Lantronix, Inc. (LTRX) Q4 2015 Earnings Report, Transcript and Summary

Good afternoon and welcome to the Lantronix's Fourth Quarter and Fiscal Year 2015 Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there’ll be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to E.E. Wang. Please go ahead.

Thanks Amy. Good afternoon everyone and thank you for joining the Lantronix Fiscal 2015 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 Web site at www.lantronix.com. In addition, a phone replay will be available starting at 08:00 PM Eastern, 05:00 PM Pacific today through August 27, by dialing 877-344-7529 in the U.S. or for international callers, 412-317-0888 and entering pass code 10070671. 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 current expectations. We encourage you to review the cautionary statements and risk factors contained in the earnings release, which was furnished to the SEC today and is available on our Web site, and in the Company’s SEC filings such as its 10-K and 10-Q. Lantronix undertakes no obligation to revise or update publicly 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 Web site, describes the differences between our non-GAAP and GAAP reporting and presents reconciliations for the non-GAAP financial measures that we use. Please refer to today's news release and the financial information in the Investor Relations section of our Web site for additional details that will supplement today's comments. As discussed on previous calls our revenue has a history of fluctuating from quarter-to-quarter due to the nature of our project based sales cycle. As a reminder we define new products as products that have been released into the start of the second quarter of the fiscal year ended June 30, 2012. Also going forward we're referring to our OEM modules product lines as IoT Module. I am now turning the call over to Kurt Busch, President and CEO of Lantronix.

Thank you E.E., and thank you to everyone joining us this afternoon. During fiscal 2015, we continue to execute on the fundamental elements of our strategy developing and launching smart IoT and M2M solutions through close collaboration with tier I customers, expanding our sales and marketing efforts worldwide and exercising financial discipline while investing for growth. From a financial standpoint FY15 was a challenging year with a 4% reduction in net revenue. The decline was driven primarily by a higher than expected 10% decrease in Legacy product revenue. In addition, as stated on our last call weakness in CapEx spending from a few large customers resulting in not achieving our FY15 goal of total enterprise solutions growth. On the positive note, we were able to offset a large portion of the Legacy decline with 48% growth in new products, marking our third consecutive year of new products growth. During FY15 new product revenues grew to 6.8 million from 4.6 million in FY14 growing by $2.2 million in FY15 versus $1.5 million of growth in FY14. During FY15 we completed significant milestones that we believe further expand our ongoing efforts to drive new product revenue and move us closer to sustainable top line growth. First, we began receiving production orders for our new wireless IoT Module. During the year both xPico and xPico Wi-Fi sales grew as design wins began transitioning to production orders. New IoT Module revenue growth helped to stabilize our total IoT Module product line, it was one of our stated goals for FY15. Over the next few quarters we expect to increase sales of new IoT Modules as design wins move to production. Second, we have substantially completed development of our custom white-labeled PrintServer device for our tier I printer manufacturer, incorporating our xPrintServer technology this new platform development has the potential to further expand our revenue opportunities in the mobile printing space. We're now in the process of completing final certifications of this product and we expect to begin shipping during FY16. Third, as previously announced we're pleased to receive the Apple AirPrint certification for our xPrintServer product in June. This certification was a multiyear effort that resulted in our xPrintServer becoming the first and only enterprise PrintServer clients certified by both Apple and Google. Today, xPrintServer is the only AirPrint server appliance that supports thousands of printers from multiple manufacturers. AirPrint certification has already led to the inclusion of our newest xPrintServer in the Apple Online Store in July 2015. And we believe that it has the potential to expand our opportunities with key printer OEMs. Fourth, as expected, our SLB and SLC 8000 products along with other new enterprise solutions continue to gain significant market traction. Overall new enterprise solutions grew by 42%. Going into FY16, we believe that our new products are well positioned for continued double-digit growth. Before I go into more detail on our progress and expectations, I'd like to turn the call over to Jeremy to go over financial highlights. Jeremy?

Thank you, Kurt. Now I'd like to take a few minutes to go over the highlights of our results for the fourth quarter of fiscal 2015. Net revenue was 10.2 million for the fourth quarter of fiscal 2015, a decrease of 871,000 compared with 11.1 million for the fourth quarter of fiscal 2014. And a decrease of 213,000 compared with 10.4 million for the third quarter of fiscal 2015. The year-over-year and sequential decreases in net revenue were primarily due to a decline in Legacy Product sales. The decline in Legacy products was partially offset by growth in new product revenue of 24% from a year ago quarter and 6% on a sequential basis. New products revenue was 1.7 million for the fourth quarter of fiscal 2015, compared with 1.4 million for the fourth quarter of fiscal 2014 and an increase of 95,000 compared with 1.7 million for the third quarter of fiscal 2015. Gross profit as a percentage of net revenue was 47.1% for the fourth quarter of fiscal 2015, compared with 50.1% for the fourth quarter of fiscal 2014, and up from 45.1% for the third quarter of fiscal 2015. Selling, general and administrative expenses for the fourth quarter of fiscal 2015, were 4.1 million compared with 4.1 million for the fourth quarter of fiscal 2014 and 3.9 million for the third quarter of fiscal 2015. Research and development expenses for the fourth quarter of fiscal 2015 were 1.8 million compared with 1.7 million for the fourth quarter of fiscal 2014 and 1.6 million for the third quarter of fiscal 2015. Total operating expenses for the fourth quarter of fiscal 2015 included severance charges of approximately 230,000. GAAP net loss was 1 million or $0.07 per share for the fourth quarter of fiscal 2015, compared with GAAP net loss of 213,000 or $0.01 per share for the fourth quarter of fiscal 2014 and sequentially GAAP net loss of 839,000 or $0.06 per share for the third quarter of fiscal 2015. Non-GAAP net loss for the fourth quarter of fiscal 2015 was 575,000 or $0.04 per share, compared with non-GAAP net income of 206,000 or $0.01 per share for the fourth quarter of fiscal 2014. And sequentially non-GAAP net loss of 357,000 or $0.02 per share for the third quarter of fiscal 2015. Now turning to the full fiscal year. Net revenue was 42.9 million for fiscal 2015, a decrease of 1.6 million compared with 44.5 million for fiscal 2014. The decrease in net revenue was primarily due to a 10% decline in Legacy Product sales and weakness in capital spending from a few large customers. The decrease in Legacy Product sales was partially offset by 48% growth in new products. New product revenue was 6.8 million for fiscal 2015, an increase of 2.2 million compared with 4.6 million for fiscal 2014. Gross profit margin was 47.3% for fiscal 2015, compared with 50% for fiscal 2014. The decline in fiscal 2015 was primarily due to charges for excess and obsolete inventories. Selling, general and administrative expenses were 16 million for fiscal 2015, compared with 6.4 million for fiscal 2014. Research and development expenses were 6.9 million for fiscal 2015 compared with 6.7 million for fiscal 2014. GAAP net loss for fiscal 2015 was 2.8 million or $0.19 per share compared with GAAP net loss of 933,000 or $0.06 per share for fiscal 2014. Non-GAAP net loss for fiscal 2015 was 767,000 or $0.05 per share compared with non-GAAP net income of 948,000 or $0.06 per share for fiscal 2014. Now turning to the balance sheet, cash and cash equivalents were 5 million as of June 30, 2015 compared with 6.3 million as of June 30, 2014. The decline in cash was primarily related to the operating losses we experienced in fiscal 2015 and an increase in inventories, which was offset by 700,000 in borrowings on our revolving line of credit. Net inventories were 9.5 million as of June 30, 2015 compared with 8.4 million as of June 30, 2014. Most of the inventory increase was for two of our new product families, the SLB and EDS-MD. These are two of our best performing new products during fiscal 2015 and we built inventories in anticipation of additional opportunities that remained opened as we exited the fiscal year. We expect to use cash during the next fiscal quarter related to the recent increase in inventories. We plan to bring down inventory levels over the next few quarters which we believe will reduce our use of cash. As of June 30, 2015, our working capital was 7.4 million which we believe is sufficient to achieve our current growth plan. Ending the year, our other current liabilities increased by 431,000 to 3.8 million, in part the increase was a result of more than 0.5 million in deferred revenue related to new product custom developments. We expect to recognize this revenue during fiscal 2016. For fiscal 2016 our goal are to deliver double-digit new product revenue growth and bring gross margins closer to our target model of 49% to 51%. Our primary focus continues to be driving long-term revenue growth while managing our spending based upon our revenue expectations, preserving working capital and maintaining financial discipline. I'll now turn the call back to Kurt.

Thank you, Jeremy. As the numbers show, FY15 was a challenging year for us. Even as we achieved our third consecutive fiscal year of high double-digit growth in New Products, these accomplishments were masked by the declined Legacy Products that impacted our overall revenue for the year. I want to share with you the specific progress we’ve made during FY15 and why I believe these achievements have the potential to drive continued growth and demand for Lantronix's new products in FY16 and to ultimately deliver enhanced value to our shareholders. As I have stated on previous calls, our growth strategy is focused on disciplined and innovative product development in close collaboration with tier 1 companies. Expansion of sales channels worldwide and financial discipline focused on managing working capital while investing for growth. And FY13 we have consistently achieved substantial double-digit growth in New Product revenue and we continued this trend in FY15 with 48% year-over-year New Product growth. We continue to attract interest from significant customers for both our new IoT Modules and Enterprise Solution. During FY15 new IoT Module sales grew as more early adopters of xPico and xPico Wi-Fi began moving towards production. Today our modules are IoT enabling a wide range of applications including industrial automation, security and environment monitoring as well as consumer devices. We're currently developing new IoT Modules in close collaboration with tier 1 account that we have plans to launch in FY16. These products will set the stage for future growth opportunities. We believe that as more of our customers begin moving from design to production, the new IoT Modules will again deliver double-digit growth in FY16. For FY15, new Enterprise Solutions delivered 42% growth over FY14 despite headwinds from reduced capital spending from a few large customers. Our new IT and data center management products, the SLC 8000 and SLB delivered significant positive results in FY15. As many of you are aware, these products were developed in close collaboration with tier 1 partners from the telecom and networking industries. During FY15 we began to see broader adoption of these products. We recently announced an SLC 8000 firmware upgrade that included FIPS 140-2 compliance. This high security standard is mandatory for government application and is quickly becoming a must have for healthcare and financial environments, where protection of privacy is mission critical. Having the FIPS compliance further expands the opportunities for SLC 8000 advanced console service. During FY15 we continue to expand visibility of the xPrintServer product family as top equipment manufacturers began including xPrintServer and their accessory lines. Apple awarded AirPrint certification to the xPrintServer making it the first AirPrint server appliance certified by both Apple and Google to support mobile printing to thousands of printers. We've already achieved immediate benefit from our AirPrint certification. In July 2015 our newest xPrintServer Office Edition began selling in the Apple online store. In addition we believe that AirPrint certification will be a key selling point for expanding our relationship with OEM printer manufacturers. During FY15 we substantially completed development of a custom light-label print server solution for our tier 1 printer manufacturer. We expect to begin realizing revenues from this project during FY16 as we complete final product certification. During FY16 we expect to launch new IoT Gateway products that will enable the Internet of Things for critical devices in a wide range of application from retail to medical. Today new enterprise products make up 25% of our total enterprise solution revenue. We believe that as we continue to move forward with expanded channel opportunities the new enterprise solutions will continue to deliver double-digit growth in FY16. On a sales and marketing front we continue to make progress in expanding and deepening our borrower, distributor and rep relationships worldwide. As many of you are aware in early FY13 we expanded our relationship with Ingram Micro to include the EMEA region. During FY15 our continued efforts bore fruit as Ingram EMEA delivered significant revenue for the reason as well as generated new product opportunities. Retail mix continued to be a key part of our go-to-market strategy and during FY15 we were pleased to see that our top 20 resellers as a group experienced overall revenue growth as they expanded sales. We increased the number of manufacturer reps in the U.S. to increase sales of our IoT Modules. And in mid-FY13 we expanded our relationship with Arrow Electronics. Since then Arrow has delivered meaningful revenue and become a key opportunity generator for Lantronix extending our reach in Asia and Europe with the opportunity to stay upfront [ph]. During FY15 we believe that this relationship has the potential to become a significant contributor in the future. Moving into FY16, we are committed to further deepening our relationships with our sales partners worldwide to accelerate new product growth. Total new products made up 16% of our net revenue in FY15 up from 10% in FY14. New products were 25% of enterprise solution and 6% of IoT Modules. IoT Modules typically have a longer time frame from customer engagement to revenue. In FY16 as more new IoT modules moved from design wins to production we expect new products to become a larger contributor to total IoT sales. In summary, focused execution on our growth strategy has helped to drive new product sales. For FY15 New Products grew by 48%, partially offsetting the decline in our Legacy business. Entering FY16 we believe that we have a solid foundation for continuing to drive new product revenue growth with design wins for IoT Modules moving to production, broader adoption of our Enterprise Products, AirPrint certification opening new opportunities for our mobile printing products and expanding channel sales as we continue to deepen our relationships with key partners worldwide. 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.

Thank you, we will now begin the question and answer session, [Operator Instructions] our first question is from Jaeson Schmidt of Lake Street Capital Markets, please go ahead.

Just wondering when we look out to fiscal '16 is there a particular end market or a couple of end markets that you think will literally drive growth going forward?

Thanks for calling in Jaeson, looking into fiscal '16 we have a couple of things that are kind of on deck now with the expansion of our Enterprise Solutions and that really is both data center branch office and really a kind of an adjacent market to data centers, is what we call test labs would basically the SLC 8000 is used in testing a good number of network equipment and as well in the Enterprise Solutions we see that it's -- we see good traction in the interest for xPrintServer, now that we've achieved AirPrint certification we think that will bring a lot of opportunities for us. So those all pretty vertically focused type products that we see on the enterprise side. On the IoT Module side these are much more horizontal products that are used to enable the Internet of Things in a broad range of applications. That being said our initial design wins are in maybe resource monitoring, industrial automation as well as we have a consumer design and we expect those to be the initial revenue drivers moving into FY16.

And then looking at the Legacy business how should we look at that decline going forward, I know it sounds like you're looking for double-digital growth in the new product segment, but any visibility within that Legacy business?

The Legacy business is always difficult to forecast the decline, but we saw approximately 10% decline last year and that's been around that range over the next -- last couple of years.

Okay that's helpful. And then the last question and then I'll jump back into queue, any change in the competitive landscape? Do you think some of the softness you saw in fiscal ’15 was a result of share loss, stock loss or do you think it was just a matter of kind of a weaker capital spending environment?

So in fiscal ’15 we had a few enterprise customers that were very strong in FY14 and they ran into their own headwinds and that basically brought some of their orders effectively to zero for FY15 and that was very specific to a few large customers. They did great in FY14 and didn't do so well in FY15. It really had nothing to do with share loss. They weren't buying from anyone.

Our next question is from Mark Stiefel of Stanford Capital [ph]. Please go ahead.

Hi, Kurt and Jeremy, I will start with a statement and I want to ask you a couple of questions, the statement is, that as a shareholder I find it really grating to hear you guys really -- you Kurt and nothing personal because I like you, you're a good guy, but to here you say that we're executing on our strategy and you keep saying we're executing on our strategy. Well, you got steadily declining revenue and steadily increasing losses, so if you're executing on your strategy then maybe you need a new strategy, so that's my statement. I mean you can respond to that or not, I can ask you my question, up to you.

So Mark, we are executing on our strategy and the strategy is around driving New Products growth and we have been investing for future New Product growth. And the key aspects of our strategy are really engaging with large tier I accounts, we put that strategy in place a couple of years ago, we've seen good results for it on the Enterprise side both engaged in selling to the initial tier I’s as well as further up -- follow-ons for mass market types sales. And we're expecting to start seeing the results on the IoT Module side and then once we get the revenue for both the IoT modules and the Enterprise side then we'll be able to reverse the decline of overall top line growth and really overcome the decline in the legacy business.

So you know you speak several times about the 48% year-over-year growth in New Products, but unless I am missing something -- maybe I’m making a mistake, it seems that sequentially for the last three quarters, right, this quarter to Q3 and Q3 to Q2 that there was almost no growth in New Products, is that correct and if so what does that mean?

Please hold the line. It appears the speaker line has accidently disconnected, so please continue to hold while we reconnect that. Just one moment please. And the speak line has been reconnected, please go ahead.

My apologies, I accidently press the wrong button. So I meant have pressed mute and there are two red buttons and they're fairly close together and I hit the wrong one, so sorry about that Mark.

Well, you've bought 90 seconds to come up with an answer for my question.

Yes, it's actually [multiple speakers] trying to dial back in. So for an absolute number the New Products have been relatively flat on a quarter-by-quarter basis and a little bit of growth on each quarter, but the key thing is really what's happening underneath and we're seeing a good amount of different New Products growing at different rates and there is a high degree of lumpiness on the New Products, many of them are what I refer to as new customer new markets, so there is a good amount of lumpiness in what makes up those New Product numbers. And when we look at the details as well as the guys that are ramping in a short-term for FY16, we're quite confident that we'll be able to continue a substantial overall New Product growth rate, but quarter-by-quarter numbers are not really indicative of what to expect on the year-by-year basis.

Okay so based on this quarter that you've just reported, ballpark it looks as if you’ve got around six quarters of cash left, without further drawing down our credit line. So, how do you respond to that? I mean, is revenue stabilized now, at a run rate of 10.2 for quarter or is it going to get worst and are the loss going to get worst? And what can you do on the expense side to get closer to breakeven at the current revenue run rate?

Mark, I can help you with that. You know, starting with the liquidity question. Today, we have about $7.4 million in working capital, prior to doing our raise in 2012 that was down to close to $2 million, it was about a $5 million plus buffer there from what we've operated in the past. So, we feel pretty good about the amount of working capital we have today and our ability to achieve our growth plans with our existing working capital.

Well, does that mean you're not going to need to raise more money? That what you have now will get you to breakeven and profitability?

We believe today, we have sufficient working capital for -- based on our current growth plan.

Well, okay. And then last question, the stock is pretty darn close to all-time lows, it briefly touched all-time lows, one day last week, why aren't you guys stepping up and buying some? I mean in some reasonable amount?

You mean that the management team or you mean the company?

Management team.

We've recently purchased in the last few months, many members of the management team, if you look at our Form 4s [ph] and we are --.

Is this like something in the 401K or something?

No there is a ESPP plan, Employee Stock Purchase Plan that many of the management team participate in.

[Multiple speakers] I may have seen that, but I think it was really small amounts, correct me if I'm wrong. Why aren’t you guys stepping up and buying $20,000 worth of stock or something like that? You are at an all-time low, if you really believe that you got this thing turned around, the company's an absolute steal down here.

I think I did by around $20,000 worth of stock

Okay. Alright, thank you.

And Mark, today we're in a closed window.

Yes, so when does that open?

Typically opens three days after our release.

Okay, great. I look forward to seeing some more Form 4s [ph] then, thank you.

[Operator Instructions] At this time I'm not showing any additional question. So that does conclude our question-and-answer session. I'd like to turn the conference back over to Kurt Busch for any closing remarks.

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 on the first quarter FY16 results in late October.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.