Lantronix, Inc. (LTRX) Q4 2016 Earnings Report, Transcript and Summary

Good afternoon and welcome to the Lantronix Fourth Quarter and Fiscal Year 2016 Results Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to E.E. Wang, Director of Corporate Marketing and Investor Relations. Please go ahead.

Thank you, Amy. Good afternoon everyone and thank you for joining the Lantronix fourth quarter and 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 August 30, by dialing 877-344-7529 in the United States or for international callers, 412-317-0888 and entering pass code 10091231. 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 to everyone joining us for this afternoon's call. During the fourth quarter of fiscal 2016, we continue to make progress on the initiatives we launched shortly after I joined the company in December. First, driving operational excellence in our organization. Second, completing rationalization of our product roadmap, and third launching a new strategic direction and starting the investment required to position our company for growth. Our results for the June quarter reflect continued progress as we achieved both year-over-year and sequential revenue growth and recorded our second consecutive quarter of non-GAAP profitability. Our particular bright spot IT management products grew 27% sequentially and 34% year-over-year in the fourth quarter driven by the growth in sales of our SLC 8000 advanced console manager. In addition we experienced modest sequential and year-over-year growth in our quarterly IoT product sales driven primarily by increased contribution from our xPico and our xPico Wi-Fi IoT products. Bottom line, we are making solid progress but we still have much left to do. It will take time and continued execution for us to achieve sustainable growth. However, I believe we are on the right path and as a team we’ve demonstrated that we’re not waiting to take action or afraid to make changes. While some of our initiatives will take time to have an impact, I’m starting to see a genuine shift in the culture of this team and the belief that we can win in the markets we participated. Before I provide some additional color on our results during the fourth quarter and our plans for fiscal 2017, I'm going to turn the call over to Jeremy to discuss our financial results.

Thank you, Jeff. Please refer to today's new release and 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 an alignment with our new strategy and the rationalization of our products roadmap, we have reorganized our product lines into categories that reflect the markets we are primarily focused on. IoT which represents our IoT gateways and building blocks includes products such as the XPort, UDS, xPico, PremierWave and EDS product family. And IT management which represents our IT infrastructure and management solutions includes product such as the SLC 8000, SLB and Spider products family. In addition, we will be reporting results for non-focused and end of life products as other revenue. Today’s news release provides details on our performance in both the old and new reporting format. Now I'd like to take a few minutes to go over our results for the fourth quarter of fiscal 2016. Net revenue was $10.5 million for the fourth quarter of fiscal 2016 compared with $10.2 million for the fourth quarter of fiscal 2015 and $10 million for the third quarter of fiscal 2016. The year-over-year increase in net revenue was primarily due to growth in our IoT and IT management products and new product sales of greater than 50%. This growth was primarily due to increased contribution from our SLC 8000 and to a lesser extent our xPico Wi-Fi which both grew by more than 200% over the same period last year. Gross profit as a percentage of net revenue was 47% for the fourth quarter of fiscal 2016 compared with 47.1% for the fourth quarter of fiscal 2015 and 48% for the third quarter of fiscal 2016. Selling, general and administrative expenses for the fourth quarter of fiscal 2016 was $3.4 million compared with $4.1 million for the fourth quarter of fiscal 2015 and $3.5 million for the third quarter of fiscal 2016. We continued to carefully manage our expenses even as we invested for growth and expanded our sales resources with several key hires worldwide. Research and development expenses for the fourth quarter of fiscal 2016 were $1.8 million relatively flat with the year-over-year and sequential quarters. Sequential and year-over-year revenue growth combined with reduced expenses helped us to achieve improved operating results for the second quarter in a row. GAAP net loss was $247,000 or $0.02 per share for the fourth quarter of fiscal 2016 compared with a GAAP net loss of $1 million or $0.07 per share for the fourth quarter of fiscal 2015 and a GAAP net loss of $456,000 or $0.03 per share for the third quarter of fiscal 2016. Non-GAAP net income was $121,000 or $0.01 per share for the fourth quarter of fiscal 2016 compared with a non-GAAP net loss of $575,000 or $0.04 per share for the fourth quarter of fiscal 2015 and non-GAAP net income of $189,000 or $0.01 per share for the third quarter of fiscal 2016. Now turning to the full fiscal year, net revenue for the fiscal year ended June 30, 2016 was $40.6 million compared with $42.9 million for the fiscal year ended June 30, 2015. The 5% decline in total net revenue was primarily due to an 11% decline in legacy product sales, which was partially offset by 27% growth in new product sales. Gross profit as a percentage of net revenue for the fiscal year ended June 30, 2016 was 47.7% compared with 47.3% for fiscal year ended June 30, 2015. Looking forward to fiscal 2017, we expect gross margins to remain fairly stable. GAAP net loss was $2 million or $0.13 per share for the fiscal year ended June 30, 2016 compared with the GAAP net loss of $2.8 million or $0.19 per share for the fiscal year ended June 30, 2015. Non-GAAP net income was $238,000 or $0.02 per share for the fiscal year ended June 30, 2016 compared with non-GAAP net loss of $767,000 or $0.05 per share for the fiscal year ended June 30, 2015. Now turning to the balance sheet, cash and cash equivalents were $6 million as of June 30, 2016 compared with $5 million as of June 30, 2015. The increase in cash was primarily related to a $2 million equity investment from Hale Capital Partners in June and a $2.9 million reduction in net inventory. Sequentially net inventory decreased by $691,000 from the prior fiscal quarter. Working capital was $9.1 million as of June 30, 2016 compared with $7.9 million as of June 30, 2015. As of June 30, 2016 we had no borrowings on our line of credit. Now looking forward, to-date most of the cost related to the launch of our New India Software Lab and the addition of sales and marketing resources has been self-funded by making tough choices and reallocating resources. As we continue to execute on our key strategic objectives during fiscal 2017, we expect to see some increase in operating expenses in support of these activities. I will now turn the call back to Jeff.

Thank you, Jeremy. As I mentioned at the start of today's call, our short term plan was centered on three key objectives. First, driving operational excellence across the business. Since kicking off our plan in late December 2015, our team has been focused on this initiative across our entire operations, we took the hard look at the business and identified what areas needed to be restructured, consolidated or improved. We also evaluated some of our processes and quite frankly threw some of them out and started over. I have asked my team to challenge ourselves with why we do things the way that we do and the brainstorm about better ways to approach our business. During the June quarter, we continued to execute in some areas that are not yet visible to the outside world but also in areas we can share such as rationalized product line and marketing spending, further reduction of inventories helped by improved forecasting and implementing a number of new processes to drive extra discipline throughout the organization. During the quarter, the new excitement and focus in our sales team translated into improved sequential results from all regions. We continue to invest in our sales force initiatives and we’ve recruited a number of new talented people to support our worldwide business. While it will take time for new sales resources to have an impact on results, I believe that we are off to a good start. On the marketing front, we launched several new outbound campaigns that have already helped to contribute to increase demand for our SLC 8000 product line. Combined with our sales efforts, SLC 8000 revenues grew more than 200% over the fourth quarter of fiscal 2015, and we're up approximately 60% from the first half of fiscal year 2016. On the development front, we continue to build out our engineering team and in July announced the official opening of our IoT software lab in Hyderabad, India. The new lab brings additional software skills and capacity to the team and will play an important role in the execution of our expanded IoT strategy. Turning to our second initiative, the final step in rationalizing our product roadmap was revisiting how we think about and describe our business. And as you can tell from today's press release, we've made it very clear what our priorities are as a company. Simply put we are in the business of delivering secure data access and management solutions for IoT and IT asset. Whether it is an electronics embedded IoT gateway that helps to securely connect a wireless cash register to the store for a sidewalk sale or an IoT device gateway that used to manage and access a water irrigation system in the city park or an IT management appliance that helps to bid the IT admin make sure that its network is operating smoothly 24/7 from anywhere. Lantronix is in the business of creating secure and robust solutions that make it easier for companies to access the benefits of the Internet of Things. This brings me to our third initiative, defining a new strategic direction that will position Lantronix for growth in the IoT market. Our new strategic direction builds on the experience we've gained in delivering robust connectivity solutions to millions of devices for more than 25 years and as directed at moving us further up to value chain. As you might have noticed when we described the business we're in, it wasn't just about connectivity or even exit, but we emphasized data because at the end of the day securely managing machine data is a critical area where we believe we can add more value. Today less than one third of companies surveyed worldwide by the analysts from circle research have been able to successfully launch an IoT project. While the promise of IoT is great, developing and implementing an IoT project is costly, complex and often time consuming, and many equipment manufacturers find themselves tied up in the complexities of building an IoT solution only to miss out on the business benefits IoT can bring. Lantronix has built a reputation for delivering IoT solutions that our customers describe as easy to deploy and they just work. It's why many Fortune 500 companies rely on Lantronix connectivity solutions today. As we move ahead, our objective will be to bring these qualities to the new software led gateway solutions we will be developing and launching in fiscal year 2017 and beyond. These new solutions will help companies to simplify their industrial IoT deployments, enable end users to securely access the data generated by their smart machines and assist OEMs in creating value added business model. As we start this new fiscal year, our team is focused on driving three key initiatives. The first initiative is about a constant focus on operational excellence. During FY '17, we will continue to execute on the operational improvements we started last year which includes everything from just in time manufacturing enable by late stage configuration to improve sales forecasting and execution to tighter engineering project discipline that enables us to consistently meet our committed plan. Our second initiative will be to drive continued growth in our IT management business through shared gains enabled by targeted marketing and improved channel engagement. During fiscal year 2017, our marketing plan will be to ramp up our outreach efforts and communicate while Lantronix is a better choice for IT management. On the channel front, yesterday we announced a new premier partner program Lantronix SmartAdvantage. The program provides substantial discounts, incentives and tools to resellers when they register a qualified deal for the Lantronix SLC 8000 or other Lantronix IT management solutions. We believe this program will allow us to aggressively expand access to our industry leading IT management platform and it gives our resellers a substantial incentive to promote our products. Our third initiative is all about executing our strategic direction and investing in new offerings to more broadly participate in the fast growing IoT market. In addition to offering easy to deploy and secured IoT connectivity solutions, we plan to launch new offerings over the next year and beyond that further simplify IoT deployment through built in tools and software that can help our customers more fully participate in the business of the Internet of Things. Now let me wrap up. I'm pleased with our recent results from the fourth quarter of fiscal year 2016 and they demonstrate, we are making steady progress. There is an excitement within our team about the early momentum we are seeing with our new direction and the impact of the changes we have made to refocus our business. We fully anticipate we would likely encounter some setbacks along the way but we are aligned on our plan for fiscal year 2017 and have the conviction to invest in our strategy even at the times we have to trade up short term gains. The journey is just beginning for us to build the new IoT data access and management solutions that will contribute to our long-term growth strategy. We believe that we have identified some interesting opportunities where we can provide new offerings that leverage our IoT knowhow and existing routes to market, while at the same time solve a bigger piece of the IoT problem. We have studied the market and believe we can offer a unique set of solutions with the different approach than others are using in the marketplace today. We hope you will stay engaged with us as we continue on this journey to reinvent Lantronix. Before I open the call for questions, I want to thank my team for their continued hard work and execution. The team is clearly excited about our new direction and anxious to start sharing this with partners and customers alike. We look forward to sharing our continued progress with all of you on our next earnings call. Operator, at this point we would like to now open the call for questions.

[Operator Instructions] The first question is from Jaeson Schmidt at Lake Street Capital Markets.

Hi guys, thanks for taking my questions and congrats on the really strong results. Just wanted to start with the quarter, wondering obviously the SLC 8000 performs really well, wondering if there were any other product lines or geographies that outperformed your original expectations?

Yes, we saw a good performance in all the geographies, so it's nice to do, it was kind of broad based not just specific to one particular region. We also saw a pretty good performance in some of our new wireless products that we brought to market. We just started shipping our PremierWave 2050 product and had some new some new design-wins ramping with that. And our xPico product line I think we mentioned in the actual script also had a pretty good quarter. So, some of those new wireless products certainly contributed beyond the SLC family which did really well for us.

Okay, that's helpful. And then Jeff if you could talk about how you feel about your overall visibility the rest of the year, and I guess more specifically what you're seeing from an inventory standpoint at the distributors?

Okay. Yes, I mean visibility it's a little tough in our business because in some cases we sell through two-tiered channels to end users and then also in the OEM business we don't always get perfect visibility to their demand. But from a channel standpoint, we didn’t see - I mean I think we felt like things were operating pretty normally and don’t feel like there was necessarily any channel build going on. We pay attention to what goes in and what goes out and everything looked pretty consistent there, I don’t think we saw really much shift in channel inventories. When you look at the business now, coming from where we've been earlier in the fiscal year '16, we're kind of taking at one quarter at a time, we're obviously just starting the first quarter. So, I guess I’ll have a better sense of what the fiscal year looks like when we get a little further into it but from a channel standpoint we didn’t see any unique behavior there.

Yes, I’d like to add something also on the channel inventories. If you recall Jaeson about 60% of our revenue is recognized on sell-through, so the fluctuation of inventory in the channel isn’t always inductive of a build and an impact on future revenues for that reason.

Fair point.

Okay, that’s helpful. And then with the new partner program that you guys have just established, does that change your target gross margin or the gross margin range that I think it was originally kind of that 49% to 51% longer term?

Yes, I'll comment and I'll let Jeremy add a little more to it. The partner program for us was really about extending the reach for our products and getting a few more partners engaged in the portfolio. We frankly I think the company had not put as much emphasis on the channel in the most of last few years and we recently hired a new resource to manage a channel for us, and we’ve been putting so more marketing emphasis on the channel and we had number of partners come to us and say, they’d really like to participate with us particularly on selling our leadership product there. So, we’re excited about the prospects of that, that that could potentially represent for growth of - continued growth and share gain there; a lot of what we have done was with not - without this new program in place from that standpoint. The other thing we did do a little bit of adjustment looking at price in the competition and looking at the MSRP for our product as well, so we did some adjustment there also in consideration of what we might do with the channel program. So, we don't see a material change there but I’ll let Jeremy comment a little bit on margins as we think about fiscal year '17.

Yes, so for fiscal year '16 we reported margins for the year about 47.7% and looking forward for fiscal '17 we expect the margins to remain relatively stable. I think as it relates to the VAR program and the products IT management products, those are some of our higher margin products, so to the extent that we're successful in that program, there is the ability to benefit from that from a mix standpoint.

Okay, perfect. Thanks a lot guys. I’ll jump back in the queue.

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

Thank you, Operator. I'd like to thank you for your participation in our call today. We look forward to updating you on our progress, achievements and actions when we report on our first quarter results in late October. Thanks again for attending the call. And this concludes the call for today.