Lantronix, Inc. (LTRX) Q2 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Quarter 2 2013 Lantronix Inc. Earnings Conference Call. My name is Patrick, and I'll be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Ms. E.E. Wang. Please proceed.

Thank you, Patrick. Good afternoon, everyone, and thank you for joining Lantronix's Second 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 starting at 7 p.m. Eastern, 4 p.m. Pacific today through February 7, by dialing (888) 286-8010 in the United States, or for international callers, (617) 801-6888 and entering passcode 72135803. 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 questions. These forward-looking statements are based on Lantronix’s current expectation 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 on 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 second 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 would now like to introduce Kurt Busch, President and CEO of Lantronix. Kurt?

Thank you, E.E. And thank you to everyone joining us this afternoon. Today, I'm pleased to report that during the December quarter, Lantronix continued to make progress in each of the key elements of our fiscal 2013 plan. Our results in progress during the quarter, included the following: achieved year-over-year and sequential increase in quarterly revenues as a result of continued increase in both new product and existing product sales; achieved year-over-year and sequential improvements in gross profit, operating margins and reduced GAAP loss; recorded our fourth consecutive quarter of non-GAAP net income; launched 3 new products during the quarter, which included xDirect, a simple-to-use flexible and cost-effective solution to network machines; vSLM, a virtualized software solution that allows IT managers to seamlessly integrate and manage IT equipment; and xPrintServer Office Edition, an enterprise version of our unique award-winning mobile printing solution. In addition, we expanded our marketing and sales efforts. These items have begun to show results in increased sales of our device management and external device enablement products. Before I go into more details on our progress, I'd like to turn the call over to Jeremy to go over our financial highlights for the second quarter ended December 31, 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 financial commentary. Now, I'd like to take a few minutes to go over the highlights of our results for the second quarter of fiscal 2013. Net revenue for the second quarter of fiscal 2013 was $12.2 million, an increase of 16% from the second quarter of fiscal 2012, primarily due to an increase in unit sales of our new products, and to a lesser extent, revenue growth of older products in each of our 3 major product lines. In addition, I'm pleased to report that revenues in all of our regions increased from the year ago fiscal quarter. Sequentially, net revenue increased 9% from the first quarter of fiscal 2013, primarily due to increases in unit sales of our SLC console server and xPrintServer product families, that are both classified as part of the device management product line. Net revenue in the Americas region was $6.9 million an increase of 17% from the second quarter of fiscal 2012. The double-digit growth in the Americas was primarily due to increased sales from our device management product line, which were largely driven by contribution from our new xPrintServer products family, which began shipping in January 2011, and increased unit sales of our SLC console server family. In addition, increased unit sales from both our embedded and external device enablement product lines also contributed to the revenue growth. Net revenue in EMEA region was $3.6 million, an increase of 22% from the second quarter of fiscal 2012. The revenue growth was primarily due to increased unit sales from both our embedded device enablement product line and xPrintServer product family. Although the EMEA region's embedded device enablement product line continued to show weakness, net revenue increased sequentially by 16% as a result of increased unit sales of our SLC console server and xPrintServer product families. Net revenue in the Asia Pacific region was $1.7 million, an increase of 4% from the second quarter of fiscal 2012. Sequentially, net revenue in the Asia Pacific region decreased by 20%, primarily due to seasonality and the timing of a customer's production ramp or an embedded design win, which was a significant contributor to our results in the first quarter of fiscal 2013. Gross profit, as a percentage of net revenue for the second quarter of fiscal 2013, was within our target range at 49.6%, compared to 48.2% for the second quarter of fiscal 2012, and 48.8% for the first quarter of fiscal 2013. We expect gross profit margin to remain at the lower end of our target range as revenue from new product introductions continue to increase. Selling, general and administrative expenses were $4.7 million for the second quarter of fiscal 2013 compared to $4.4 million for the second quarter of fiscal 2012, and $4.3 million for the first quarter of fiscal 2013. The year-over-year and sequential increase in SG&A expenses were primarily due to costs related to a marketing plan we initiated in November 2012 to drive sales growth and brand awareness for the xPrintServer products family. At the same time, and in line with our commitment to continued financial discipline, we partially offset the increases in our marketing expenses by continuing to exercise tight control on our G&A spending. Research and development expenses were $1.7 million for the second quarter of fiscal 2013, compared to $1.6 million for the second quarter of fiscal 2012 and the first quarter of 2013, respectively. GAAP net loss was $412,000 for the second quarter of fiscal 2013 or $0.03 per share, compared to a GAAP net loss of $1.4 million or $0.13 per share for the second quarter of fiscal 2012. And sequentially, a GAAP net loss of $430,000 or $0.03 per share for the first quarter of fiscal 2013. Non-GAAP net income for the second quarter of fiscal 2013 was $70,000 or $0.00 per share, compared to non-GAAP net loss of $629,000 or $0.06 per share for the second quarter of fiscal 2012. And sequentially, non-GAAP net income of $48,000 or $0.00 per share for the first quarter of fiscal 2013. As Kurt mentioned, this marks the fourth consecutive quarter that the company has achieved non-GAAP net income. While our expenses may fluctuate from quarter-to-quarter, we plan to manage expenses in-line with our revenue expectations, and at the same time, invest in those initiatives that will facilitate the company's long-term focus on growing new product sales and profitability. For fiscal Q3, we don't expect our OpEx spending to change significantly. Now turning to the balance sheet. Cash and cash equivalents, as of December 31, 2012, were $8.5 million, compared to $11.4 million as of June 30, 2012. The decrease in cash was primarily due to an increase in inventory levels. Net inventories as of December 31, 2012, were $9.7 million, compared to $6 million as of June 30, 2012, as we increased inventory levels to support new product releases and buffer stock for anticipated customer demand. We continue to closely monitor and manage our inventory levels with the objective of increasing our turns over the next several quarters. Working capital was $11.5 million as of December 31, 2012, compared to $11.9 million as of June 30, 2012. I'll now turn the call back to Kurt.

Thank you, Jeremy. As I stated at the beginning of this call, we continued to make progress in all key elements of our 2013 plan that I outlined during our last conference call. We managed our operations in line with current market conditions. As Jeremy went over just a few minutes ago, we increased our investment in marketing and inventory to support our new product introductions and sales efforts for fiscal 2013. At the same time, we continued to carefully manage expenses and achieved non-GAAP income for the fourth consecutive quarter. We continue to execute on our product development plan with the target of one new product launch per quarter. During the December quarter, we exceeded our target with 3 new product launches that were directed at both new and existing markets. We expanded our efforts into key new market areas. For example, in November, we launched and began shipping the newest edition of our xPrintServer product family, the xPrintServer Office Edition. This product is designed specifically for large enterprise environments with enhanced security and enterprise management features such as remote authentication, active directory, proxy server support, as well as the ability to enable USB printers. We've been very pleased by the initial response to this product. We continued a product refresh cycle in our core business areas. During the December quarter, we introduced 2 new products as part of this initiative, XDirect, a serial-to-Ethernet device server, whose small and flexible form factor and simple plug-and-play connectivity, which we believe will broaden the market applications for Lantronix solutions. And in November, we launched the vSLM, the Virtual Secure Lantronix Management Appliance, a software version of our popular SLM appliance, a key selling enabler of our device management products. As stated on our last call, the launch of new products and platforms is critical to our business and our long-term vision to become the preferred leader in delivering secure, feature-rich and simple to deploy M2M solutions. Over the next few quarters, we expect to launch new products that will further enhance our offerings in the wireless device networking, sensor device networking and mobile printing markets. In addition, we'll introduce next-generation versions of some existing Lantronix solutions that are directed at expanding both the market applications of our technologies to new potential customers and increasing the strength of our relationships with existing customers. We expanded our marketing and sales efforts to accelerate the ramps of new products. During the quarter, we increased our investment in advertising and marketing, primarily focused on enhancing awareness and expanding sales of our xPrintServer product family. I'm very happy to report these efforts have already started to bear fruit as we have achieved significant increase in record sales of our xPrintServer product family during the December quarter. Entering into the March quarter, we will continue to execute on our expanded marketing plan. Earlier this month, we participated for the second year in a row at the Digital Experience event, a preview event held the night before CES. Lantronix was one of 150 select technology companies displaying key new products. The event was attended by more than 1,200 analysts and news media. This week, Lantronix is the mobile printing sponsor at Macworld in San Francisco, exhibiting the Lantronix xPrintServer Office Edition at Mac IT event and partnering with Adobe to support its iPhoneography event, demonstrating the intersection of art and technology. And in late February, Lantronix will participate as an exhibitor at Embedded World in Nuremberg Germany. This is the largest global embedded technologies conference. We are very excited about this year's Embedded World as we will be announcing a key new embedded solution. A critical part of our efforts is to expand our sales and distribution relationships worldwide, particularly in the EMEA and APAC regions, where there has been lower market penetration. We continue to make progress in these areas. We recently expanded our distribution relationship with Ingram Micro to Europe, a relationship that should help facilitate expansion of our sales opportunities in this region. While we continue to see quarter-on-quarter weakness in our embedded sales in EMEA, our efforts to expand awareness of the Lantronix external device enablement and device management products started to show some early progress as we saw increased unit sales of our xPrintServer and SLC console server product families during the December quarter. Earlier this week, we made further progress in this area when we announced an agreement with our long-term partner, Arrow Electronics, to expand their distribution of our embedded M2M products to the Asia-Pacific region. Specifically with regards to the xPrintServer products family, during the December quarter, we continued to expand sales channels with the announcement of a new marketing partnership with Datavision, New York's largest computer and specialty electronics retailer, and a resale agreement with OKI Data Americas, the North American subsidiary of the popular global printer manufacturer. In summary, we are continuing to make progress on our plan. With increased new product revenue, continued expansion of our sales and marketing efforts worldwide, consistent execution in driving market-driven product strategy and careful fiscal management and strategic investments that are in-line with our plan. Ultimately, as we continue to focus on the execution of Phase 2 of our plan, we believe our efforts will accelerate new product revenue growth and in the long-term, position Lantronix as the preferred leader in delivering secure, feature-rich and easy-to-deploy M2M solutions. Before I turn the call over for questions, I want to extend a special welcome to our newest board member, Bruce Edwards, who was elected in November at our annual shareholders meeting. With more than 25 years of experience as a Technology Industry Director, CEO and CFO, I'm thrilled to have Bruce on the board. Finally, 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 comes from the line of Krishna Shankar of Roth Capital.

I may have missed some of this on the call but can you talk about some of the milestone you're achieving with the new products, both in the device management and device enablement area and how smooth the new product design wins are coming along?

Actually, we're quite happy with the results that we're seeing on the new product side. We've released 10 new products in the last 6 quarters and we're seeing some good traction on those products. But to date, the xPrintServer is the largest contributor to new products, basically being it's a device management product that-- those typically ramped earlier. The other new products were actually quite happy with the evaluations that are much more of an OEM design cycle than the xPrintServer is. In addition to that, we've increased our marketing efforts and expanded our sales channels to accelerate the growth of all those new products.

Okay, and how do you see the environment in EMEA now compared to Q3? What do you see in some of the international markets? And will your new marketing and distribution efforts in those regions offset some of the macro weakness there in terms of growth in those regions?

So we -- you're referring to Q3 calendar, Krishna?

I'm referring to yes, going forward into the calendar March quarter.

Yes, sure. So we -- though we're not giving guidance into the March quarter. In the December quarter, we continued to see weakness in our embedded business in Europe, but we did see a good increase in European revenue, primarily because the increased marketing sales efforts on the non-embedded products, basically our external device enablement products as well as our device management products.

Okay, and then would you care to comment on some of your new distribution arrangements with Avnet in Asia, Ingram Micro in Europe and how that might contribute to revenues in 2013?

Yes, sure. So Ingram Micro in Europe is really all about the external products, so the external device enablement products as well as the device management products. And it's saying that Ingram Micro Europe is just the first step. We'll also be expanding the VAR channels and the reseller channels for those products. Probably you should see some effect -- in sort of later this year, it's not an immediate light switch there. For Arrow in the APAC region, our APAC region revenue is relatively small and Arrow is focused on our embedded products. Embedded products typically have 1 year to 2 year ramp. So setting up Arrow in the APAC region is all about being where the customers are. And that's really the philosophy about our new effort around expanding the sales and marketing efforts is having good distribution and sales channels where the customers are. So Arrow is just a first step in the APAC region of expanding the revenue there.

Okay. And taking a longer term viewpoint I know the macro stuff out there but as you look at your longer-term planning efforts for 2013, do you feel confident about the revenue growth and continuing your string of pro forma profitability through 2013?

We're pretty confident on the growth of new products. If a huge drop in the macro environment obviously can affect many, many companies, but we're very confident moving forward.

Your next question comes from the line of J.D. Abouchar of GRT.

Just following up on Krishna's question. I know you're not giving guidance, but we're layering on new products and we're adding sales and marketing and obviously, both those take time to ramp, the embedded products taking longer than the external products. But is there some inflection point or any milestones we can look at to how long before a salesman is productive. And when we should start to see some growth absent macro slowdowns?

So J.D., I think we've already shown the initial steps of our -- I mean, initial growth of our sales and marketing efforts with our external products. And we expect that growth to continue barring any kind of a microenvironment knocking us back down there. I think that probably answers your question.

[Operator Instructions] Your next question comes from the line of George Santana with Ascendiant.

First have there been any significant design wins in the embedded business since the last call?

So George, we're very happy that with the progress we're making on the embedded side, that we're not announcing any particular design wins. Given the time frame of embedded design win to the ramp of revenue, we just pretty much monitor those design wins and do everything we can to get them into production, but it's not been our policy to announce specific design wins.

Okay. And following up on the inventory issue and the buildup appears to have been mostly in the finished products, and I'm wondering if you can provide any additional color there.

So the increase in inventory has primarily been to support new product releases. And in addition to that, we built some buffer stock for anticipated customer demand. We had some product shortages a couple of quarters ago, and that's a reaction to some of those shortages.

Okay. And this is mostly, I presume, in products like the xPrintServer and things like that?

It's across the board, but it's definitely supporting new product releases as well.

At this time, there are no additional questions in queue. You may proceed.

Thank you, operator. I'd like to thank you for your participation on our call today. We look forward to updating you on our progress, achievements and actions when we report our third quarter results for fiscal 2013 in early May.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a good day.