Lantronix, Inc. (LTRX) Q1 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the First Quarter Fiscal Year 2013 Lantronix 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's First 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 through November 8 by dialing (888) 286-8010 in the U.S. or for international callers, (617) 801-6888 and entering passcode 59543811. As a reminder, during the course of this conference call, management may make forward-looking statements in their prepared remarks and statements in response to your questions. 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 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, see the company's recent SEC filings, including its annual report on Form 10-K and its quarterly reports on Form 10-Q. 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. Also, please note that during this call, the company will discuss non-GAAP financial measures. Please refer to our first quarter fiscal year 2013 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. On that note, I'd now like to turn the call over to Kurt Busch, President and CEO of Lantronix.

Thank you, E.E., and thank you to everyone for joining us this afternoon. I'd like to extend a special thanks to our East Coast investors for joining us, and we hope they have a quick recovery from the damage caused by Hurricane Sandy. At our last call, we stated that our focus for fiscal year 2013 would be on leveraging the foundation that we built in fiscal 2012 and executing the second phase of our turnaround. The key elements of our plan for fiscal 2013 are to further expand our efforts into the market areas we first entered in fiscal 2012. These include wireless device networking, sensor device networking and mobile printing solutions. We'll continue the product refresh cycle on our core business areas, execute on our product development plan with a target of one new product launch per quarter, expand our marketing and sales efforts to accelerate the ramp of new products and finally, manage our operations in line with current market conditions. In spite of the continued European economic uncertainty, I'm pleased to report that during the first quarter, we continued to make measurable progress on each of our objectives. Namely, we achieved year-over-year improvement in gross profit, operating margins and reduced GAAP loss; maintained non-GAAP profitability for the third quarter in a row; experienced increased sales and design win activity for our new products; began initiatives that will expand our distribution channels and relationships with value-added resellers. In addition, we began shipping the xPrintServer Home Edition and in September, we announced that the xPrintServer product family is now being carried at Fry's Electronics Mega Stores. And since the start of fiscal 2013, we have launched 3 new products: xSenso, which is our first device server designed for analog sensors; xDirect, a simple-to-use and cost-effective solution for networking machines; and vSLM, a virtualized software solution that allows IT managers to seamlessly integrate and manage IT equipment. Before I go into more detail on our plans for fiscal 2013, I'd like to turn the call over to Jeremy to go over our financial highlights for the first quarter ended September 30, 2012. Jeremy.

Thank you, Kurt. Please refer to the financial information in the Investor Relations section of our website for additional details that will supplement my commentary. I would like to take a few moments to go over the highlights of our results from the first quarter of fiscal 2013. Net revenue for the first quarter of fiscal 2013 was $11.2 million, flat with the first quarter of fiscal 2012 and sequentially, a decrease of 4% compared to $11.6 million for the fourth quarter of fiscal 2012. Revenue for the quarter continued to be impacted by weak economic conditions in the EMEA region. Net revenue in the EMEA region was $3.1 million in the first quarter of fiscal 2013 compared to $3.5 million in the first quarter of fiscal 2012, a decrease of $0.4 million, or 13%. On the other hand, we're encouraged that revenues in both the Americas and Asia-Pacific regions increased year-over-year. Net revenue in the Americas was $6 million in the first quarter of 2013 compared to $5.7 million in the first quarter of fiscal 2012, an increase of $0.3 million or 5%. Net revenue in the Asia-Pacific region was $2.2 million in the first quarter of fiscal 2013 compared to $2 million in the first quarter of fiscal 2012, an increase of $0.2 million or 9%. Despite the economic uncertainty in EMEA, we experienced a sequential quarterly increase in sales of our new products, which offset a portion of the decline in sales of our older products. Gross profit as a percentage of net revenue for the first quarter of fiscal 2013 was 48.8% compared to 47.4% for the first quarter of fiscal 2012 and 50.7% for the fourth quarter of fiscal year 2012. As discussed on our last call, the sequential decrease in gross profit as a percentage of net revenue was expected as some of our new products that are early in their product life cycle have gross margins that are lower than our corporate average. We may experience some downward pressure on our gross margins due to product mix as products early in their life cycle continue to make up a larger portion of our product sales. However, we expect our gross margin to remain within the company's target model range of 49% to 51% during fiscal 2013 as planned cost reductions are realized. Selling, general and administrative expenses were $4.3 million for the first quarter of fiscal 2013 compared to $5 million for the first quarter of fiscal 2012, and up slightly from $4.2 million for the fourth quarter of fiscal 2012. The year-over-year decrease in SG&A expenses were primarily due to lower professional fees and personnel-related costs. During fiscal 2013, we expect that our SG&A expenses may trend upward as we execute on our plan to expand our sales channels and increase our marketing efforts to build market awareness for new product releases. Research and development expenses were $1.6 million for the first quarter of fiscal 2013 compared with $1.7 million for the first quarter of fiscal 2012 and a slight decrease from $1.8 million for the fourth quarter of fiscal 2012. During fiscal 2013, we expect that our R&D expenses may trend upward as we continue to execute on new product development. GAAP net loss was $430,000 for the first quarter of fiscal 2013 or $0.03 per share, compared to a GAAP net loss of $1.4 million or $0.14 per share for the first quarter of fiscal 2012 and sequentially, a GAAP net loss of $178,000 or $0.01 per share for the fourth quarter of fiscal 2012. Non-GAAP net income for the first quarter of fiscal 2013 was $48,000 or $0.00 per share, compared to non-GAAP net loss of $697,000 or $0.07 per share for the first quarter of fiscal 2012. And sequentially, non-GAAP net income of $351,000 or $0.03 per share for the fourth quarter of fiscal 2012. Going forward, we expect that our quarterly non-GAAP breakeven point will increase to approximately $11.5 million in quarterly net revenue, primarily as a result of our expanded sales and marketing efforts. The non-GAAP breakeven point 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 September 30, 2012, were $10.5 million compared to $11.4 million as of June 30, 2012. As discussed on our last call, during fiscal 2013, we expect to use cash to execute on our product development plan, including increased inventory levels and capital expenditures to support this plan and continued payments on our existing term loan. Net inventories as of September 30, 2012, were $7.6 million compared to $6 million as of June 30, 2012. As previously mentioned, the increase was put in place to provide optimal stocking levels for new product releases and buffer stock for anticipated customer demand. Working capital was $11.6 million as of September 30, 2012, compared to $11.9 million as of June 30, 2012. I'll now turn the call back to Kurt.

Thank you, Jeremy. At the end of last quarter's conference call, I told you that we had completed Phase 1 of our turnaround plan. Entering into fiscal 2013, our intent is to put the same energy, discipline and focus into executing on Phase 2 and putting the company on a path to achieve long-term profitable growth. Our plan is not one that is centered on creating 1 or 2 quarters of results. It is one that is designed to achieve steadily quarterly progress that we will create value and profitability for our shareholders over the long term. Namely, we will make progress towards this vision in fiscal 2013 by executing on the following: first, increasing our marketing and sales efforts. As I stated earlier, this means not just deepening our existing relationships, but actively pursuing opportunities to expand our sales and distribution network globally. In August, we launched a new global premier partner program. This program is directed in improving and creating more direct collaboration between our retail and VAR network with Lantronix sales and marketing teams. In September, we announced the appointment of industry sales veteran, Lei Zhong, as Sales Director for the APAC region, excluding Japan. Lei has extensive experience in M2M sales. We expect him to play a significant role in deepening our relationship and expanding our sales opportunities in Asia. A key part of this initiative is to expand our sales and distribution relationships worldwide. For example, in EMEA and APAC, the vast majority of our sales consist of embedded product. At the same time, in the Americas, our sales are roughly evenly distributed between our 3 main product categories: embedded device enablement, external device enablement and device management solutions. In fiscal 2013, we plan to add new relationships that will expand visibility, awareness and availability in the European and Asian markets of our shorter sales cycle, external device enablement and device management products. Yesterday, we announced that we signed a distribution agreement with Ingram Micro Europe. This is one of the first steps of our plan to expand Lantronix sales opportunities in Europe from predominantly embedded modules to our external device enablement and device management products. We are also expanding our investments in marketing the popular xPrintServer product family. This product family has garnered a lot of media and industry awareness, and during fiscal 2013, we plan to capitalize on this through a concentrated effort to broaden awareness among IT managers, users and potential retail partners. Second is continued consistent execution of our product strategy. The launch of new products and platforms is critical to our business and our long-term vision of becoming the preferred leader in delivering secure, feature-rich, simple-to-deploy M2M connectivity solutions. Since the start of the current fiscal year, we have launched 3 new products: xSenso, the first member of our analog device server product family; xDirect, a serial-to-Ethernet device server whose small form factor and simple plug-and-play connectivity will broaden the market application for Lantronix solutions; and today, we announced the availability of the vSLM, a Virtual Secure Lantronix Management Appliance, a software version of our popular SLM appliance, a key selling enabler of our device management products. For those of you that don't know, SLM is a master control center that allows IT managers to seamlessly integrate and manage multiple pieces of IT equipment through a single interface. With vSLM, we've created a software version of the SLM to be scalable, cost-effective and can be accessed securely anywhere in the enterprise. In addition, IT managers can evaluate the solution by downloading a free time-limited trial version before committing to adoption. During the September quarter, we've experienced a ramp in both design opportunities and design wins for our new embedded products such as the PremierWave EN and xPico, as well as measurable revenue growth from the ramp of our PremierWave EN design win. Since last December, Lantronix has introduced 8 new products into our external device enablement and device management product categories. I'm happy to report that we are encouraged by the initial response to these products. With our efforts to increase investment in marketing and strengthen our sales channels, we expect to further expand the opportunities for both our device management and external device enablement products. In the coming quarters, you should expect to see new members of the xSenso and xPrintServer products family that we believe will greatly enhance their usability in these key new market areas. We also plan on increasing our wireless offerings, including introducing a new addition to the well-received xPico product line. Third, we understand that we cannot create success without also continuing to execute on strong financial and operational discipline. Establishing a strong operational foundation was the primary focus of our efforts during fiscal 2012. As we continue to make progress in fiscal 2013, we realize it is important that we continue to carefully monitor market conditions and exercise control over both our expenses and balance sheet, even as we increase our investment in sales, marketing and R&D to support new product ramps. In summary, we are continuing to make progress on our plan. We have taken and continued to take steps to expand our sales and marketing efforts worldwide. We have executed and will continue to consistently drive our market-driven product strategy. Now over the coming quarters, we plan on expanding our product offerings for the key new areas of wireless, analog sensor and mobile printing. While carefully managing our expenses and balance sheet, we've made investments to optimize our inventory and align it with anticipated new product demand. During the first quarter, our plan has already yielded promising initial results with growth in new product revenues and opportunities. Ultimately, we will continue to focus on execution of Phase 2 of our plan. We believe our efforts will accelerate new product revenue and in the long term, position Lantronix as the preferred leader in delivering secure, feature-rich and easy-to-deploy M2M connectivity 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.

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

Just a couple of questions. What are the mix of device enablement and device management? What is the revenue mix during the quarter for the 2 product lines? And can you also talk about the weakness in the EMEA markets and what you're seeing there so far in the December quarter?

Hey, Krishna, it's Jeremy. I'll give you the mix by product line for the Q1 that we just completed. For device enablement embedded, it was approximately 52%; for device enablement external, it was approximately 29%; and device management was 19%.

Krishna, this is Kurt again here. In the EMEA region, we're really focusing on expanding our channels there, and the Ingram Micro agreement with Ingram Micro Europe is the first step in expanding our channels to be able to effectively sell our external device enablement product, as well as our device management products.

Okay, okay, so I guess the focus there is get some of this external device management and device enablement, which has quicker time to revenue as compared to the embedded product line.

Exactly.

Okay. And then can you talk about -- you said you had good design win momentum for the PremierWave EN and xPico. Can you talk about design wins and the initial revenue ramps in those 2 new product lines?

Krishna, we don't break out specific revenue by product, but we're very encouraged by the areas that these are in. The PremierWave EN is our first, I'd describe it, as system-on-module or a SOM-type part. This device allows people to run their applications on the Lantronix module, and we've seen a lot of good traction in both POS, point of service applications, as well as energy monitoring applications with the PremierWave EN. And then the xPico, we've seen -- that's much more of a horizontal-type product and we're seeing good traction in a number of the verticals that we plan from security to health care to some industrial applications, as well as IT data center. So being the xPico is effectively a horizontal device enablement-type product. It’s basically selling across all the verticals that we play in today.

And you described xPico as more of an embedded module, right?

Yes, xPico is a very small embedded module. There's a picture of it on our website. It's about the size of a quarter.

Okay, okay. And then can you give -- how are bookings during the September quarter? Can you give a sense for how the bookings trended during the September quarter?

Hey, Krishna, this is Jeremy. We don't provide that level of information.

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

Maybe following up on Krishna's -- one of his earlier questions. The company's sort of balancing sort of near-term sales opportunities with sort of the longer-term embedded ones that just used to have a longer pipeline. Maybe you could talk a little bit about how you expand the xPrintServer product and capitalize on this Christmas. Fry's is a great partner, but obviously it's sort of regional and spotty in its locations.

Yes, so J.D., thank you for calling in. The xPrintServer is really one aspect of our vision about being a secure, feature-rich and simple-to-deploy M2M provider. And one of the nice things we've seen about it is that it's doing a good job of pulling through IT data -- or data center or IT management products, has very similar sales channels. So part of our increased efforts in IT data center, which basically will help the external device enablement, as well as all of the device management products, are the increased marketing effort that we're making around xPrintServer; will also help those other products.

Okay. And then maybe a different question. You spoke earlier about the vSLM new software product and it sort of highlights the software content overall on your devices. Maybe just sort of, from 30,000 feet, give us a better overview of where the R&D dollars are being spent, how many engineers are sort of software versus hardware and what's really making your products unique.

That's a great question, J.D. Yes, I view our products as really software-enabled hardware. And when you go into our R&D office, it's something like 80% of our engineers are software engineers and approximately 20% are hardware engineers.

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

I was hoping you could maybe talk a little bit more about the expected ramp time in terms of building channels, building pipeline and getting to the revenue for the products that you have released in the last few months.

So we're continuing to work on expanding our channels. I guess there's really probably 2 questions that you've got there. One is around channels and one is around products. So quarterly, you're -- pretty much on a relatively short-term basis, we'll be working to expand our channels. And I think we've made some good progress on that with Ingram Micro and adding Fry's in this last quarter. Around the products, the external products such as the ITM products, as well as the external device enablement products, those products typically ramp in the sort of 9 months to 1 year range, when some them -- some of the ITM or the device management products, we actually will see revenue immediately like we did with the xPrintServer. On the embedded side, which is a good amount of our efforts today actually. I want to stress that embedded is about 50% of Lantronix revenue today and it's approximately about that in our efforts internally and in the sales channel. Those products take somewhere, say, 1.5 years to 2 years to really reach measurable revenue. But you do get some sample revenue right away. But to get good measurable revenue, it's kind of the 1.5 years-plus timeframe.

[Operator Instructions] And your next question is from the line of Bill Nasgovitz with Heartland Funds.

I might have missed this. R&D, you expect it to be hanging around the $1.6 million a quarter. Is that...

Yes, in the -- in my remarks, I stated that we expect R&D to potentially increase slightly as we continue to release new products and develop. We could give you a little more information and that is that a good amount of our new products are wireless products. And those have associated with them onetime certification fees, and those are usually in the 100-plus K range. So you’ll see R&D kind of go up and down in that range based on when we sort of tap in the number of products that we go through our pipeline.

Okay. Could you give us an idea of what the market potential is of, perhaps, your hottest 2 that you're most excited about?

Yes, we're actually pretty excited about all of our products. And as we kind of discussed in our Lantronix investor presentation, we think that the market potential for the xPrintServer is kind of in the several hundred million dollar range, and we've just kind of scratched the surface of where that market potential is. And then sort of the same range for both the wireless and the analog space for us. This is very new for us and some very exciting markets that we're getting into.

And gentlemen, you have no other questions at this time.

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 second quarter results for fiscal 2013 in late January.

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