as I'd like to give guidance into this quarter, I really can't do it so at this time, Krishna. I'm sorry about that.

Okay. And then in terms of the new products that you have, which ones would likely show the sort of fastest trajectory to revenues, if you could contrast the xPrint, the xPico, the other embedded products, if you could talk about the revenue opportunities in each of the 3 major new products you have launched.

Yes, that's a great question. So typically, our device management product such as the xPrintServer, our SLC product line, our Spider product line, things that fall into the device management product line. Those types of products, we almost see immediate revenue on. They're typically products that stand on their own and very often are not designed in with other products. So sometimes there's some lumpiness with, let's say, data center build-out and whatnot. Our embedded products are kind of the opposite of that. So things like the xPico is an embedded product and it needs to be designed in much like a semiconductor into someone's system and then that system has to go through its full qualification and its ramp. And we typically see somewhere between 9 to 18 months when I look back at historical revenue ramps of things like the XPort, which is one of Lantronix -- still one of Lantronix's most successful product. So those embedded-type products that are much like chips or some of the 8 -- or I mean, 9 to 18 months. And then the ones that are in the middle would be the external device enablement products and those would be the things along the lines of the PremierWave XN for industrial wireless, the PremierWave XC for cellular connectivity as well as the xSenso. All those types of products, we typically would start seeing revenue in kind of the 9 months to -- say, in 9 months to say, 1.5 years kind of time frame but it's really, you start seeing things at the 9-month sort of time frame.

And also on the xPrintServer for the Apple ecosystem. You've expanded your footprint there with new channels and distribution partners and you also have the home addition. Can you talk about the opportunity there with the home addition and the new set of distribution channels?

Yes, so we've installed -- we've made some progress there. And in fact, I think we have quite a bit more progress to go on the distribution channels for the xPrintServer product line. Today, it is available on many online sites such as Amazon and Newegg and whatnot but -- and the only brick-and-mortar today is in Micro Center. And we really do need to expand our sales channels for the xPrintServer product line. We're doing that today. We do think that the opportunity for the home version of the xPrintServer, it's really targeted towards those people that are moving in sort of the -- with what was referred to by Apple as the post-PC world, the people that use tablets as their main computing device and that's basically what we've done at our house where we don't even turn on our PCs anymore at home. It's just the xPrint or the iPads and the xPrintServers are typically the main things that are on. So we are quite encouraged by the opportunity but we do need to increase the channel for those products.

Okay. And then a question on inventories. A nice reduction in your inventory there year-over-year. What is the state of your inventory both on hand and in the channel? And do you see -- are there any lingering effects to the disruptions from the Thailand floods and other factors you had cited in your last call?

I think that from an inventory standpoint, we've gotten our inventory where basically we're at the bottom of our inventory, I guess, is the best way to put it. We've completed our inventory reduction efforts. And now, we're going to be building up inventory slightly to support both buffers for increased demand, as well as stocking quantities for new product introductions. So we think that we've gotten our inventory -- it's basically at the high end of the range. We -- in the last call we talked about an inventory turn range between 3 and 4. At the end of this quarter, inventory turns were approximately 3.9, I believe, was the number.

3.8.

Or 3.8. Okay. Thank you, Jeremy. And we think, we're kind of at the top end of that level.

Also to clarify, we didn't -- we were not impacted by the Thailand flooding.

So things are in a steady state in terms of both your inventory on hand and in the channel right now?

Yes, we believe so.

Your next question is from the line of Bill Nasgovitz with Heartland Funds.

Well, what percent of our sales is in Europe?

It's usually approximately 30% of our sales is in Europe, plus or minus a few percent.

Is there any particular areas of the world where sales were up for the June fiscal year?

For the quarter on quarter, we did see an increase in our Asia Pacific region.

And what percent is Asia?

Approximately 20%. Actually, it was 18% in Q4 2012, and it's about 15% in the prior quarter.

Okay. Do you see that opportunity as a large one for the company?

The APAC region?

Yes.

Yes. Actually we do feel that there is a good opportunity for the company and that is one of the areas when in the prepared comments I talked about, increasing our marketing and sales effort. And the APAC region is one of the target areas for that effort.

Okay. So I'm just looking at your slideshow here and your one particular -- Page 13, you have accelerate growth expanding Lantronix addressable market. And looking at 2012 versus 2011, it looks as if you're estimating about a 60% increase in the addressable market through this calendar year, I would assume. And it's just frustrating. We all know that this market, the addressable market, over the years is growing. Having been a long-term Lantronix shareholder, it's extremely frustrating to go through year after year and we know that it's a new team and all that, but if the addressable market has been growing again very fast this year, how come we keep recording down sales?

As we come out with new products, those are increasing our addressable market, and as I addressed Shankar's -- or Krishna Shankar's questions, if there is some lag between new products coming out, my feeling of looking at this, Bill, is that when we have new products coming out that expands our addressable market but it does takes some time for those new products to get into production and actually start generating revenue. And our increase here on the slide that you're talking about, Slide 13 of the investor presentation, that increase in addressable market is entirely due to new products being introduced into the marketplace.

All right. Well, okay. Just a follow-up question on this market. You highlighted 2 device management products, the xPico and the xSenso.

Looking through device enablement products is what -- how we refer to those.

So which sector would they be in? The regular analog?

Referring back to the -- to Slide 13, the xPico fits into the current device management business. That is a much smaller version of our wired -- pardon me, the current device enablement segment. That is a much smaller, more cost-effective version of our, say, something similar to the XPort, and that would fit into the bottom darkest color to refer to the slide that you're bringing up. And then the other...

Okay. So is it fair to say under current device management, is that where the bulk of our products are today? Is that area really hasn't grown that much?

Yes, most of the revenue today is under current device enablement, the bottom line, and a very small of our -- small part of our revenue, approximately 20%, is in the device management space. Those our products such as our SLC and Spider products.

Okay. So then going forward, we've added into this new xPrintServer, that's a big growth area, and the cellular analog device enablement?

Yes, exactly. And the analog product is the xSenso. It was the first of the analog products.

Okay. So do you anticipate -- it looks as if September is going to be another bad quarter. So what are -- when are we going to see a turn on the top line?

We're not giving that detail of guidance but we do expect that the new products will be contributing to revenue in the latter half of fiscal 2013.

The second half of 2013, next?

We should be seeing some of the new products such as the xSenso, the PremierWave, the 2 PremierWave products that we're talking about and then the xPico being that's an embedded product probably will not contribute significantly for or at least a year from now.

Which of the new products has the biggest potential going forward?

I don't have a real good answer for that. I think they all actually have pretty good potential at this point, Bill.

Going back to your examples, xSenso and xPico, which do you think is going to be bigger in 2013, '14?

We're not giving that level of information at this point.

Well, could you just give us an example, your customer -- our customer list was impressive. Can you just give a specific example of where the xSenso or the xPico is used today?

So the xPico is an embedded product, and that's targeting towards the same product or the same segment as our XPort today. So XPort today is Lantronix's most successful product and it makes up say 30% of our revenue plus or minus on any given quarter. The xPico is to expand that market that we were pretty much closed off of today due to either form factor, because of size as well as cost. The xPico is both smaller and lower cost so that will expand the addressable market to things like the XPort can go into and that typically goes into security-type applications, as well as we see industrial automation and energy applications for the XPort. So that is where the xPico is, and it's really intended to grow market share of where we play today. The xSenso, on the other hand, is an analog device server. And we're seeing interest there in areas such as industrial automation, manufacturing, energy or people who want to [indiscernible]

Kurt, just give a specific example. You don't have to name the customer but they're using in the industrial area this sensor to do what specifically?

Okay. Yes, sure. The most common sensor is temperature. So the xSenso, you could plug temperature sensors into it and put it into the network and set up alarms. So say you're doing manufacturing and the temperature has to stay within a certain range, the xSenso can offer you that. The same for humidity or any variation of sensor you would like to plug into it.

Okay. And then the xPico, just a specific example?

So a specific example for xPico is say you have a security panel that you want to network-enable. And the xPico is a very small module. It's about the size of a US quarter. It can be plugged into that panel and enable that panel to be accessed over the network.

Okay. And then just 1 -- 2 final questions. Do you use 3D printers at all in your design or manufacturing process?

We use them truly for prototyping. We do not have any production with 3D printers, but we regularly use them for prototyping.

And that's a positive?

Yes, I think it's great. We can get a 3D version of a product, I think, in 3 or 4 days. We use that for prototyping our boxes. So you get a look and feel and actually we can have something that we can do beta testing with it as well. The 3D-printed versions are a little bit more fragile but they are -- they do look like it and has really help us get to market quicker.

And then lastly, in your presentation here I don't see the balance sheet. I did see working capital -- I heard working capital $11.9 million. What is the debt outstanding versus a year ago?

So current debt is $667,000 and a year ago, it was about $1.2 million.

Okay. So I hope this is a year of top line. It looks as if you've made some really good moves here with the balance sheet. And certainly, R&D is starting to pay off with new products. So that's great to see. I just hope we get some traction on the sales front. It's been a long, long pull here.

We agree, Bill.

Your next question is from the line of Ed Burrum [ph] with Runo [ph].

I'm just trying to get a feel for kind of what we're looking at top line for the next couple of quarters because the year-over-year is one thing but the sequential decline of 4% in the -- in your fourth quarter, which given new products, I understand some of them won't be revenue generating for a while. But EMEA is 30% of your total revenues. In this -- in the quarter that just finished, was that market down -- it's double digits, sequentially to create a 4% top line decline for the quarter? What kind of decline is recurring in Europe for you guys?

Yes, this is Jeremy. EMEA was down about 15% sequentially.

Down 15%. And I would presume given that Europe shuts down and the things are not very good there that you're not looking at anything better sequentially in the quarter that we're in. And I know you don't want to answer that because that's guidance but so the other question I have is SpiderDuo and, I guess, XPort Pro were 2 products that were refreshed a couple of years ago. They're important products for you guys, what's the -- what do they represent as a total percent of revenue? And are they the ones that are sort of creating the disappointing top line growth here?

Those products, the SpiderDuo and the XPort Pro, although they came out a few years ago, they're growing but they're not growing as quickly as probably we would like. At the end of the day, the issue is a decrease in legacy products that are very, very old.

Okay. All right. Okay. All right, listen, and are you -- you made no commitment. At least, I didn't hear a commitment to maintaining non-GAAP profitability in the quarter that we're in, is that correct? I didn't hear that. So I would presume that this quarter, hearing what you're saying, that we could see you slip back into a non-GAAP loss in the quarter that we're in.

We're really not in a position to comment in either direction being that we don't have full visibility of where the quarter will end.

All right. Okay. All right. Well, listen, I think you guys are obviously doing as well as you can. I think you've done a great job on your balance sheet and managing the expense side of your P&L and we'll just have to wait and be a little patient to see whether your new products and marketing strategy will sort of pan out. So I appreciate it. Thanks.

Your next question is from the line of J.D. Abouchar with GRT Capital.

I had a question on the embedded products because obviously that's where a fair amount of growth can come from if they get traction. How different is that sales channel? Is that more an OEM sale and sort of how do you handle that conflict between going through your VARS versus direct? And then ultimately, what impact does margin have if you get more OEM business?

The embedded business today makes up approximately 50% of our business. So it actually, we have a good channel for developing the embedded relationships today and though they're -- the embedded products are slightly below the corporate average, they're not dramatically below the corporate average. So we're not foreseeing any kind of a drastic change in our overall gross margins due to expanding the embedded business.

Okay. And on the healthcare products, is that a dramatically different sales channel or is that sort of the guidance you already have?

It's a similar sales channel that we have -- already have. And healthcare, we believe, is a very good market for us but it is like embedded has a very long qualification cycle.

Right. And final question, on the xPico, we're working on a wireless version. Is that correct?

So we haven't commented on what the next version of xPico is, but I think that's highly likely.

Your next question is from the line of Mark Gomes [ph] with Haier.

Your representation tells us that your addressable market should double over the next year. So kind of addressing the angst of one of your previous callers. It seems to me that it's important that you can provide us with a view into the things that you see on a day-to-day basis that make you boast on your intermediate and long-term revenue picture. Obviously, revenues haven't taken off yet but the stock is at its low or pretty much close to its lows paying investors to wait if you are indeed set up to be successful. So maybe if you can provide us an insight into that.

So in the short term we have our device management product such as the xPrintServer, which we believe will continue to ramp. We have -- if you look at the largest opportunities, we believe are in the cellular and analog device enablement areas where we've come out with the first members of those families and we'll be coming out with future cellular and future analog products to be able to better address each area of that -- of those market segments. And I'm actually quite encouraged by that area because those are areas we really could not plan before. So that's expanding our addressable markets. And then really from long term we'll have continued and newer device enablement products which are really the xPico and the future xPico versions that we think will be more of a long-term revenue driver for us, say, a year, 1.5 years out from today.

Okay. And in your current market segments, is it safe to say that your goal is to at least maintain, if not grow market share?

Yes, that's exactly right.

Okay. And then obviously, your market share will increase in your new areas because you're coming from 0, right?

Exactly.

So it should be safe to say then that as these products ramp up and we see your addressable market double in size, that you must be feeling that at some point once these products do ramp up, that your company revenue will double in size as well.

We are -- we did publish a target model that basically has a 1- and 2-year -- or 1- to 2-year outlook, as well as a 3-year outlook of what we look at what would be from a gross margin, operating income and non-GAAP operating income point of view. And all of that is assuming top line growth.

But what I'm saying is if you maintain your market share or grow your market share in all -- in each of your segments and your segments double in size, then your revenue should by the associated property also at least double in size?

Yes, at some point. I mean, you don't get it immediately.

And that's all the time we have for Q&A today. So I'm going to turn the call back over to Mr. Kurt Busch for some closing remarks.

I'd like to thank all of you for calling in today and I look forward on updating you on our progress, achievements and actions when we report our first quarter results in early November. Thank you.

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.