Lantronix, Inc.
Q3 2015 Earnings Call Transcript

Published: 29 Apr 2015

[Operator:]

Hello and welcome to the Lantronix Inc. Third Quarter Fiscal Year 2015 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 E.E. Wang. Please go ahead.

[E.E. Wang:]

Thank you, Amy. Good afternoon everyone and thank you for joining the Lantronix Fiscal 2015 Third Quarter 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

[Kurt Busch:]

Thank you E.E., and thank you to everyone joining us this afternoon. Starting this quarter, we will be providing financial details regarding our new products which as we’ve stated in the past are a key element of our growth strategy. We achieved 33% year-over-year increase in new product revenues during the third quarter of FY ’15 compared with the same period last year. For the fiscal year-to-date, new product revenues were up 59% for the nine months ended March 31, 2015 compared with the same period last year. We’re pleased that the year-to-date new product revenues have already exceeded full FY ’14 new product revenues. Total revenues continued to be affected by decline in legacy products and weakness in customer capital spending that impacted the timing of projects. These resulted in total revenues being down year-over-year and sequentially. Despite challenging near-term conditions we are focused on executing to our growth strategy of delivering disciplined and innovative product development; engaging with tier I accounts and expanding our sales and marketing efforts worldwide. As new products become a larger percentage of our revenues, we believe that these actions will ultimately create long-term profitable growth. Before I go into more detail on our progress and expectation, I'd like to turn the call to Jeremy to go over our financial highlights.

[Jeremy Whitaker:]

Thank you, Kurt. 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 my financial commentary. Now, I'd like to take a few minutes to go over the highlights of our results for the third quarter of fiscal 2015. 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 cycles. As Kurt mentioned earlier, starting this quarter we will be providing more detail regarding our new product revenue. We define new products as products that have been released since the start of the second quarter of fiscal 2012. Net revenue for the third quarter of fiscal 2015 was 10.4 million compared with 11.6 million for the third quarter of fiscal 2014, and 10.7 million for the second quarter of fiscal 2015. The year-over-year and sequential decreases in net revenue were primarily due to decline in legacy product sales and weakness in capital spending that impact the timing of customer projects. The year-over-year decline in legacy products was partially offset by 33% growth in new product revenue. During the third quarter of fiscal 2015, new product revenue was 1.7 million compared with 1.2 million for the third quarter of fiscal 2014, and flat with the second quarter of fiscal 2015. Fiscal year-to-date net revenue was 32.7 million compared with 33.4 million for the same period last year. Fiscal year-to-date new product sales were 5 million, up 59% compared with 3.2 million for the same period last fiscal year. Since this is the first time that we are disclosing revenue from new products we will provide data for the last three fiscal years. New product revenue was 4.6 million in fiscal 2014, 3.0 million in fiscal 2013 and approximately 900,000 in fiscal 2012. Gross profit margin for the third quarter of fiscal 2015 was 45.1% compared with 50.9% for the third quarter of fiscal 2014 and 48.2% for the second quarter of fiscal 2015. The decrease in gross profit margin was primarily due to $290,000 charge for excess and obsolete inventories, mainly related to the repurchase of excess raw materials from our contract manufacturers. Over the long-term we continue to target a gross profit margin in the range of 49% to 51%. Selling, general and administrative expenses for the third quarter of fiscal 2015 were 3.9 million compared with 4.2 million for the third quarter of fiscal 2014 and 4.0 million for the second quarter of fiscal 2015. Research and development expenses for the third quarter of fiscal 2015 were 1.6 million compared with 1.8 million for the third quarter of fiscal 2014, and 1.8 million for the second quarter of fiscal 2015. GAAP net loss was 839,000 for the third quarter of fiscal 2015 or $0.06 per share compared with a GAAP net loss of 130,000 or $0.01 per share for the third quarter of fiscal 2014, and sequentially a GAAP net loss of 632,000 or $0.04 per share for the second quarter of fiscal 2015. Non-GAAP net loss for the third quarter of fiscal 2015 was 357,000 or $0.02 per share compared with non-GAAP net income of 331,000 or $0.02 per share for the third quarter of fiscal 2014, and sequentially non-GAAP net loss of 99,000 or $0.01 per share for the second quarter of fiscal 2015. Now turning to the balance sheet, cash and cash equivalents were 5.6 million as of March 31, 2015 compared with 6.3 million as of June 30, 2014. Our cash balance at the end of the quarter benefited from customer prepayments and the letter of credit that are since been repaid. We continue to believe that we have a sufficient resource to execute on our growth plan and meet our working capital needs. Net inventories were 8.7 million as of March 31, 2015 compared with 8.4 million as of June 30, 2014. For the upcoming quarter, we expect operating expenses to trend up slightly. That said our primary focus remains on driving long-term revenue growth for managing our spending based upon revenue expectations, preserving working capital and maintaining financial discipline. I’ll now turn the call back to Kurt.

[Kurt Busch:]

Thank you, Jeremy. Today Lantronix is enabling the Internet of Things by solving key issues relating to mobility, management and security that are applicable to a wide range of industries from healthcare, energy, retail, security and other verticals. In fact, it is likely that the Lantronix’s product has touched some part of your world. Just a few examples of this are

[Operator:]

Thank you. [Operator Instructions] Our first question comes from Jaeson Schmidt at Lake Street Capital Markets. Jaeson Schmidt First one, wondering Kurt if you could comment on any particular notable trends that you’re seeing from a geographical perspective? Kurt Busch Sure. First of all thanks for calling in Jaeson, it’s great to hear from you. So we’ve seen most of the weakness we’ve seen in capital spending is really where our enterprise business is the strongest and that’s in North America. Today we see Europe holding up pretty well, but enterprise is relatively small there as well as enterprise is relatively small outside the United States. So from a geographic point of view the weakness is primarily in the enterprise capital spending areas of North America. Jaeson Schmidt And then I know you guys have some early nice partnerships or relationships with Verizon, Medtronic, NetApp. Can you just comment on how those are progressing and if you’re seeing additional traction in that each of those customers? Kurt Busch Sure. So a key part of our go-to-market strategy is to engage with tier 1 accounts to develop new products. And typically we see early revenue from those tier 1 accounts such as the one that you mentioned and then we push it out into our foreign retail channels on a worldwide basis. So we’re still very encouraged to work with those customers. Many of those customers place large orders on a lumpy category. Some quarters they're strong, some quarters they are not. And that’s basically the nature of this kind of enterprise business. And we’re really looking forward to working with these guys on next generation products. Jaeson Schmidt Okay. And then the last on before I jump back into queue. Just wondering if you could comment on your overall visibility, I know the capital spending is impacting some of your businesses now, but how confident are you with that looking at the second half of this calendar year that you could really see some nice growth? Kurt Busch So typically, we see good design wins and we see good evaluations and basically good customer feedback to show with the new products or gaining traction. Much of our businesses through distribution sales, through distribution channels and we recognize revenue on self through. So very often, we don’t have a lot of visibility to with the final revenue number for any particularly quarters going to be until that quarter is over.

[Operator:]

[Operator Instructions] Our next question is from Mark Spiegel with Stanphyl Capital

[Mark Spiegel:]

Hey guys. I see two good things in this report. And unfortunately it looks almost like only two good things, but they might be meaningful. Sequential revenue overall was down 2.7% with last quarter was down 7% versus the quarter before that. Has the business stabilized in terms of revenue? Kurt Busch And right now Mark it’s -- well first of all Mark thank you for calling in. I mean we believe that given the traction we’re seeing on the next generation products that we’re working to stabilize that revenue. But again we don’t have really good visibility on a quarter-by-quarter basis. But we are very positive about the outlook.

[Operator:]

As a reminder, I’m sorry, you have another question. Go ahead sir.

[Mark Spiegel:]

Okay. I don’t know what have the operator kind of came in and cut me off there. The new products are sequentially flat from last quarter. So why is that? Kurt Busch Sure. So new products were flat, but quarter-over-quarter and reps are pretty encouraged by that, because we've seen a good amount of weakness in capital spending and most of those new products are in the enterprise space where that weakness of capital spending has been occurring. The weakness we see in specific is North America enterprise capital spending. And the fact that we’re able to achieve just, I’d say, flat new products quarter-on-quarter, I chop that up as a win, because we did see a pretty good decrease in the legacy enterprise businesses quarter-on-quarter.

[Mark Spiegel:]

So we’re now, I don’t know five years into this alleged economic recovery, which if you saw the GDP report this morning is really not much of recovery at all. What makes you think that enterprise capital spending is going to comeback if that hasn’t comeback by now? Kurt Busch So we’ve really seen the weakness just in the last two quarters Mark. And I don’t have good projection whether or not this is a two quarter weakness or one year weakness. I think probably some of the bigger enterprise data companies might have better visibility to us. But we basically are seeing weakness and push out. I haven’t really seen any deals cancel, but we have seen slowness; and getting the POs through and whether or not they happen in this quarter, the next quarter is still uncertain.

[Mark Spiegel:]

Last one, as I said one of the good things is that you’ve appeared to have generated around $200,000 in cash this quarter. Now you mentioned a letter of credit, I don’t know how that works into that, and can you talk a little bit about cash consumption going forward? Jeremy Whitaker Yeah, so just give you a little bit more flavor around the letter of credit is that we repurchase the raw materials from one of our contract manufacturer in connection with a transition to a new contract manufacturer. So we use the letter of credit to repurchase that material. That was about $600,000 and so that was not paid until April. So that had a positive impact this quarter and it will have a negative impact coming into the next quarter.

[Mark Spiegel:]

So you really consumed around $400,000 in cash, is what you’re saying? Jeremy Whitaker Yes, I mean that’s a good way to look at it.

[Mark Spiegel:]

And do you have any color on what that’s going to look like going forward, the cash consumption? Jeremy Whitaker Well right now we’re operating within a couple of $100,000 of breakeven and so if we continue to operate at a similar level I would not expect significant cash consumption. It should be similar to that.

[Mark Spiegel:]

So in another quarter you’re just reporting what is I mean, all those to be equal, essentially $400,000 of consumption you’re saying. When you say right now you’re within 200,000 [indiscernible] like, the quarter we’re in right now -- I mean that you’ve cut it by another 200,000? Jeremy Whitaker No, the quarter we've just reported down, had about $300,000 non-GAAP loss which is pretty close to our cash consumption.

[Mark Spiegel:]

So any color on your cutting expense I mean at this level of revenue, is that where that’s going to stay? Kurt Busch Right now Mark we’re working to grow revenue and control expenses as well as is working to improve margin. I mean as you saw we had a drop in margin this quarter. And all of those things will get us back to -- we’re working to get us back to cash breakeven, or get us back to the point where we were generating cash which we were doing in last fiscal year.

[Mark Spiegel:]

All right, I have no more questions.

[Operator:]

At this time I show no other questions. Would you like to make any closing remarks Mr. Busch?

[Kurt Busch:]

Thank you operator. I’d actually like to thank everyone for your participation on our call today. We look forward to updating you on our progress, achievement and actions when we report on our fiscal 2015 results in late August.

[Operator:]

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