Lantronix, Inc. (LTRX) Q3 2018 Earnings Report, Transcript and Summary

Good day, everyone. And welcome to the Lantronix 2018 Third Quarter Conference Call and Webcast. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Shahram Mehraban, VP of Marketing. Please go ahead.

Good afternoon, everyone, and thank you for joining the Lantronix's third quarter fiscal 2018 conference call. Joining us on the call today are Jeff Benck, Lantronix' President and Chief Executive Officer; and Jeremy Whitaker, Lantronix' 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 8 p.m. Eastern, 5 p.m. Pacific today through May 3 by dialing 877-344-7529 in United States or for international callers, 412-317-0888, and entering passcode 10119123. During this call, management may make forward-looking statements, which involve risks and uncertainties that could cause Lantronix' 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 website and in the company's SEC filings, such as its 10-K and 10-Qs. Lantronix undertakes no obligation to revise or update publicly any forward-looking statements to reflect future events or circumstances. Please note, that during this call the company will discuss design-wins which are defined by the company as a verbal or written commitments from a customer to use company's product in their design or implementation. There is a risk that some of these design-wins may not enter into production Also 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. Jeff?

Thanks Shahram. And welcome to everyone joining us for this afternoon's call. I am thrilled to report that our third quarter revenue was $11.6 million which is the highest quarterly revenue since I joined the company. We also made great progress on strengthening our business as we achieved strong year-over-year gross margin improvement, reported our second consecutive quarter of GAAP profitability which was our best result in the last 10 years, and delivered on our ninth consecutive quarter of non-GAAP earnings. We also increased our cash position to $9 million. We saw our IoT business grew 15% sequentially fueled by 61% growth in our active Wi-Fi products. We announced our latest embedded Wi-Fi gateway, the xPico 250 and started the sample XPort Edge, our next generation embedded wired ethernet gateway. We're very excited about this new addition to the patented XPort product family because we're continuing to see strong demand for our wired ethernet solutions particularly in the industrial vertical where the industry 4.0 is driving new IoT projects. In fact in the last quarter alone, we achieve more than 10 new design-wins with our XPort family of embedded wired ethernet modules. On the ITM front, the business was down sequentially after record sales of our SLB branch office products last quarter. We did however closed a large SLC 8000 deal with a major global cellular carrier in the quarter. Our growing pipeline of SLC and SLB opportunities gives us confidence in our share gain plans. We are encouraged by the demand we are seeing for a differentiated IT management offerings. It's clear data center customers want to get better control of their connected devices whether the network is operating at peak performance or even more importantly when things go wrong. Our strategy of bringing the same management capability that our customers rely on for their in-band networks to out-band is clearly resonating. We also made progress in the quarter on our IoT software initiatives by launching Lantronix gateway central, a cloud-based SaaS offering build on our MACH10 IoT platform that allows our customers to monitor and manage their installed base of Lantronix IoT Gateways. Before I provide some additional color on our direction, I will turn the call over to Jeremy to discuss our financial highlights from the second quarter.

Thank you, Jeff. Please refer to today's news release and the financial information in the Investor Relations section of our website for additional details that will supplement my financial commentary. Now I’d like to take a few minutes to go over our results for the third quarter of fiscal 2018. Net revenue was $11.6 million compared with $11.5 million for the third quarter of fiscal 2017 and $11.3 million for the second quarter of fiscal 2018. The sequential increase was primarily due to 16% growth in our IoT product line. Sequentially, our ITM product line declined as we just came off the record SLB quarter and we had a handful of ITM deals that pushed out of the third fiscal quarter. Gross profit as a percentage of net revenue reached the highest level in over 15 years, a 56.8% for the third quarter of fiscal 2018 compared with 55.5% for the third quarter of fiscal 2017 and 55.7% for the second quarter of fiscal 2018. The continued improvement in gross margin was a result of lower costs and pricing discipline. Selling, general and administrative expenses for the third quarter of fiscal 2018 were $4.2 million compared with $4.4 million for the third quarter of fiscal 2017 and $4.2 million for the second quarter fiscal of 2018. Our research and development expenses for the third quarter of fiscal 2018 were $2 million compared with $2.1 million for the third quarter of fiscal 2017 and $1.9 million for the second quarter of fiscal 2018. I'm pleased to report that we delivered our second consecutive quarter of GAAP profitability. GAAP net income was 344,000 or $0.02 per share during the third quarter of fiscal 2018. This compares to a GAAP net loss of 162,000 or $0.01 per share during the third quarter of fiscal 2017 and GAAP net income of 225,000 or $0.01 per share during the second quarter of fiscal 2018. We all reported our ninth consecutive quarter of non-GAAP profitability as we achieved non-GAAP net income of 767,000 for the third quarter of fiscal 2018 as compared with non-GAAP net income of 484,000 for the third quarter of fiscal 2017 and non-GAAP net income of 689,000 for the second quarter of fiscal 2018. Now turning to the balance sheet. Cash and cash equivalents increased to $9 million as of March 31, 2018 compared with $8.1 million as of June 30, 2017. Net inventories were $7.4 million as of March 31, 2018 compared with $7 million as of June 30, 2017. Working capital improved to $11.6 million as of March 31, 2018 compared with $10.4 million as of June 30, 2017. Now I’ll give some insight into gross margin percentage and operating expenses for the fourth fiscal quarter. We expect our gross margin percentage to remain in the range of what we have experienced so for this fiscal year. In addition, we expect operating expenses to increase slightly as we continue to invest in additional resources to meet our strategic objectives. I’ll now turn the call back to Jeff.

Thanks Jeremy. Now let me provide you with an update on our three strategic initiatives for this fiscal year which once again are; first, to increase our number of IoT wireless gateway design-wins, second, to continue our share gain momentum with our IT management products, and lastly to establish our IoT software business based on MACH10 or IoT platform. On our first initiative, we continue to progress by expanding our roadmap with our announcement in late February of our latest embedded IoT Gateway, the xPico 250 at embedded world. This new gateway has Bluetooth connectivity to the xPico 240 and creates additional used cases for our wireless gateways. In the mean time, we have achieved 20 design-wins with our xPico 240 Wi-Fi Gateway and our opportunity pipeline continues to grow. Turning to external gateways, as we discussed in our last earnings call, we started the initial volume ramp of our SGX5150 IoT device gateway. This ramp has continued into 3Q as we saw more than 70% quarter-over-quarter in unit sales of this Gateway. We're also making good progress in penetrating the system integrated channel and the manufacturing segment with our IoT products. To that end, for the first time this week, we are participating in the Control Systems Integrators Association or CSIA annual conference in San Francisco, where we are highlighting our IoT solutions including the SGX5150 gateway for use in the manufacturing vertical to hundreds of system integrators. During the quarter, we also received orders from a system integrator who is using the SGX to connect tool in assembly-lines of a major European auto manufacturer. As had mentioned in our last earnings call, although more of our development spend has been focused on Wi-Fi, we're still seeing solid demand and an increased pipeline of design-wins for our wired ethernet products. In third quarter, we announced the technical preview of new product in the patented XPort family of wired ethernet solutions called the XPort Edge, and six weeks later we further announced the initial sampling of this product to help accelerate the design and shorten the development timelines for our early access customers. We're very optimistic about the potential of this new product as it brings additional capabilities such as enhanced security, device management and the new level of performance to an already successful product family further expanding our serviceable available market. Now turning to our second initiative focused on share gain with our IT management products. While our ITM business was down sequentially after a record Q2 for our SLB branch office manager, our opportunity pipeline for both our SLB and SLC 8000 products remains strong. Reinforcing that, we anticipate a return to sequential growth in our ITM business in Q4 as we expect several of our large SLC 8000 projects to close in the quarter. Finally turning to our third initiative which is focused on establishing our IoT software business. During the third quarter we launched Lantronix Gateway Central cloud-based SaaS offering powered by our MACH10 IoT platform. This new Lantronix posted offering which is available for both our external and embedded IoT gateways enables device manufacturers, system integrators and end-users to provision and manage their new and deployed Lantronix IoT gateways quickly and securely. For a small yearly fee of less than $20 per device, any Lantronix Gateway customer can get the benefits from the MACH10 platform to monitor and manage their Lantronix gateways. This is also a great door opener for us to engage more customers who after trying it might consider using MACH10 for managing their own IoT assets. During the quarter, we also continued our close engagement with our early customers for the MACH10 global device manager under IoT pilots and we're learning a lot through this process about the types of challenges they face designing and implementing an end-to-end IoT cloud solution. This is providing valuable insight to enable us to tune our platform and services to help close the gap between their current offerings and a fully deployed and optimized IoT solution. We're continuing to invest in MACH10 technology platform and plan to launch an additional SaaS offering for our IT management products in the coming months. This new SaaS solution will enhance our IT management product line with new capabilities and give us an additional competitive advantage over other console manufacturers. This management software offering can enable us to provide more value and drive incremental revenue on existing hardware sales. Beyond that, it will also allow us to stay connected to our IT management customers through a recurring SaaS business model. More on this new offerings as we announce it later this year. Now let me wrap up, I’m thrilled with our performance in fiscal Q3. We delivered record gross margins which resulted in 3% GAAP profit margin and 7% non-GAAP profit margin and our second consecutive quarter of GAAP profitability once again demonstrating the leverage in our business model. I’m also very pleased with our progress on our key initiatives with the recent product launches, a new IoT SaaS offering and the continued ramp on our new IoT Gateway products. Looking to Q4, I anticipate another quarter of year-over-year growth enabling us to finish the year stronger than we came into it. I look forward to updating you on our progress as we continue our journey. That completes our prepared remarks for today. So I’ll now turn it back to the operator to conduct the Q&A session.

[Operator Instructions] The first question comes from Jaeson Schmidt with Lake Street Capital Markets. Please go ahead.

Just want to start with the IoT traction. Obviously you guys are seeing some early nice momentum in the March quarter, curious if you could talk about what's really driving that. Is it these new product introductions, is it overall market growth and share gains, just any additional color there would be helpful?

I mentioned in the script that we saw good traction in some of the new Wi-Fi offerings and our SGX5150 external gateway in particular is ramping nicely. And we saw nice sequential - really strong sequential growth there. We did launch a number of new embedded Wi-Fi solutions some at the end of last calendar year and some into this year that we're getting really good design traction on but they’re not all yet contributing substantially to the revenue. So, we still think we’ve got that in front of us but it’s good to see some of the Wi-Fi products performing better. The other thing that’s helped us in the IoT segment is our wired ethernet products kind of continue to perform well. So some of those are legacy products we had a while, we also mentioned that we’re going to put a new offering in the market in that segment called XPort Edge. But we’ve seen really pretty solid performance high single-digit growth on the full fiscal year to date of that wired family. And if you think about last year we saw really strong growth double-digit growth last year so on the back of a growth year we’re seeing pretty good strength there. So when you put that together it's over covering any legacy and we saw some nice growth there.

And then just shifting to gross margin, obviously really strong in the quarter. I know you mentioned some pricing discipline and cost cuts there but could you talk about if the new product introductions are providing a tailwind on gross margin as well?

Yes, I wouldn’t say it was driven as much by mix I mean we do look at that because we see a little bit of a difference with ITM products and generally having a little higher than average gross margins. I’m not seeing a lot of help from the new products because they’re kind of in line with where we are. So it really wasn’t driven as much by a mix in the quarter but more driven by the fact we’ve been pretty disciplined about driving some cost improvements in our build material cost. And then also as we said having pricing discipline and knowing where competition is at and where we need to be to price competitively. While you know not being overly aggressive, you want to add anything to that.

No, I think that’s a pretty good summary.

So that’s kind of what driving. We did pick up a little bit Jaeson our view of like where we could deliver a margin improvement more consistently. In the past we had said in the low 50s and we're now sort of nudging that up again. So we believe that this is sustainable and we’re happy about that.

And the last one from me and I'll jump back in the queue. I guess kind of a two-part one just, looking at the IT management business is that new deal you recently closed with a existing customer or is this a brand new customer for you. And then looking at the SaaS offerings that you'll be offering in the IT management segment, can you discuss what type of economics we should be thinking around that offering?

Yes, so we did talk about a new design win that we closed in the quarter, it's not a new customer that would have the customer but I would say the project itself is new so the business is new. We talked about our carrier last quarter. This is actually a different customer but it's a customer we have business with but it’s good to see us refresh and start to deploy some new platforms that we think will have some follow-on opportunity to as we go through next fiscal year. And then so that we referenced because we thought that - we thought it was worth mentioning that we have continued to penetrate multiple carriers when it comes to IT management which we think is pretty exciting. And then on your other question on the SaaS model or the SaaS - I’m little bit one of the team we haven’t announced yet but we’re previewing of this that we’re going to look to leverage our MACH10 investment into the IoT management space. In many ways, our IoT management product they manage things as well. I mean they may not be what's tradition use of IoT but devices in the data center and more and more sensors and things starts to look more IoT, so we’re able to leverage this MACH10 technology platform. And we really believe will have the ability to do - to provide a differentiating capability that will be a value add on top of our hardware platform that is the IT management business. So, there is an opportunity for incremental revenue from that. We do saw management software in that space today. We have centralized management with VSLM product. So you look at this as something as beyond that but it will be something incremental that we can offer to customers that we think is could really be differentiating on top of the unique differences we have today with our modular platform and our support for USB and some of the things that the competition doesn’t have. When you add in this new capability unless you’ve taken the time to invest a couple of million bucks in a cloud platform, it’s going to be hard to follow us. And so when I look at some of the legacy competitors they haven’t wanted to invest here, we think this could be pretty interesting for us and there is a lot of really interest although we haven’t formally announced but we are showing some customers under NDA and the response is pretty exciting. So, early days but I wanted to reinforce that while MACH10 revenue is taken longer for us to see contribute to adding at this point to this fiscal year, we really do believe there is a couple of ways to monitor this investment as we go through time.

[Operator Instructions] Okay, seeing no further questions in the queue. This concludes our question-and-answer session. I would like to turn the conference back over to Jeff Benck for any closing remarks.

Thank you, Operator. So we look forward to updating you on our progress, achievements, and actions when we report on our fourth quarter and full year results in late August. Thanks again for participating in the call and have a good afternoon for everyone. Thank you.