Lantronix, Inc. (LTRX) Q2 2016 Earnings Report, Transcript and Summary

Good afternoon and welcome to the Lantronix's Second Quarter Fiscal 2016 Results Conference Call. All participants will be in 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 Ms. E.E. Wang, Director of Corporate Marketing and Investor Relations. Please go ahead.

Thanks Lora. Good afternoon everyone and thank you for joining the Lantronix second quarter of fiscal 2016 conference call. Joining us on the call today are Jeff Benck, Lantronix’s President and 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 08:00 PM Eastern, 05:00 PM Pacific today through February 23, by dialing 877-344-7529 in the United States or for international callers, 412-317-0888 and entering pass code 10078652. 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 our earnings release, which was furnished to the SEC today and is available on our website, 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 website, describes the differences between our non-GAAP and GAAP reporting and presents reconciliations for the non-GAAP financial measures that we use. I’ll now turn the call over to Jeff Benck, President and CEO of Lantronix.

Thank you E.E. And welcome everyone joining us for this afternoon's call. It’s been a busy two months since I joined the Company and I look forward to sharing with you my observations, where my focus is and most importantly where I see Lantronix headed in the future. After my first two months on the job, my belief has never been stronger that Lantronix has the right technology, enterprise experience and people to deliver greater value to our customers. We are in a market that is searching for better solutions that can simplify delivering on the promise of Internet of Things. However, it is also clear that the Company has not been meeting analyst and investor’s expectations and has certainly fallen short of executing on its strategy. We need to act with a sense of urgency to ensure that we get after the opportunities in front of us. Over the last couple of months my executive team and I took a step back to examine and challenge everything our team has been doing. We recognized that change is needed and would require making some tough trade-offs so that we can begin to focus on the priorities that will create greater value for our customers and shareholders. We've already started taking actions to narrow our focus, create needed resources and position the Company to more fully participate in the growing IoT market. Before I provide some additional details, I'm going to turn the call over to Jeremy to discuss the results from our second fiscal quarter.

Thank you Jeff. Please refer to today’s news release and 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 go over our results for the second quarter of fiscal 2016. Net revenue was $9.5 million for the second quarter of fiscal 2016 compared with $10.7 million for the second quarter of fiscal 2015 and $10.6 million for the first quarter of fiscal 2016. 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 and in part this impacted the current quarter. The year-over-year decrease in net revenue was primarily due to the anticipated decline in sales of our legacy products. The overall decline in legacy products was partially offset by growth in some of our new product families. Year-over-year growth in our new products was primarily due to increased contribution from our xPico Wi-Fi and SLC 8000. The December ended quarter marked the first time that SLC 8000 sales outpaced its predecessor and we are pleased with the recent momentum we’ve seen with this new product offering. The sequential decrease in net revenue was primarily due to lumpiness in our EMEA region that was partially offset by some sequential growth in new products. We anticipate some recovery in EMEA region during the fiscal quarter ended March 31, 2016. Gross profit as a percentage of net revenue was 48.1% for the second quarter of fiscal 2016 compared with 48.2% for the second quarter of fiscal 2015 and 47.9% for the first quarter of fiscal 2016. We expect our gross profit percentage for the third fiscal quarter of 2016 to be relatively consistent with the second quarter of fiscal 2016. Selling, general, administrative expenses for the second quarter of fiscal 2016 were $3.8 million compared with $4 million for the second quarter of fiscal 2015 and $3.7 million for the first quarter of fiscal 2016. Included in SG&A expense for the second quarter of fiscal 2016 was a severance charge of $286,000 related to the departure of former CEO in November of 2015. Research and development expenses for the second quarter of fiscal 2016 were $1.7 million and relatively flat with year-over-year and sequential quarters. GAAP net loss was $928,000 or $0.06 per share for the second quarter of fiscal 2016 compared with GAAP net loss of $632,000 or $0.04 per share for the second quarter of fiscal 2015 and a GAAP net loss of $331,000 or $0.02 per share for the first quarter of fiscal 2015. Non-GAAP net loss was $196,000 or $0.01 per share for the second quarter of fiscal 2016 compared with a non-GAAP net loss of $99,000 or $0.01 per share for the second quarter of fiscal 2015 and non-GAAP net income of $124,000 or $0.01 per share for the first quarter of fiscal 2016. Despite the challenging quarter, we continued to manage expenses carefully to minimize the impact to earnings and cash flow. Now turning to the balance sheet, cash and cash equivalents were $4.6 million as of December 31, 2015 compared with $5 million as of June 30, 2015. We made significant progress on our inventory reduction efforts during the second quarter. Net inventories were $7.9 million as number 31, 2015 compared with $9.5 million as of June 30, 2015. As of December 31, 2015, our working capital was $7.2 million which we believe is sufficient to support our business. As disclosed in the Form 8-K we filed on February 5, we recently initiated a strategic restructuring plan to reallocate resources in order to support our sales and product development efforts. We expect the restructuring plan to be substantially completed by the end of the third quarter of fiscal 2016 and it is expected to result in a pretax charge ranging from $200,000 to $300,000. We don't expect the results of the restructuring to substantially reduce our ongoing operating expense as most of the savings will be reinvested to support the strategic objectives that Jeff will discuss shortly. Excluding the cost around in the restructuring plan, we expect operating expenses for the third fiscal quarter of 2016 to be relatively consistent with the second quarter. In addition, we expect to use cash in the range of $600,000 to $800,000 to fund severance charges and support our strategic objectives. I'll now turn the call back to Jeff.

Thank you, Jeremy. I want to take the next few minutes to share with you in more detail my observations since joining the company. The actions my team and I have undertaken thus far to position the company for growth and why I believe Lantronix will be successful in the IoT marketplace. First I confirm the strength that Jeremy to want to lead the Lantronix team. We have some incredible technology assets and a talented group of employees who are participating in one of the most exciting segments of the technology industry today, the Internet of Things. Also considering our size, we have an impressive group of customers who deploy our solutions, companies like Allegion, Intel, Kabel Deutschland, Medtronic, T-Mobile, Verizon and many more. Considering how many large customers depend on our technology, it's clear that the team has made progress in engaging Tier 1 customers for our new products and also allowing them to help shape our roadmap. At the same time, the company has definitely faced some challenges over the last year. It's no secret that sales of our legacy products are declining and the new products have not been ramping as quickly as we would like. It is clear that if we were to achieve a greater level of success, some significant changes are needed in our approach and we have already begun this effort. Over the last 60 days my executive staff and I took a step back to examine how we could improve the business that we participate in today and get aligned on where we want to take the company in the future. Following this exercise, as Jeremy mentioned, we implemented a restructuring of our resources to address gaps in our execution and to enable more investments in our go-forward strategy. Our new plan requires that we execute on three key objectives. The first objective is to drive operational excellence across the business. Our medium priority is to revamp our sales and marketing functions and improve our execution. We're taking quick action this quarter to optimize our geographic footprint to allow for more investments in sales regions that are under resource today such as the Americas. Specifically, we are consolidating Japan into our APAC territory and creating one geographic region, which going-forward will be referred to as APJ or Asia-Pacific Japan. Also, here at headquarters, we took actions to reduce some of our support and overhead personnel to bring spending in line with our near term revenue trends and to free up investment in other areas. As part of the effort to fix the sales team, I determined that we needed new leadership. I have been searching for the right candidate to lead our sales team and I'm pleased to announce today that Kevin Yoder, former Vice President of Sales for the Americas at Avago Technologies, will be joining as our new Vice President of Worldwide Sales. Kevin brings more than 25 years of experience in the technology industry building and leading successful sales teams and we're extremely excited to have an executive of his caliber join Lantronix. Our second objective is to rationalize our product roadmap to allow for more investments in areas we believe have the greatest potential for return. This will lead us to stop development efforts on low return products, continued sustaining investment in our leadership offerings to drive market share gain and focus on new product development on IoT solutions. Let me share how this plays out with respect to our product strategy. We will reduce our investment in xPrintServer product line, maintain the investment in the industry leading SLC 8000 product family and most importantly, we will increase our investment in IoT solutions which we believe represents our best growth opportunity. Our third objective is focused on honing a clear IoT strategy and creating a differentiated play in the marketplace. Unlike many players in the IOT space, Lantronix has more than 20 years of deep M2M experience and installed base of millions of connected devices worldwide. We are a trusted brand in delivering secure, reliable connectivity for thousands of customers ranging from emerging companies to Fortune 500 organizations. This provides us with a unique industry insight what's really needed for these enterprise customers as they look to deploy IoT solutions. While I'm not ready to go into the details of our expanded IoT product development plan today, based on our strengths, these new products will be enterprise-focused and deliver secure easy-to-deploy and manage industrial hardened capabilities that will help customers extract more value from an IoT deployment. While we anticipate adding more software value to our offerings, we will continue deliver new enterprise IoT building blocks in support of this strategy. For example, next week at the Embedded World 2016 in Germany, we will launch a new wireless embedded platform that is targeted specifically at building enterprise level Wi-Fi connectivity into ruggedized commercial and industrial applications. In support of our third objective, honing a clear IoT strategy, last week, we also announced the appointment of Sanjeev Datla as our new Chief Technology Officer. Sanjeev is am entrepreneurial visionary in the development of networking, connectivity and IoT solutions. His experience includes launching several successful start-ups and leading development of next-generation technologies for companies, such as that Emulex, Broadcom and NEC. Sanjeev will play an important role as we move forward in launching new and interesting IoT solutions later this year. So now let me summarize our three objectives. Fixing sales and marketing and establishing a culture of operational excellence, which means being efficient and effective across the company. Second, rationalizing our product strategy, which translates to making the right trade-offs and deciding where we'll focus our time and energy. And lastly, honing a clear and differentiated IoT strategy to more fully participate in this exciting growth opportunity. As you can tell, in the last 60 days, we moved quickly to start the process of change needed for Lantronix. As we move forward, we will be focused on improving how we sell and market our products, including the solutions we will be introducing in the upcoming quarters. The impact of these changes won’t happen overnight, but I believe that we will ultimately be successful for several reasons. We already have an established portfolio of proven technologies. We have a talented team that’s committed to creating sustainable success. We have an install base of millions of connected devices and strong customer relationships. And lastly we have the right strategy to address some of the current gaps in the IoT market that the solutions available today don’t. Further, there are thousands of companies that do not have the engineering resources or skill to build their own enterprise IoT solutions from scratch. This is the key segment of the market that Lantronix can address with the depth of knowledge and experience that differentiates us from others. While it will take time for our efforts to bear fruit, we have already started on this new journey and we're building the right team and the right strategy to enable our future growth. I look forward to sharing our progress on our upcoming calls. Before I turn the call over for questions, I'd like to thank my Lantronix colleagues for walking me to the team and being supportive of the need for change. This is a huge advantage and will enable us to move forward with speed. Operator, we would now like to open the call for questions.

Thank you. [Operator Instructions] And our first question comes from Jaeson Schmidt of Lake Street Capital Markets.

Hey, guys, thanks for taking my questions. Just wondering if you could comment how we should think about the legacy business’ decline going forward. Is there any sort of range we should be thinking about for this calendar year?

Hey, Jaeson, it’s Jeremy. Yes, we've seen the legacy products decline over the last couple of years at about 10% annual rate. We continue - we expect that rate to continue here in the near future at a similar pace.

Okay, perfect. And then one last one before I jump back into queue. I know you said OpEx would be relatively flat in March. Do you expect to continue to invest going forward throughout the rest of this calendar year or kind of flattish going even beyond March?

I think when we get into the fourth quarter, we would expect OpEx to start to trend up as some of investments that we make in headcount begin to fill in.

Okay, perfect. Thanks a lot guys.

[Operator Instructions] Our next question comes from Mark Spiegel of Stanphyl Capital.

Yeah. Hi, guys. Welcome aboard and good luck to you and your team. I'm glad to see the change that's been made. Really, just two initial questions and I'll get back in the line. First one is, Jeremy mentioned anticipating $600,000 to $800,000 of cash consumption in the current quarter. What I'm wondering is, is that inclusive of cash consumption for the ongoing business or is that only for the severance and restructuring cash consumption?

Hey, Mark. This is Jeremy. A large portion of that use of cash relates to severance.

So, I think your question was - it includes both, but the majority is restructuring and severance related.

Yeah, okay. Good. So as it includes both, that's fine, because it’s easy to figure out what it was, because you put those figures out there. It looks as if the ongoing business only consumed somewhere in the ballpark of $200,000 last quarter, but I don't know how much of that was sort of unusual one-time inventory drawdown? I mean, can you stabilize things you think at that number, until you can start growing again, because if you can, you got plenty of runway obviously?

So I think a pretty good indicator of our use of cash just from operations would be looking at our non-GAAP number. So we had about $200,000 of non-GAAP loss last quarter and that works out pretty closely to the use of cash that we have from operations, at least at 9.8 million.

So I think you're thinking about it the right way, within line with what your comment are, there are some investments we want to make, but you saw us also do some restructuring with an intent to be able to fund that investment. With some of the headcount changes and some things we want to add, we will see some creep up in expense, but we’re mindful of the fact that we don't have unlimited money here in terms of what we can invest going forward without making tough trade-offs.

Okay, terrific. That's good to know. And then the second question, and I don't know how specific you can be on this, but I’m not an engineer, I'm a financial guy, I'm an investor and when you say, well, so you have a new CTO and obviously a new VP of Sales and you say these things won’t happen immediately, but we've gotten started on them, how long does it take to figure out what kind of IOT products you are going to decide to fill these gaps and then design them and then manufacture them, and then start getting them into the market? I mean, I would think if this is something that doesn't happen for a year, but am I too pessimistic or too optimistic with that kind of number?

Well, I think we didn't want to indicate that if we decide to add additional offerings, which we will, we know that much that you would immediately see this uptick in revenue in a new product, new product enhancement or addition in the coming quarter, because sometimes people get too much in front of that. We are leveraging a lot of the technology and the building blocks that we’re already in the market on in the IOT space, but we clearly see an opportunity to do more. What I think you will see us moving quickly on is deciding where we’re going to invest and where we’re not and making those trade-offs, some of which hadn't been done in the recent history of the company and then also we have spent quite a bit of energy on the go forward strategy looking at what we can do to enhance the products we have, to make them more competitive and we also already had a pipeline of new technology that was in the pipe, in fact that embedded world I mentioned, we're announcing a brand-new Wi-Fi product that we're pretty excited about that we have a number of key customers lined up on. So it's going to take time and one of the reasons that we said we wouldn’t expect this all take hold in the next quarter or two is because coming out of these products can take a few quarters, but also then the customers, if they are an OEM customer may take them longer to complete their testing to get to market. But I also would say from my perspective assessing the business, there are some things we can do within the products we already have and be more effective on sales and marketing execution of that. So I don't want to paint such a bleak picture that we can't improve our NPI performance and that's probably why I’m making changes operationally at the same time that I want to invest for a long-term strategy that has real promise.

Okay, very good. That makes sense. Thank you very much. I'll get back in the line.

Okay, thanks.

[Operator Instructions] And this will conclude our question-and-answer session. I would like to turn the conference back over to Jeff Benck for any closing remarks.

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 our third quarter fiscal year ‘16 results in late April 2016. I guess at this point, this concludes the call. Thank you for your time.

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