Lantronix, Inc.
Q1 2014 Earnings Call Transcript

Published: 31 Oct 2013

[Operator:]

Good day, ladies and gentlemen, and welcome to the First Quarter Fiscal 2014 Lantronix, Inc. Earnings Conference Call. My name is Regina, and I'll be your conference operator for today. [Operator Instructions] As a reminder, today's event 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 go ahead, Ms. Wang.

[E.E. Wang Lukowski:]

Thanks, Regina. Good afternoon, everyone, and thank you for joining the Lantronix First Quarter Fiscal 2014 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 approximately 7

[Kurt F. Busch:]

Thank you, E.E., and thank you to everyone joining us this afternoon. In the first quarter of fiscal 2014, sales for Enterprise Solutions grew, primarily due to the ongoing efforts to expand our sales channels. This partially offset the decline in sales for some of our mature OEM Modules, which resulted in a decrease in overall revenue. I'm pleased to report that through fiscal and operational discipline, we recorded non-GAAP net income and reduced GAAP loss for the first quarter of fiscal 2014. Overall, we're encouraged by the opportunities being generated by our new products and the expansion of our sales channels. Before I go into more detail on our progress and expectations, I'd like to turn the call over to Jeremy to go over our financial highlights. Jeremy?

[Jeremy R. Whitaker:]

Thank you, Kurt. 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 the highlights of our results for the first quarter of fiscal 2014. Net revenue for the first quarter of fiscal 2014 was $10.9 million compared to $11.2 million for the first quarter of fiscal 2013 and $11.1 million for the fourth quarter of fiscal 2013. The year-over-year and sequential decline in net revenue was primarily due to a decline in unit sales for some of our mature OEM Module products. At the same time, we saw year-over-year and sequential growth in our Enterprise Solutions product line, primarily due to increased contribution from international sales as a result of ongoing efforts to expand our sales channels. Gross profit, as a percentage of revenue, for the first quarter of fiscal 2014 was 49.5% and within our long-term target model range of 49% to 51%, as compared to 48.8% for the first quarter of fiscal 2013 and 44.7% for the fourth quarter of fiscal 2013. Selling, general and administrative expenses for the first quarter of fiscal 2014 were $3.9 million compared to $4.3 million for both the first quarter of fiscal 2013 and the fourth quarter of fiscal 2013. The fourth quarter of fiscal 2013 included severance costs of $208,000. Research and development expense for the first quarter of fiscal 2014 was $1.7 million compared to $1.6 million for the first quarter of fiscal 2013 and $1.8 million for the fourth quarter of fiscal 2013. Total operating expenses for the first quarter of fiscal 2014 were $5.6 million compared with $5.9 million for the first quarter of fiscal 2013 and $6.1 million for the fourth quarter of fiscal 2013. As expected, operating expenses for the first quarter of fiscal 2014 were lower as a result of the cost-cutting measures we began implementing during the fourth quarter of fiscal 2013. GAAP net loss was $267,000 for the first quarter of fiscal 2014, or $0.02 per share, compared to a GAAP net loss of $430,000, or $0.03 per share, for the first quarter of fiscal 2013 and sequentially, a GAAP net loss of $1.1 million or $0.08 per share for the fourth quarter of fiscal 2013. Non-GAAP net income for the first quarter of fiscal 2014 was $220,000 or $0.01 per share compared to non-GAAP net income of $48,000 or $0.00 per share for the first quarter of fiscal 2013 and non-GAAP net loss of $665,000 or $0.05 per share for the fourth quarter of fiscal 2013. Now turning to the balance sheets. Cash and cash equivalents, as of September 30, 2013, were $5.8 million compared to $5.2 million as of June 30, 2013. Net inventories were $8.5 million as of September 30, 2013, compared to $8.7 million as of June 30, 2013. As discussed on previous calls, our revenue has the tendency to fluctuate from quarter to quarter due the nature of our sales cycle and as a result of project-based purchases that oftentimes have 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, we expect to continue to manage our spending based upon revenue expectations with a primary focus on driving long-term revenue growth while preserving working capital and maintaining fiscal discipline. I'll now turn the call back to Kurt.

[Kurt F. Busch:]

Thank you, Jeremy. On our last call, I stated that our plan for fiscal 2014 would focus on the following

[Operator:]

[Operator Instructions] And your first question today comes from the line of Krishna Shankar with Roth Capital.

[Krishna Shankar:]

Kurt and Jeremy, regarding the enterprise platforms that you've had some growth, can you talk about some of the key enterprise products where you've seen growth both in the U.S. markets and the international markets recently?

[Kurt F. Busch:]

So Krishna, we're seeing growth across the board on our international -- or our enterprise product suite. The efforts that we see -- that we put in place to expand our sales and marketing efforts outside the United States are bearing fruit on both new products, as well as some of the older products.

[Krishna Shankar:]

Okay. So it's pretty kind of broad-based pickup in your international channel, I guess?

[Kurt F. Busch:]

Exactly. And it includes the new products, as well as some products that are many years old.

[Krishna Shankar:]

Okay. And how did the xPrint business do from the June to the September quarter?

[Kurt F. Busch:]

Sure. So in this quarter we saw a decrease in our home version, and we saw an increase in our office version. And the office is really targeted for the Enterprise, which we feel is the most exciting area for the xPrintServer.

[Krishna Shankar:]

Okay. And then you mentioned that the legacy business continued to be a drag on revenue growth. But can you give us some sense for what portion of the total revenues are now, sort of from a legacy camp versus the new growth products?

[Kurt F. Busch:]

We're not breaking that out at this point, Krishna.

[Krishna Shankar:]

Okay. But you still have a relatively significant amount of legacy products in the kind of sales channel?

[Kurt F. Busch:]

Yes, absolutely. But the -- what we probably should point out is, though we've seen decline in the legacy products, primarily in the OEM Modules this last quarter, the efforts that we do on expanding our sales channel has boosted up some of the legacy products in the Enterprise Solutions. And we do feel that our new product growth will outstrip the decline in legacy products in the long term.

[Krishna Shankar:]

Okay. And then this is the first quarter where I've heard you say that the international business picked up because of your channel efforts and you saw some weakness in the U.S.. Can you elaborate on what you're seeing in the U.S. market now?

[Kurt F. Busch:]

So we saw the U.S. was impacted primarily with our OEM Modules. And there was a few things going on there. We had a couple of large customers that have irregular buying cycle that influenced the U.S. as well as one of our largest products, the XPort, it's a small product but it's a large revenue contributor. It's going through a transition from one version to the next, and we've seen some irregular buying patterns in the XPort as well. And those both adversely affected the U.S. revenue.

[Krishna Shankar:]

Okay. And then final question, how are your IT management doing? The products doing the vSLM and some of the network management and the data center type-products, how are they doing?

[Kurt F. Busch:]

Sure. So the vSLM -- or, pardon me, vSLC products. vSLM is a management product that manages most of our IT products. We still continue to see strength in that product line, but that product line has been traditionally very lumpy from quarter-to-quarter.

[Operator:]

[Operator Instructions] Your next question is from the line of George Melas with MKH Management.

[George Melas-Kyriazi:]

Quick question on the gross margin. It had a nice rebound. Can you maybe provide some color there?

[Jeremy R. Whitaker:]

George, this is Jeremy. On our last quarter, we saw some increase in operating and overhead costs. In the current quarter, we did not see similar costs. In addition, we saw some savings both in freight and a little bit of improvement in product mix.

[George Melas-Kyriazi:]

Okay. Is -- I guess, this is within your target range. But do you think that is actually -- you'd be able to repeat that for -- you'll be able to stay there for fiscal '14?

[Jeremy R. Whitaker:]

Yes. In the long term, we believe we continue to execute to our plan that we can meet our long-term target model of 49% to 51%.

[George Melas-Kyriazi:]

Okay. And in the medium term, I mean, for fiscal '14, is that sort of the range that you're targeting as well?

[Jeremy R. Whitaker:]

So George, given our size and how sensitive our margins are, about $100,000 will swing it one point, one way or the other. It makes it difficult to give really short-term guidance on that.

[George Melas-Kyriazi:]

Okay, great. And then just a broad question for Kurt. Can you sort of educate us a little bit about some of the changes in sort of the product development process that have happened in the last, let's say, year or 1.5 years since you guys came? And maybe describe how do you think that, that process is actually going better.

[Kurt F. Busch:]

Sure. So we put in place a very disciplined typically described as a phase-gate process in the company to really -- that's very important in driving home, really for the company, the importance of coming out with innovative products that are fulfilling an unfulfilled need by the customers and offer a strong ROI for the company. And this is something that hasn't been in place for the company for some period of time. And being able to really put a disciplined process from, basically, the opportunity of the product to the definition of the product and a clear feature set, a clear customer base, has allowed us to come out with products basically on schedule, addressing customer needs, and has allowed us to keep up with this -- with our commitment of coming up with one product every quarter.

[George Melas-Kyriazi:]

Okay, great. And the cellular space is very new to you. I mean, the overall wireless space is clearly where you're putting a lot of resources. It had been mostly Wi-Fi. Now it seems like you're coming out with some cellular product. Where do you see the bigger opportunity, in Wi-Fi or cellular?

[Kurt F. Busch:]

At this point, it's really hard to say between the 2 of them. People will typically -- if they have Wi-Fi, they will go with Wi-Fi first. And then cellular is typically the connection of last resort or the connection for any kind of a remote application, say whether it's like oil and gas or any kind of -- usually, the utility-related M2M applications require cellular. And typically, you have to pay for some service in that case. So it's obviously a -- the last thing anybody wants to do. But we do see good opportunities in both cellular and Wi-Fi. But today, we both see them as the best growth opportunities for Lantronix.

[Operator:]

[Operator Instructions] Now ladies and gentlemen, this will conclude our question-and-answer portion today. I would like to go ahead and turn the call back over to management for any closing remarks they would like to make.

[Kurt F. Busch:]

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 second quarter of fiscal 2014 in late January.

[Operator:]

Ladies and gentlemen, thank you so much for your participation today. This does conclude our presentation, and you may now disconnect. Have a great day.