Lantronix, Inc. (LTRX) Q4 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Lantronix Fourth Quarter and Fiscal 2013 Conference Call. My name is Bree, 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, Bree. Good afternoon, everyone, and thank you for joining the Lantronix's Fourth Quarter and 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 September 5, by dialing (888) 286-8010 in the U.S., or for international callers, (617) 801-6888 and entering passcode 24563513. During this call, management may make forward-looking statements which involve risks and uncertainties that could cause Lantronix’s results to differ materially from management’s expectations. We encourage you to review the cautionary statements and risk factors contained in the earnings release, which was furnished with the SEC today and is available on our website and in the company’s SEC filings such as its 10-K and Form 10-Q. Lantronix undertakes no obligation to revise or update publically any forward-looking statements to reflect future events or circumstances. Also, please note that during this call, the company will discuss some non-GAAP financial measures. Today’s earnings release, which is posted in the Investor Relations section of our website, describes the differences between our non-GAAP and GAAP reporting and presents the reconciliation for the non-GAAP financial measures that we use. I would now like to turn -- to introduce Kurt Busch, President and CEO of Lantronix.

Thank you, E.E., and thank you to everyone joining us this afternoon. Before Jeremy gets into the details of our results for the fourth quarter of fiscal 2013, I'd like to make some comments regarding the progress we've made during the past fiscal year, as well as give some brief insight on where we are headed. As stated on our previous call, the key elements of our fiscal 2013 plan were to continue disciplined execution on our product development strategy, focusing both on expanding our product offering into new market areas and refreshing core product families, and to expand our marketing and sales efforts to accelerate the ramp of new product revenue and to increase awareness of our full portfolio of Lantronix solutions worldwide. Despite continued headwinds in the European market and quarterly fluctuations in our revenue, we execute on the fundamental elements of our business, which resulted in 3% annual revenue growth. We believe this provides early indications that our plan is working. Specifically, we delivered 7 new products to market, exceeding our commitment of launching into production one new product per quarter. These included Home and Office editions of our award-winning xPrintServer product family; xDirect, our first portable plug-and-play solution, designed to offer instant ethernet connectivity; xSenso and xSenso Controller, the first 2 solutions introduced under the new sensor device networking product family; and vSLM and SLB, next-generation remote IT management products. We launched a new global premier partner program to enhance our partnerships with key VARs and resellers. We signed agreements with key global distributors, Ingram Micro Europe, Arrow Electronics and Mouser Electronics, to expand the sales opportunities to our products in Europe and Asia Pacific, and we enhanced our market visibility of our xPrintServer product family through increased advertising and marketing initiatives, as well as adding reseller and marketing partnerships. These efforts resulted in the xPrintServer becoming a top 5 product family for us in terms of revenue contribution during fiscal 2013. These accomplishments resulted in a 3% year-over-year total revenue growth for fiscal 2013, a turnaround from fiscal 2012, when we recorded an 8% revenue decline. The turnaround was driven by new product revenue growth that outpaced the decline for mature products. As we continue to execute in fiscal 2014, we believe that we will make further progress in our long-term plan to drive revenue growth and achieve profitability. Before I go into more detail on where Lantronix stands today and our expectations for fiscal 2014, I'd like to turn the call over to Jeremy to go over our financial highlights. 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. I would like to point out that in order to align our products with how they are marketed, sold and deployed, that we have re-categorized our product lines into 2 categories. Beginning with our next conference call, our Embedded Device Enablement products will be reported as OEM modules, and our External Device Enablement and Device Management products will be combined and reported as Enterprise Solutions. Today's news release and our Form 10-K filed with the SEC provide details on our performance in both the old and new reporting formats. For the purpose of today's call, I will discuss our results using the previous product line categories. Now I'd like to take a few minutes to go over the highlights of our results for the fourth quarter of fiscal 2013. Net revenue for the fourth quarter of fiscal 2013 was $11.1 million compared to $11.6 million for the fourth quarter of fiscal 2012 and $12.2 million for the third quarter of fiscal 2013. As discussed on previous calls, due to the nature of our sales cycle, our revenue has a tendency to fluctuate from quarter-to-quarter as a result of project-based purchases by customers, oftentimes having a significant impact on our quarterly operating results. The quarterly lumpiness we experienced is further exaggerated due to the current size and scale of our business. That being said, the sequential decline in quarterly net revenue was primarily due to the fact that during the third quarter of fiscal 2013, we benefited from 3 customer transactions that did not recur during the fourth quarter of fiscal 2013. One of these transactions is an ongoing embedded design, and we expect periodic purchases from this customer to continue in future quarters. The year-over-year decline in net revenue was primarily due to decreased unit sales in some of our mature product families, which were partially offset by increased sales from our new products. Gross profit as a percentage of revenue for the fourth quarter of fiscal 2013 was 44.7% compared to 50.7% for the fourth quarter of fiscal 2012 and 46.2% for the third quarter of fiscal 2013. Sequentially, the decline in our gross profit margin was primarily due to an increase in manufacturing costs and overhead. As discussed on our last conference call, we expect to see an improvement in our gross profit margin percentage during the first quarter of fiscal 2014. Operating expenses for the fourth quarter of fiscal 2013 were $6.1 million compared to $6 million for the fourth quarter of fiscal 2012, and a decrease of $327,000 compared to $6.4 million for the third quarter of fiscal 2013. Operating expenses for the fourth quarter of fiscal 2013 included severance charges of $208,000 related to actions that we took to lower our operating expenses and non-GAAP breakeven point. The sequential decline in operating expenses were primarily due to lower marketing costs as we participated in 2 large trade shows during the third quarter of fiscal 2013. As a result of our recent cost-cutting efforts, we expect operating expenses for the first quarter of fiscal 2014 to decline sequentially. GAAP net loss was $1.1 million for the fourth quarter of fiscal 2013 or $0.08 per share compared to a GAAP net loss of $178,000 or $0.01 per share for the fourth quarter of fiscal 2012, and sequentially, a GAAP net loss of $801,000 or $0.05 per share for the third quarter of fiscal 2013. Non-GAAP net loss for the fourth quarter of fiscal 2013 was $665,000 or $0.05 per share compared to non-GAAP net income of $351,000 or $0.03 per share for the fourth quarter of fiscal 2012, and sequentially, non-GAAP net loss of $388,000 or $0.03 per share for the third quarter of fiscal 2013. Now turning to the full fiscal year results. Net revenue for fiscal 2013 was $46.7 million, an increase of $1.3 million or 3% compared to $45.4 million for fiscal 2012. The growth in net revenue was primarily the result of increased new product revenue, that in large part, was driven by sales of our xPrintServer product family. In addition, new product revenue growth was helped by an increase in production volumes for a single customer of our PremierWave EN product family in Japan. Fiscal 2013 sales also benefited from early traction that we experienced with some of our other new product families, including xPico, xDirect, PremierWave XN and PremierWave XC. The growth in new products was partially offset by decline in unit sales for some of our mature and end-of-life products. Operating expenses were $24.7 million for fiscal 2013 compared to $24.9 million for fiscal 2012. GAAP net loss was $2.8 million for fiscal 2013 or $0.19 per share compared to a GAAP net loss of $3 million or $0.27 per share for fiscal 2012. Non-GAAP net loss was $935,000 for fiscal 2013 or $0.06 per share compared to a non-GAAP net loss of $504,000 or $0.04 per share for fiscal 2012. Turning to the balance sheet. Cash and cash equivalents as of June 30, 2013, were $5.2 million, a decrease of $6.2 million compared to $11.4 million as of June 30, 2012. A significant use of cash was related to a $2.8 million increase in inventories to support new product releases and forecasted changes in customer demand. In addition, cash was used as follows: $866,000 in capital assets to support product development and manufacturing; $814,000 related to cash losses from operations; $693,000 related to a decrease in accounts payable; and $667,000 for scheduled payments on our term loan, which we expect to be completely paid off in September 2013. Working capital was $8.5 million as of June 30, 2013, compared to $11 million as of June 30, 2012. Now I'd like to provide an update on our target model. As stated in today's news release, we are in a transitionary period and pursuing a strategy to increase revenue by expanding sales channels and regularly releasing new products with the expectation that in the long-term, new product revenue will significantly outpace the decline in mature product revenue. We believe that this strategy will ultimately result in the long-term improvement of gross margin and profitability. Although new product revenues are beginning to outpace the decline in mature products, which resulted in 3% annual revenue growth in fiscal 2013, the point at which new product revenue begins to significantly outpace the decline in mature product revenues is difficult to predict due to our lengthy product design cycles and the project-based nature of our customer purchases. Accordingly, we have updated our target model by adjusting the time line by 1 year to reflect current market conditions and expectations. The purpose of the 3-year target model is to demonstrate the long-term operating leverage that we believe could be achieved if our strategy is successful, assuming a period of sustained revenue growth, driven by new product introductions. Our 3-year target model includes the following financial metrics as a percentage of net revenue: gross margin in the range of 49% to 51%; GAAP operating income of 5% to 7%; and non-GAAP net income in the range of 8% to 10%. In summary, while we are not satisfied with the revenue growth of 3% in fiscal 2013, we are encouraged by our ability to stem the decline that we experienced in fiscal 2012. For fiscal 2014, our primary focus continues to be on investing our resources to accelerate revenue growth while maintaining financial discipline. I'll now turn the call back to Kurt.

Thank you, Jeremy. While we would've preferred a stronger finish in the last quarter of fiscal 2013, we are pleased with the progress we've made during the year. Today, I'd like to share with you the 3 reasons why I believe the progress will contribute positively to fiscal 2014. First, new product revenues continue to ramp. During fiscal 2013, new product revenues began to outpace the decline in mature products and the percentage of revenues coming from new products grew significantly, which resulted in 3% revenue growth, reversing the prior year's 8% revenue decline. To give you more insight, we began to see early stage revenue contributions and growth from several of our new product lines, in particular, the xPico, PremierWave and xDirect product families. In addition, total year xPrintServer sales grew substantially. Going into fiscal 2014, we believe that there are many more revenue opportunities for this award-winning product family as we expand awareness of this unique mobile solution to the EMEA and Asia-Pacific markets. Second, we continue to make progress in strengthening and expanding our sales and distribution channels worldwide, especially in the EMEA and APAC regions, where we signed key agreements with high-profile global distributors. In addition, we substantially increased the number of VARs in our premier partner program. More recently, we announced the opening of our office in Shanghai, China, and a partnership with one of China's largest etailers, JD.com, which, this month, began offering Chinese versions of our xPrintServer product family. As we move forward in fiscal 2014, our focus will be on strengthening the relationships we've established and continuing to expand our presence worldwide. We believe that our efforts begin to ramp, that these new relationships will begin to play a significant role in contributing to our revenue growth during fiscal 2014 and beyond. In addition, we plan to invest in marketing initiatives designed to expand awareness of our products and enhance customer and partners' experience in doing business with our company. Third, and perhaps most important, we believe our new product development effort position Lantronix to capitalize on the growing convergence of mobility and M2M systems that is rapidly changing the way companies conduct business. These markets transitions include: the increased role of cellular and Wi-Fi networks for M2M communications; the increasing desire by companies to remotely access, monitor, manage electronic machines and devices; the transition from IPv4 to IPv6; and the increased role of mobility and BYOD or bring your own device. We will be addressing these transitions with products offering simple customization, manageability and high levels of security and ruggedness. Many of our new products were designed to fulfill the needs created by these market transitions. As indicated earlier on the call, we have already started to see traction in several of these new product families. I want to bring your attention to one of the new OEM modules, the xPico Wi-Fi, which is our second product in the xPico form factor and was first demonstrated back in February at the Embedded World conference in Nuremberg, Germany. After its beta test period, we recently released this product into production. Though it is small in size, it was a large project and the first new platform we have developed in the last 2 years. When I refer to a platform, I'm referring to a new processor and operating system and in this case, a new wireless interface as well. This new platform will serve as the basis of other products over the coming years. The xPico Wi-Fi is a very good example of the convergence of mobility and machine-to-machine. With this tiny device, a machine can have simultaneous client and access point functionality. What this means is the user can access the machine directly through their mobile device. With the xPico Wi-Fi, we transform the user experience from one involving cryptic alphanumeric displays to just some combination of numbers and using apps that require cross referencing in some hard-to-find manual to a rich, easy-to-use interface that is as familiar as using an app on your smartphone or tablet. By using the xPico Wi-Fi, any machine can have the benefit of a rich interface without the cost of embedding an expensive LCD. Now your tablet can be your direct connection to the machine. We're very excited about the initial response to the xPico Wi-Fi, and we expect it to be a successful platform in a wide range of applications. In the coming quarters, you can expect to see new cellular, Wi-Fi, print server solutions, as well as a major firmware upgrade to an existing product line that will significantly add to its functionality. As we move forward in fiscal 2014, we plan to build on the 3% revenue growth we saw in fiscal 2013, with the continued financial discipline as we add to our growing portfolio of smart M2M solutions that make it easier and more cost-effective for our customers to participate in the Internet of things market. We believe our efforts will ultimately 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'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] Your first question comes from the line of Krishna Shankar with Roth Capital.

Yes, Kurt and Jeremy, congratulations on the year-over-year revenue growth of 3%. It's hopefully a good start to accelerate in revenue growth going forward. But as you look from Q3 to Q4, can you talk about some of the factors which led to the sequential revenue decline? And how things are shaping up in terms of your bookings and backlog going into the first quarter?

Sure, Krishna. Thank you for calling in. So between Q3 and Q4 of fiscal '13, we basically saw 3 transactions that we benefited from in Q3 or 3 specific customers that did not reoccur in Q4, and that really resulted in the revenue declines. One of those we do expect to come back in future quarters. As for future outlook, I think right now, we're very positive on the year for FY '14, though we're not giving any specific numbers for the first quarter.

Okay. And then you mentioned a number of new products introduced during the year that hopefully are building momentum here, xPico, PremierWave, xDirect and xPrintServer. Can you sort of rank order those revenue opportunities as you go out to fiscal year '14?

Sure. Fiscal year '14, so the -- if we start from the top -- I mean, the xPrintServer has been a good revenue generator for us in fiscal '13, and we expect it to continue to be a good revenue generator for us in fiscal '14. Then the other parts really fall into our new enterprise systems category, which is our PremierWave XN and XC, those products, along with the xDirect, those products should all contribute to FY '14. The xPico Wi-Fi, which I'm probably the most excited about new product, as I spent some time on the prepared remarks, that product is really a fiscal '15 product because it is an embedded device. And we'll see some revenue this year, as some early customers go to production, but typically, embedded product, they're somewhere between 1 to 2 years ramp, and we've been working with guys over the last 6 months, but still we've got some time for there to ramp on that embedded product.

Okay. And then can you comment on the macro, how some of the stuff happening in Europe, EMEA and Asia, how that's impacting you or whether some of these new products can help you grow your revenues in those regions despite the macro?

Yes, sure, sure, thank you. So from a macro aspect, the situation going on in Europe definitely is not helping us. A lot of the increased work that we've done in Europe, both expanding the sales channels, as well as a few good design wins, allows Europe to stay flat year-over-year, basically from '12 to '13, and we're expecting the efforts in FY '14 with Ingram Micro to help grow the European business. And then in APAC -- I mean we have a very small presence today in China, now with the new office there and the partnership with JD.com, we're expecting to grow the China revenue. So I have to say, all the things that we're doing should be allowing us to grow our revenue despite the macroeconomic situation.

Okay. And Jeremy, you said OpEx will be down in the first quarter relative to Q4. Can you give a sense for how OpEx is going to trend in fiscal year '14?

Yes, so as I mentioned on the call, we expect OpEx to decline in the first quarter as a result of some of the cost cutting activities we took here in the fourth quarter. Looking into '14, we continue or we plan to continue to invest in the revenue growth.

So R&D will still increase year-over-year, you think fiscal year '14 versus '13?

Yes, many of our newer product development is around Wi-Fi and cellular products, which tend to have higher certification costs. So there could be an uptick in R&D as we develop those products.

[Operator Instructions] Your next question comes from the line of Igor Novgorodtsev with Lares Capital LLC.

I actually have a couple of questions, if I may. First of all, I want to understand your guidance a little bit better. When you say you expect net margins, you're referring to operating margins? In other words, EBIT margins, or you are referring to essentially margins after taxes?

I'm not sure I understood the question. Could you repeat it?

You referred in your guidance you have a net margin of -- non-GAAP net margins, for example, you have 5% to 7%. Are you referring to margins from operations? Or that would include any possible restructuring or possibly cost reductions, essentially margins after all the charges that counted in, that's what you expect?

So in the target model, the non-GAAP margin that I referred to is taking our net income less non-GAAP adjustments for us, which are depreciation, amortization and share-based compensation.

Okay. But would it be fair to say -- you said that you've done some restructuring this quarter and some cost reduction and you obviously incurred some charges. Would it be fair to say that you would expect to have further restructuring? Or you think you're done, at least in the bills [ph] it looks right now and then you'll restructure it in the foreseeable future?

Today, we have no further plans of restructurings or reductions.

Okay. And I mean, I realize you didn't provide the guidance on the revenue and I appreciate the challenge knowing that you have a lot of new products. But would it be fair to say that you don't expect the revenue to decline next year? So it's anywhere between being flat and revenue going up? Or you wouldn't be able to provide this level of guidance?

So Igor, we don't supply specific guidance, but we are working towards making FY '14 a growth year to build on the progress we made in FY '14 -- FY '13. So that's definitely our efforts.

Okay, okay. I mean, that's fair enough question. Now I have a question about the xPrintServer, the whole family. It looks like a lot of printers being made today support printing from iPad or iPhone directly. I was actually just looking at HP website. Do you think that xPrintServer is sort of a stop-gap solution? And then do you see any sort of sales trailing off a little bit, simply because people replaced their older printers with the newer ones, which support direct printing and they don't need your product anymore?

Sure. That's actually a great question, Igor. So the experts of our Home edition probably competes the most with people making a new printer decision, being the most of the new home printers do support air print in one way or another. But the Office edition is really where the xPrintServer is targeted. And typically, office printers, as well as retail POS printers and things like that, have a relatively long life cycle, and those printers today do not support air print. So we feel that the xPrintServer has good legs left in the revenue for that product.

So you're saying maybe another year or 2, that will still be a useful product?

Definitely, in the office environment. I really -- I mean, today, I am not aware of any office multi-functioning or large type copy machines that support air print natively, and these things typically have, say, 5-year lifespan. So we feel that we do have good legs for the xPrintServer product line.

Okay, fair enough. I know that there was a lot of press lately that iPad is losing market share, maybe because they haven't had upgrade for quite some time now. And I guess the same goes for iPhone, although a new iPhone is coming out. Are you at least considering doing anything for Android-based devices?

Yes, that certainly sounds like a good idea, but we're not making any progress or any promises on future products right now.

Okay. But at least, you're taking a look at this or you don't have any specific plans at all?

As I said, I think it's a really good idea, but we're not talking about future product announcements.

If there are no more questions, I would like to turn the conference back over to Kurt.

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 on first quarter fiscal 2014 in late October.

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