創力 (LTRX) 2011 Q2 法說會逐字稿

You are now on the main call. You may begin your conference at this time.

Good afternoon, everyone, and thank you for joining Lantronix's second-quarter fiscal 2011 conference call. On the call today are Jerry Chase, Lantronix's Chief Executive Officer, and Reagan Sakai, Lantronix's Chief Financial Officer. A live and archived Webcast of today's call will be available at the Company's Website at www.lantronix.com, and in addition, a phone replay will be available through February 10th. The number to call for the replay is 888-286-8010, using the 8-digit passcode, 85982809. From international locations you may dial 617-801-6888, using the same passcode.

As a reminder, during the course of this conference call, management will be making forward-looking statements in their prepared remarks, and in response to your questions concerning, among other matters, Lantronix's plans for future product introductions, upcoming planned product releases, the implementation of new corporate marketing messages and marketing techniques, and statements regarding future financial metrics, including non-GAAP profitability and cash flow. These forward-looking statements are based on Lantronix's current expectations and are subject to a number of risks and uncertainties. Actual results could differ materially as a result of several factors. For a more detailed discussion of these and other risks and uncertainties, see the Company's recent SEC filings, including its Form 10-Qs filed for the fiscal quarter ended September 30, 2010, and Form 10-K filed for the fiscal year ended June 30, 2010. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof, and the Company undertakes no obligation to update these forward-looking statements to reflect subsequent events or circumstances. With that said, I would now like to introduce Jerry Chase, President and Chief Executive Officer of Lantronix.

Good afternoon, everyone. Thank you for joining us. We are pleased to report continued revenue growth (technical difficulty) quarter, which reflects growth in our core business and increasing sales of our new generation of products. Second-quarter revenue was $12.7 million, representing a solid 11% growth over the same quarter last year and 4% growth sequentially. We also achieved our tenth consecutive quarter of non-GAAP profitability.

Our new generation of products, including SpiderDuo, XPortPro, and EDS1100/2100, continues to gain traction in the market. While initial shipments have been relatively small, we are beginning to see these new products generate increasing contribution to our revenue, positively impacting our results. To better illustrate this upward trend, for the June-ended quarter, we shipped approximately $233,000 of the new products and recognized revenue of $214,000. For the September-ended quarter, we shipped approximately $489,000 of the new products and recognized revenue of $300,000, and for the December-ended quarter, we shipped approximately $468,000 of the new products and recognized revenue of $569,000. The reason for the difference between shipments and revenue is that we recognize revenue on sell-through. For the March-ended quarter, we expect quarter-over-quarter growth for the new products in the mid-30% range.

Turning to our medical initiative, we are making good progress in ramping our sale presence and engaging new partnerships within this key vertical. You may recall that we announced our strategy focus on medical device connectivity in the April/May timeframe of last year. Since that time, we hired dedicated medical-focused marketing and sales personnel to help us address the market.

Sales cycles in medical are relatively long with an average time to revenue of about 18 months. These people have been leading us in our efforts to fill the medical pipeline and establish Lantronix in the market. For example, you may have noticed a very well received white paper and Webinar we co-sponsored with HIMSS Analytics in January, titled Medical Devices Landscape, Current and Future Adoption, Integration with Electronic Medical Records and Connectivity. The Webinar was attended by over 300 participants. HIMSS analytics is a wholly owned, not-for-profit subsidiary of the Healthcare Information and Management System Society.

We also began developing the EDSMD, which will begin shipping in June of this year. The EDSMD is a unique multi-port device server optimized for the hospital environment. It allows remote access to, and management of virtually any medical equipment found in a hospital room or critical care environment. EDSMD provides enterprise-level security allowing safe remote access and management from practically anywhere.

Concurrent with the development of EDSMD, we have identified and are well on our way to partnering with two medical middleware companies. These partnerships will enable us to provide protocol conversion and dashboard information in the EDSMD at the point of care. This means that EDSMD will provide a more valuable solution to hospitals. And because it does not need to communicate as often with central servers, it will help solve the bandwidth congestion problem hospitals are facing as they implement electronic medical records systems.

We are also excited about the strong reception for our new dual-frequency imbedded Linux-based wireless server, PremierWave EN, which will launch next week. While PremierWave EN addresses customers across all our targeted verticals, it has been received especially positively from medical OEMs because it allows their design engineers to easily add intelligent wireless Ethernet networking to any medical device. It provides secure, high quality, wireless connectivity enabling hospitals and other health care organizations to securely transmit medical or other important information across networks, addressing a critical concern regarding the safety of patient information.

Turning to another key initiative, we are pleased with the growing customer interest and acceptance we are seeing for AccessMyDevice. You may recall that on September 30th of last year, we launched AccessMyDevice, and enterprise-grade Internet-centric service enabling business and technology professionals to easily view, manage, control and service virtually any device from virtually anywhere. Our initial and primary go-to-market focus for AccessMyDevice is to offer it in conjunction with Lantronix's VIP Access-enabled products. Because this is our primary focus, we expect our normal sales cycle of 9 to 18 months to generate meaningful revenue. Given our September launch, we are pleased with the pipeline development for AccessMyDevice.

To give an example of AccessMyDevice in action, you may recall that last September we announced a new customer engagement with United Oil, a distributor for three major oil companies here in Southern California. Key for United Oil in choosing a remote access and management solution for fuel tank monitoring was minimal disruption to the stations and people they serve, including no requirement to make any IT changes, including to VPNs; no requirement for stations to change their Internet service provider, their ISP; no equipment rebooting needed. Under our initial contract, United Oil deployed our AccessMyDevice solution using VIP Access-enabled EDS1100s to remotely manage gasoline storage tanks for data collection and analysis at 70 stations in Southern California. United Oil was able to simply install and activate our EDS solution at these stations without need to change any existing networks, ISPs or software being used. For United Oil, AccessMyDevice is providing realtime fuel tank information that is helping them save costs, improve efficiency and build on the, I got it, take responsibility, United Oil philosophy.

To give you a flavor of our AccessMyDevice opportunities, we are also working with a US solar energy and energy management company in conjunction with our XPortPro, an Italy-based food production company with our SpiderDuo, an automotive diagnostics application used in manufacturing and based in Germany in conjunction with XPortPro, a managed service provider for golf course sprinkler management in Japan with our AccessMyDevice gateways and portals, a managed service provider for remotely monitoring and managing gas turbines at power plants in the Middle East from Japan, and a US company providing medical equipment refurbishment, diagnostics and maintenance services with our SpiderDuo.

Again, we are at the front-end of these opportunities. Most of these in customer-- customer engagements started with the launch of AccessMyDevice this past September. In subsequent calls, we look forward to keeping you posted on the progress of our new products, our progress in the medical market and with AccessMyDevice. I will now turn the call over to Reagan for a review of our financial results.

Thank you, Jerry. In addition to GAAP results, we report adjusted net income and adjusted operating expenses, referred to non-GAAP net income or loss and non-GAAP operating expenses, respectively, and non-GAAP net income or loss per share. Please refer to our earnings release posted in the investor relations section of our website, where we have provided the definition for these non-GAAP financial measures. We believe that the presentation of non-GAAP financial measures provide important supplemental information to management and investors regarding financial and business trends relating to the Company's financial condition and results of operations.

The non-GAAP financial measures disclosed by Lantronix should not be considered a substitute for, or superior to, financial measures calculated in accordance with GAAP. And the financial results calculated in accordance with GAAP and reconciliations to those financial statements should be carefully evaluated. The non-GAAP financial measures used by Lantronix may be calculated differently from, and therefore may not be comparable to similarly titled measures used by other companies. In our Investor Relations Section of our website, we have provided reconciliations of the non-GAAP financial measures to the most directly comparable GAAP financial measures.

Before reviewing our financials, I would also like to, again, note that with the substantial improvement we have achieved in the financial health of the Company and the predictability of revenue, at the end of the March quarter last year, we elected to discontinue a company-wide furlough program that was in effect for five quarters. Consequently, our previous June, September and December-ended quarters did not have furlough programs, and therefore reflect higher payroll expenses than comparable periods, which did have furlough programs. In addition, in the past two quarters, our operating expenses reflect the impact of costs related to a contested proxy, which has now been resolved.

Taking these two events into consideration, our operating expenses have actually remained consistent year over year, and we continue to positively trend on profitability and cash. Our expenses remain under tight control and our team has remained consistent at approximately 120 employees.

Turning to our financial results for our second quarter of fiscal 2011. Net revenue was $12.7 million, an increase of 11% over the second quarter last year, and a 4% increase sequentially over the preceding quarter. As part of an ongoing corporate initiative to optimize our sales distribution channel, the Company renegotiated our agreement with a direct customer that removed stock rotation and price protection terms, which allows the Company to recognize revenue upon shipment, as opposed to a sell-through basis. The result was recognition of approximately $342,000 of net revenue during the quarter.

As part of this same initiative, we removed stock rotation and price protection terms from certain low-volume direct customers and redirected them to master distributors, which allows the Company to recognize revenue upon shipment as opposed to a sell-through basis. The result was a recognition of approximately $297,000 of net revenue during the quarter. I would like to emphasize that this is not a change to our revenue recognition policy. We continue to recognize revenue on a sell-through basis for those customers who have stock rotation and price protection terms, and these include our master distributors.

Gross profit margin was 49.4% in the first quarter, compared to 52.7% in the second quarter a year ago. The decrease in gross profit margin was due to product mix, increased reserves for excess of obsolete inventory related to an end-of-life product, an increase in warranty reserves and an increase in freight cost related to an increase in the volume of inventory receipts in the quarter. We see second-quarter gross margin as a low-water mark and expect to see improvement in the gross margin going forward toward our targeted range of between 50% and 52%.

GAAP operating expenses were $6.8 million compared to $6.4 million for the second quarter a year ago. GAAP operating expenses were negatively impacted by approximately $372,000 in legal and consulting expenses related to the Company's contested proxy that was settled last November. I am pleased to note that this past November we reached an amicable resolution of the Company's contested proxy. Our new board of directors consists of seven members, five or which are independent. Our second-quarter expenses reflect the impact of legal and consulting costs incurred in the quarter related to the contested proxy. We don't believe these expenses are indicative of our operational results and therefore we have excluded them on a non-GAAP basis.

Selling, general and administrative expense was $5.1 million compared to $4.9 million in Q2 a year ago. The increase was primarily due to increased legal and consulting expenses of approximately $372,000 in the quarter related to the contested proxy and an increase in payroll costs offset by a decrease in advertising and marketing expense. Again, although payroll costs were higher, they reflect a return to normal levels following the suspension of a company-wide furlough program that was in effect during the year-ago quarter.

Research and development expense was $1.7 million compared to $1.5 million a year ago. The increase was due to expenses related to development projects for upcoming product releases and an increase in payroll costs reflecting the suspension of a company-wide furlough program that was in effect during the year-ago quarter.

GAAP net loss was $579,000 or a loss of $0.06 per share compared to net loss in the second quarter last year of $375,000 or a loss of $0.04 per share. The GAAP net loss in the current quarter was negatively impacted by approximately $372,000 in legal and consulting expenses related to the Company's contested proxy that was settled last November.

On a non-GAAP basis, operating expenses were $5.8 million compared to $5.6 million in Q2 last year. Non-GAAP net income was $603,000 or $0.06 per share compared to non-GAAP net income of $495,000 or $0.05 per share last year. Our institutional investors view non-GAAP profitability as a valid measure of performance and an excellent proxy for cash earnings. We also believe that non-GAAP profitability is a valid and meaningful measurement of performance. From the beginning, we have indicated that one of our financial goals was consistent non-GAAP profitability. Our achievement against that stated goal has been 10 consecutive quarters and two full fiscal years of non-GAAP profitability. I'd like to note that from fiscal 2002 to fiscal 2008, Lantronix reported consecutive quarterly non-GAAP profit only once and never achieved consistent non-GAAP profitability.

Turning to the balance sheet. Cash and cash equivalents increased $570,000 to $10.6 million as of December 31st, compared to $10.1 million as of June 30, 2010. Total receivables, which include accounts receivables and contract manufacturers' receivables, were $3.5 million at December 31st, compared to $2.4 million at June 30, 2010. The increase was directly related to the increase in revenue. Net inventory was $9.6 million compared to $6.9 million at June 30th. The increase in inventory was attributable to a buildup of finished goods and strategic components to ensure timely delivery and enhanced customer satisfaction.

Accounts payable were $9.8 million compared to $6.5 million at June 30. The increase was primarily due to the increase in inventory in the quarter, as inventory is a primary driver of accounts payable. Working capital was $8.6 million as of December 31, 2010, compared to $7.6 million as of June 30th. Going forward, we will be focused on optimizing our inventory by ensuring product availability while introducing our new products into the mix. To support these new products and growth, we expect our cash balance to range between $9 million and $11 million over the next few quarters. We believe that we have the strongest balance sheet that we have had in years, and expect it to remain strong and liquid during our growth period.

I would now like to provide some insight into what we're seeing for the third fiscal quarter of 2011 and beyond. For fiscal 2011, we are focused on growing revenue, maintaining non-GAAP profitability and optimizing our balance sheet. We plan to achieve gross margins in the 50% to 52% range. We continue to believe that there is significant operating leverage in our business model, but we will invest in certain strategic hires and projects that will affect quarterly operating expenses. We believe these activities will better position Lantronix for sustained revenue growth and penetration within the medical vertical. I would now like to turn the call back to Jerry.

Thank you, Reagan. This concludes our prepared remarks, but before turning the call over for questions, I'd like to take the opportunity to thank my amazing Lantronix colleagues, our investors, our partners and especially our customers, for your ongoing support of Lantronix. Operator, we would like to open the call to questions.

Thank you, sir. (Operator Instructions).

Okay, operator, it appears there are no questions. So we'd like to thank everybody, and thank everyone for your participation on the call today and we look forward to speaking with you next quarter. Thank you.

One moment, sir, we do have three questions in the queue.

Oh, I'm sorry.

I'm sorry. They just formulated.

Okay.

Thank you, sir. John Bond, Nicusa Capital. Please proceed.

Hi, this is actually Paul Johnson.

Paul, how are you doing?

I'm well, how are you?

Good.

Congratulations on another profitable quarter. I did put it in, but somehow pushing buttons is beyond my capability.

(laughter).

I really-- Jerry, for you, I guess both-- maybe both of these are. Can you talk a little-- you talked a little bit about the GoToMyPC, obviously in the gas station attendant application. Can you riff a little bit more on what you're seeing in terms of market interest, market acceptance. When you go talk to people, is this something that they're highly interested but there's some missing pieces, is this something they're highly interested but it does take a little while to implement, highly interested at work, busy trying to do things behind the scenes? Can you kind of give us a flavor of where you are in market acceptance?

We launched-- the Company launched-- I think I've got my dates correct here, launched the predecessor to AccessMyDevice as a hardware-centric product line called ManageLinx, and I believe it was launched initially in 2007. And there were a lot of issues with it, primarily up-front investment costs, hardware-- it was very hardware focused, et cetera. The Company took those lessons to heart and came up with AccessMyDevice, which we launched as a rethink, not a rename, in September of last year.

Since that time, we have detected a heightened level of interest that seems to be increasing as the weeks go by. So we banged our ankles on the originally launch and learned from those lessons and relaunched it. As you know, it has a strong software component. It resides on our products, which is our first focus, to drive hardware. So from September of last year, we're seeing a heightened level of interest, we're seeing the pipeline fill up.

Admittedly, the first orders are small, but they're growing. I think earlier I mentioned that we're working with a managed service provider in Japan to-- for them to manage sprinkler systems at golf courses. So, again, it's small, but they continue to buy hardware from us to support this managed service offering that they have in Japan. So we're pretty pleased with it. We have a spring in our step here, the sales force does, the FAE group does, so we're pleased with where it is, and we date that from September of last year.

Do-- you've been in the market, you know, just four months. I realize it's essentially brand new in terms of technology products. Is there any missing pieces that you need, or is this enough technology now that somebody can get going, you'll add to it, obviously, as time goes on, but is there anything that you just stop and say, God, I wish we had that to offer as well?

No, it's-- yeah, good question, Paul. No, it's-- we've got what we need. As you say, we continue to develop it and make it smoother for items that the customers wouldn't see in any case, more along the lines of automation-- automating back-end processes. But we have what we need now, and ease of use is a key component of it, but we have what we need now to call on customers, to provide customers what they need to activate and enable the solution.

Excellent. Medical-- you guys have now been focused-- energy focused, marketing focused, sales people in market-- in the medical world for, I guess, about 18 months, give or take. You've always felt that you had to get 18 months before-- from the moment somebody really got engaged until they had a product out there. Sort of the earliest customers could be kind of just hitting the market now. What's your sense as we roll through the calendar year, will you-- you think you'll see some nice products introduced medical-wise over the next couple of quarters?

Yes, so we launched our medical initiative in April, May of last year, so we're probably about, what, eight, nine months into it. And we are seeing the pipeline filling up. We do have EDSMD, which is our first medical-only product that's coming out in June, and that's being very well received. It's allowing us to partner with a couple of medical middleware companies to offer protocol conversion as well as dashboarding information right in the patient's room or in a critical care environment, so we're pleased with that.

And then PremierWave EN, which is a dual-band embedded module for wireless, is launching actually next Tuesday. And that's received a very promising initial feedback from the medical customers. So we're probably around half way to where we would expect to start seeing some meaningful revenue. We are anecdotally calling on customers at a higher level, particularly here in Southern California, with more comprehensive conversations and solutions.

And if you compare and contrast -- sort of the same question we had on AccessMyDevice, which was do you have the full-- do you have enough products there, kind of a complete product set, that somebody can solve their problem, or are you still missing pieces?

We're-- with EDSMD, which is coming out in June, we will advance our product offering quite a bit, so we're not there yet. Obviously, we still have some months to go, and then with PremierWave EN launching next week, so I would say that with the medical, we're having to fill the pipeline with more products. People like what we're talking about. They like the alpha and beta samples that we've provided, but we're not yet putting products out on the street, so we're a little bit further away there on medical.

Reagan, up front, you talked-- I didn't get all the numbers, I apologize. Love to have you go through kind of new product-- recognized revenue from new products, June, September, December. I think I got December of $569,000, September at $300,000. What was the June number?

Yes, I can give you that, $300,000.

June was $214,000.

And then $300,000 September?

Yes. And then $569,000 in December.

And you said 30% sequential in March?

Yes.

Yes, probably mid-30s quarter-to-quarter growth, December-ended quarter to March-ended quarter.

What's-- when-- how do you guys find new products? It's really been kind of the effort of the new management, the products that come out since the new management has been there, I think, is your kind of general definition?

That's correct. It's our SpiderDuo, it's our EDS1100/2100 line, it's early samples of AccessMyDevice--

XPortPro.

-- and XPortPro.

And then PremierWave EN. So really, as Reagan said, it's a generation of products that were introduced to the market beginning in September, October of 2009.

And that's obviously an important metric, from your perspective, because that shows the effort-- the new R&D effort and products that have come out with the new focus from the Company.

Exactly. And as we've had conversations with yourself and others, we expect to be held accountable to these new products and to report on them going forward. We like the direction. Obviously, we're still talking about relatively small numbers, but these are going to be the products that we report on, and obviously we're focused on, and we're pretty excited about.

Perfect. Final question. Not trying to trap you into a forecast, because I don't care, but I-- Reagan, when you started to talk about the outlook for the rest of the fiscal year, I got the impression that the primary focus is revenue growth, are-- and I'm really not trying to back you into a forecast, but should we think that sequential growth is an important metric in that, or not just year over year?

Yes. Understand that the margin at quarter is typically seasonally down from our December quarter. But we remain hopeful. The pipeline looks good for both our current products and what we're-- what we label our new products. But I've still got to caution the seasonality of the March-ended quarter, compared to December.

But this management team, the sales force, and all employees are now focused on growth. We have proven that we can control our operating expenses, so anytime you have expanding revenue, get our gross margins back on track in the 50% to 52% range and control our operating expenses, obviously good things happen to the bottom line as well as to the balance sheet.

Did the December quarter have any what we'll call any nonrecurring revenue, any end-of-life stuff that got accelerated or some of the revenue recognition from some of the conversion of the way you treat some of your customers that's going to make the sequential even that much harder?

You-- no, the-- there was about $600,000 that came via the renegotiation of contracts, so let me be clear, that is not a change to our revenue recognition policy, nor did accounting drive that. This is a-- was a sales force generated initiative, and then obviously, as they're renegotiating contracts, accounting steps in and says, well, if that happens, if there is no price protection or stock rotation rights, we will, in effect, recognize that revenue.

So of the $600,000 that we picked up, I would say about-- we normally would have had about $200,000 to $300,000 of that occur in this quarter and $200,000 to $300,000 of that fall into the subsequent quarter. We still have other distributors that we are negotiating with for the March-ended quarter, and we also have signed contracts with those smaller distributors in the January timeframe.

Okay. Thank you.

Thank you.

Ed [Varume] of [Roanoake].

Yes, thanks, I-- a number of my questions were just answered, but I just wanted to kind of drill into that change in the revenue recognition. Did any of that change impact the sequential growth of new products-- of the new products that we're seeing--

No.

-- is that a-- did that impact any new products?

No, it did not.

So if-- I'm looking at these percentage changes. By the September quarter you should be easily, in terms of new products, well over a million-dollar run rate. Is that sort of a--

For the September--

Yes.

-- of 2011?

Yes.

Yes, that-- that's very fair.

That's fair, okay. And presumably the increase in receivables was related to this change in revenue recognition, is that what happened?

Part of it was due to just increased revenue numbers.

Unidentified Participant And could you just talk a little-- there was a fairly significant, percentage-wise at least, change in inventories.

Uh-huh.

Is that a permanent state now, that your inventories are going to be running at-- right now, a little less than one times (multiple speakers).

Yes. What we did was kind of three-fold. One was, I think a couple of calls before we had stated that we had lost revenue within the quarter because we couldn't ship product, either out of finished goods, or we had certain strategic components that we couldn't get our hands on, it was primarily flash 4 megabit RAM memory, I think, or flash memory, that we couldn't get a hold of. So we made a concerted effort-- and we heard from our customers, in no uncertain terms, that they were not happy with that. So we went out and during this quarter made a concerted effort to buy both those strategic component parts and build inventory so we wouldn't be caught in any sort of worldwide shortage, as well as build inventory-- finished goods inventory. So that was kind of step number one.

Also, as we start ramping our new products, that will also-- that had an upward tick on our inventory. Also, we saw good sell-through with our distributors. And as you know, we are on a sell-through model, so when we ship to them, we don't recognize revenue until it's sold through. This is for a significant majority of our distributors. And so when we ship to them, we defer the revenue, but that sits on our balance sheet as inventory. So as they provide us larger and larger POs, there is an upward pressure on inventory as well.

We also took a couple of calculated bets, if you will. We had a couple of very large-- larger deals, modest-sized deals, that we thought we would close this quarter, and we still expect to close them but it will probably be in the March or June quarters when we close these deals.

And lastly, can you just talk about your-- what your credit lines are and how much is available?

About in summer of 2010, we renegotiated our credit facility. We have a $4 million total credit facility, of which there's a sublimit of $2 million on a term loan, which reserves against the $4 million, dollar for dollar, that the balance is about one and a half-- yes, on the term loans, about $1.5 million, $1.6 million remaining, and we have about $1.5 million to $1.75 million available to us as other credit, as revolving credit.

Okay. Thank you.

Thank you.

Thanks, Ed.

Bill [Novacos] of Heartland Funds. Please proceed.

Close enough. Nasgovitz. Thank you.

Hey, Bill, how you doing, sir?

Hi, fellas. Let's just-- I'm a little bit confused in terms of just talking about AccessMyDevice. So it was launched-- was that launched in September as well?

Yes, that was launched in September of 2010, so four months ago.

Okay. And what is the current volume in terms of-- what's the run rate today?

We're talking pretty small dollars. We're talking probably about 12 months to meaningful revenue because it's driving hardware. I think probably in the December-ended quarter it was--

Less than $20,000.

-- less than $20,000. We're probably going to be somewhere in the $50,000 to $100,000 here for the next months, but really we're sort of at the front end of the sales cycle and would expect that some of these opportunities I mentioned earlier would start to materialize probably right around September of 2011.

And could you describe-- so it's peanuts, but can you describe what the value proposition is there, in terms of the offering to the marketplace?

Sure.

Is this subscription, or?

We sell it as-- we can sell it as a subscription, but we can also sell it-- I'll give a couple of different examples here. For the MSP provider in Japan that's selling water irrigation/sprinkler services to golf courses in Japan, they actually bought the networking equipment, so they're charging a service to the golf courses. So they continue to buy product from us, incrementally, month to month, quarter to quarter. That's one example. Another example is that there's a security company buying XPort Pros from us. And what they do is offer dynamic access to buildings. So if you say, hey, I want to close my building on a weekend and, oh, by the way, the marketing department has to come in from 1.00 to 5.00 on Sunday, so you dynamically access that panel behind firewalls to allow that to happen. So they're charging their customers a fee to do that, but they're using our network and we're charging them a monthly fee per XPortPro per door. This is an example of where we're-- where we're operating the network.

And then the third example is United Oil. And to get right to the value proposition, United Oil has all of the service stations around Southern California, that they provide fuel towards, and so you can imagine they've got all these virtual private networks out there, all these different VPNs, people get their internet service from different places. They've got various levels of skill out there. So what they wanted was a complete overlay of something that they could just send out to the convenience store, to the gas station, have that attendant or maybe have somebody go out there and do it, but plug it in, and now they're delivering realtime tank information so that they can have their drivers go to the refinery and pick up exactly 5,000 gallons of fuel, if that's what they need.

So in this case, United Oil is also operating the network. But as they scale it, they grow their business, potentially there's an opportunity for us to take over the network management of that aspect so that they can focus on their business and we can run that for them at some to-be-negotiated monthly subscription fee.

And how many sales people do we have selling ManageLinx?

We have -- all of our salespeople have this in their portfolio. Of course, it goes with all of our new products. So it can be sold-- our new products can be sold standalone, or they can be sold with this service. So we have about 15 people around the world selling AccessMyDevice.

Okay. With the $640,000 accounting adjustment, that-- that was -- the gross numbers, you-- quarter over quarter, are not apples to apples, so this was-- this was an increase-- an extraordinary increase, more or less moving revenue forward, is that right?

Yes. Reagan's comment earlier was about $200,000 to $300,000 of that would have happened anyway in the December-ended quarter.

I see. Okay. So at what level-- what-- it's nice to have the gross margin level expectations here laid out for the year, but what-- how about topline, what do you think this business is going to do in the second half of the year?

Well, we certainly want it-- the first half of the year, I think both quarters we were at the 11% growth. We certainly want to have the second half of the year exceed that 11% growth. All indications-- this is not providing guidance, but all indications are that we're seeing good traction on the new products, our legacy products, if you will, in our current portfolio. We're not seeing any degradation. In fact, we're seeing growth in our kind of core business. So that will contribute growth, and-- as well as the new products being layered on top of that.

I think the only word of caution is the fiscal quarter three-- the margin in the quarter one year ago was a pretty good quarter for us, so from a comp standpoint, it's not the best comparable, but I think certainly for the January through June timeframe, we're shooting for and we'll be compensated for growth in excess of that 11% that we showed in the first half of the year.

Reagan, with some of the increases in expenses that you talked about, R&D is up, what is the GAAP break-even level for this company?

The GAAP break-even?

At what level--

Yes, um.

-- what sales level does Lantronix break-even, on a GAAP basis?

I would put that probably in the mid-$13 million quarters.

Okay, so that's moved up from what we talked about maybe a year or two ago? I'm not looking at my notes here.

Was that GAAP or non-GAAP?

I thought it was GAAP, but anyway. So it-- mid-thirteens?

Yes.

And when do you expect to be there, sometime this calender year, perhaps?

Yes, uh-huh. Yes, the goal has always been, obviously, revenue growth, and GAAP profitability. We provide non-GAAP measures because it's a good-- as you know, it's a good proxy for our cash earnings, but GAAP is GAAP. And we're headed down-- we're barreling down the path towards that.

Okay. And then just one final question on this Premier-- is it Wave?

Yes. PremierWave, yes.

This is another new product, which is going to launch or is being launched currently?

Yes, it's launching on Tuesday of next week.

And that is for which market?

It's for all of our markets, so, for example, going into medical, of course, security, industrial, and-- but it's been optimized for medical. It's got a very nice dual-band radio in it that supports normal computer traffic in the hospital, but also the actual medical equipment itself, which tends to run at 5 gigahertz, so it's got a 2.4- and 5-gigahertz dual-band radio. It's got AccessMyDevice and full Linux, and Ipv6 and all the bells and whistles, so initial reactions from the market have been quite positive.

Okay. Thank you.

Thanks, Bill.

All right, Bill. Always a pleasure to hear from you.

There are no more questions in the queue at this time, sir.

Thank you, operator. I'd like to thank everyone for their participation on our call today, and we look forward to speaking with everyone next quarter. Thank you.