創力 (LTRX) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter fiscal 2012 Lantronix, Inc. earnings conference call. My name is Larry and I will be your operator for today. At this time all participants are in listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions). I would now like to turn the conference over to your host for today, Miss E.E. Wang of Investor Relations for Lantronix. Please proceed.

Thank you, Larry. Good afternoon, everyone, and thank you for joining Lantronix' third-quarter fiscal 2012 conference call. Joining us on the call today are Kurt Busch, Lantronix' 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 through May 10 by dialing 888-286-8010 in the United States or for international callers 617-801-6888 and entering the pass code 11466881.

As a reminder, during the course of this conference call management may make forward-looking statements in their prepared remarks and in response to your questions and statements regarding product strategy, marketing plans and future financial metrics including revenue, profitability, operating expenses, cash flow and working capital.

These forward-looking statements are based on the Lantronix' current expectations and are subject to substantial risks and uncertainties that could cause the Company's results for future business, financial condition, results of operations or performance to differ materially from the historical results or those expressed or implied in any forward-looking statements made in this conference call.

For a more detailed discussion of these and other risks and uncertainties facing our business, see the Company's recent SEC filings including its annual report on Form 10-K filed for the fiscal year ended June 30, 2011 and its quarterly reports on Form 10-Q filed for the fiscal quarters ended September 30, 2011 and December 31, 2011, which are available through the Investor Relations portion of our website at www.Lantronix.com.

Lantronix' quarterly report on Form 10-Q for the fiscal quarter ended March 31, 2012 also will be made available through the Investor Relations portion of our website. Readers and listeners are cautioned not to place undue reliance on any 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. If the Company were to update or correct one or more of these statements, investors or others should not conclude that the Company will make additional updates or corrections.

Also, please note that in addition to GAAP results during this call the Company also will discuss at non-GAAP financial measures. The Company believes that the presentation of non-GAAP financial measures, when presented in conjunction with the corresponding GAAP measures, provides important supplemental information 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 according to GAAP. Management believes that non-GAAP operating expenses, non-GAAP net income or loss and non-GAAP net income or loss per share are important measures of the Company's business. Management uses these non-GAAP measures to monitor and evaluate ongoing operating results and trends and to gain an understanding of our comparative operating performance.

In addition, certain of our stockholders have expressed an interest in seeing financial performance measures exclusive of impacted matters such as decisions relating to the restructuring which, while important, are not central to the core operations of our business.

Non-GAAP financial measures used by Lantronix may be calculated differently from and therefore may not be comparable to similar non-GAAP information provided by other companies. All financial results and reconciliation should be evaluated carefully. Please refer to our third fiscal quarter 2012 news release posted in the Investor Relations section of our website where we have provided the definitions and reconciliations for the non-GAAP financial measures that we use. I would now like to turn the call over to Kurt Busch, President and CEO of Lantronix. Kurt?

Thank you, E.E. Before Jeremy gets into the details regarding our financial performance for the third quarter of fiscal 2012, I wanted to share with you a few thoughts on our performance during the March 2012 quarter and more recent events.

As outlined in our three previous conference calls, the key elements of our fiscal 2012 plan are to recruit the right leadership and resources, improve margins, decrease inventory and ensure that strong financial discipline is in place; develop a new product strategy that is intended to provide innovative new products that will increase market share as well as expand the markets we address; and take action to create a strong market-driven product development machine.

During the fiscal ended March 31, 2012 we began to see the initial results from the execution of our strategy. These results include the first production shipments of two new products, the xPrintServer-Network Edition and the PremierWave-XN, meeting our commitment of on average one new product released to production per quarter.

We announced and began sampling a new embedded product, the xPico, the world's smallest device server. We increased net revenue from the prior quarter, reduced GAAP operating expenses to the lowest level in three years; reduced inventory to the lowest level in two years as well as stabilized working capital.

These activities culminated with the achievement of the best financial results the Company has seen in four quarters as we reduced GAAP loss to $41,000 and reported non-GAAP net income of $471,000. While we are pleased with the results we have achieved thus far, the management team and I are well aware that our work is just beginning.

Continued aggressive execution of our growth plan will be critically important to achieve profitable growth. To that point, last week we completed two transactions that will strengthen our balance sheet and provide necessary working capital that will allow us to continue to execute and expand our product development strategy.

In April 2012 we completed a private placement with TL Investment, our largest shareholder, which generated approximately $4.4 million in net proceeds. This transaction was priced above market value with no discount.

In May 2012 we completed an underwritten public offering which generated approximately $4.9 million in net proceeds and added 19 new institutional shareholders to our investor base. In conjunction with the public offering, we granted the underwriter a 30-day option to purchase up to 330,000 additional shares of our common stock at $2.50 per share.

After giving effect to both transactions, TL Investment's holding in the Company increased slightly from approximately 40.4% to 40.8% of our outstanding common stock. The net proceeds of approximately $9.3 million from these two capital transactions, combined with the financial and operational gains we have made in the last two quarters, provides Lantronix with a strong foundation for moving forward in our growth strategy at our ultimate objective of creating enhanced value for our shareholders.

On that note I will turn the call over to Jeremy to review our detailed financial results for the March quarter.

Thank you, Kurt. Turning to our financial results for the three and nine months ended March 31, 2012, net revenue for the three months ended March 31, 2012 was $12.1 million, a decrease of 2% compared to $12.4 million for the three months ended March 31, 2011, and sequentially an increase of 16% compared to $10.5 million for the three months ended December 31, 2011.

The year-over-year decrease was due to lower sales of external device enablement and device management products. The sequential increase in net revenue was primarily due to a $1.1 million increase in our device enablement product line as a result of a recovery in embedded sales in our EMEA and America's regions, and a $0.6 million increase in our device management product line, the majority of which were the result of sales from the xPrintServer - Network Edition which we began taking pre-orders on December 13, 2011.

For the nine months ended March 31, 2012 net revenues were $33.8 million compared to $37.3 million for the nine months ended March 31, 2011. Gross profit as a percentage of net revenue for the three months ended March 31, 2012 was 48.8% compared to 51.4% for the three months ended March 31, 2011 and 48.2% for the three months ended December 31, 2011.

With three sequential quarters of margin improvement we believe that we have made significant progress towards bringing margins back in line with our corporate target of 49% to 51%. Gross profit as a percentage of net revenue for the nine months ended March 31, 2012 was 48.2% compared to 50.6% for the nine months ended March 31, 2011.

GAAP operating expenses were $5.9 million for the three months ended March 31, 2012, a decrease of $0.8 million or 12% compared to $6.7 million for the three months ended March 31, 2011 and down sequentially by $0.5 million or 7% from $6.4 million for the three months ended December 31, 2011. GAAP operating expenses for the nine months ended March 31, 2012 were $18.9 million compared to $20.4 million for the nine months ended March 31, 2011.

Selling, general and administrative expenses were $4.1 million for the three months ended March 31, 2012, a decrease of $0.9 million or 17% compared to $4.9 million for the three months ended March 31, 2011 and down sequentially by $0.4 million or 8% from $4.4 million for the three months ended December 31, 2011.

This marked the third quarter in a row that we reduced SG&A expenses. For the nine months ended March 31, 2012, selling, general and administrative expenses were $13.5 million compared to $15.1 for the nine months ended March 31, 2011.

Research and development expenses were $1.8 million for the three months ended March 31, 2012 which was flat compared with the three months ended March 31, 2011 and a slight increase from $1.6 million for the three months ended December 31, 2011. R&D expenses for the three months ended March 31, 2012 increased slightly due to costs associated with new product launches. For the nine months ended March 31, 2012 R&D expenses were $5.1 million compared to $5.3 million for the nine months ended March 31, 2011.

Non-GAAP operating expenses were $5.6 million for the three months ended March 31, 2012 compared to $5.8 million for the three months ended March 31, 2011, (technical difficulty) $5.8 million for the three months ended December 31, 2011. For the nine months ended March 31, 2012 non-GAAP operating expenses were $17.5 million, flat with $17.5 million for the nine months ended March 31 of 2011.

We may see a slight increase in operating expenses moving forward as we continue to execute on our product development strategy. Assuming a 50% gross margin, we still expect to maintain a quarterly non-GAAP breakeven point at or below $11 million in quarterly net revenue.

GAAP net loss was $41,000 for the three months ended March 31, 2012 or $0.00 per share compared to a GAAP net loss of $399,000 or $0.04 per share for the three months ended March 31, 2011, and sequentially a GAAP net loss of $1.4 million or $0.13 per share for the three months ended December 31, 2011. GAAP net loss for the nine months ended March 31, 2012 was $2.9 million or $0.27 per share compared to a GAAP net loss of $1.7 million or $0.16 per share for the nine months ended March 31, 2011.

Non-GAAP net income for the three months ended March 31, 2012 was $471,000 or $0.04 per share compared to non-GAAP net income of $691,000 or $0.06 per share for the three months ended March 31, 2011 and sequentially a non-GAAP net loss of $629,000 or $0.06 per share for the three months ended December 31, 2011. Non-GAAP net loss for the nine months ended March 31, 2012 was $855,000 or $0.08 per share compared to non-GAAP net income of $1.7 million or $0.16 per share for the nine months ended March 31, 2011.

Now turning to the balance sheet. Cash and cash equivalents as of March 31, 2012 were $1.8 million compared to $5.8 million as of June 30, 2011. As previously mentioned by Kurt, we completed two capital transactions in April and May 2012, generating a total of approximately $9.3 million in net proceeds which we believe will strengthen our working capital position.

Accounts receivable as of March 31, 2012 were $2.7 million compared to $1.4 million as of December 31, 2011 and $2.9 million as of June 30, 2011. The sequential increase in accounts receivable was due to the sequential increase in net revenue of 16% and the timing of product shipments which were more heavily weighted towards the second half of the March 2012 quarter.

We are beginning to see results from our inventory management efforts which resulted in a reduction of our net inventories to $6.8 million as of March 31, 2012, a decrease of $2.4 million or 26% compared to $9.2 million as of June 30, 2011. While we will continue to optimize our inventory levels, we do not expect to see such dramatic decreases in inventory going forward. And in fact, we could see some decreases in inventories as we put in place stocking levels for product releases and increased demand.

Accounts Payable were $4.4 million as of March 31, 2012, a decrease of $3.9 million or 47% compared to $8.4 million as of June 30, 2011. Working capital was $2.4 million as of March 31, 2012 compared to $2.4 million as of December 31, 2011 and $5.2 million as of June 30, 2011.

The restructuring plan, cost containment measures and inventory reduction initiated by management during the quarter ended December 31, 2011 were instrumental in stabilizing our working capital during the March 2012 quarter. While stabilizing working capital was a key part of our short-term strategy, it is just as critical for us to have sufficient working capital to execute on our growth strategy.

For example, we were supply constrained during the March 2012 quarter in large part due to insufficient working capital. Our recent fund raising generated additional cash of $9.3 million and we believe that for the foreseeable future it will provide us with the capital required to execute on our strategy and achieve profitable growth. I'll now turn the call back to Kurt.

Thank you, Jeremy. Jeremy has just spent the last few minutes giving you the financial details of what occurred during the three and nine months ended March 31, 2012. As I stated earlier, the actions we took to instill greater financial and operational discipline over the last two quarters have been instrumental in creating the initial positive results that we achieved in the March 2012 quarter.

More importantly, we have instilled an entrepreneurial and energized product development mentality that will continue to build momentum as we drive forward towards profitable growth. Our focus from the beginning has been to build a product development machine that leverages the strengths of Lantronix' existing IP portfolio, its strong sales channel and its reputation as an innovator in creating end-to-end solutions that are simple and elegant to use.

Earlier this fiscal year I committed to you that we would launch on average one new product into production each quarter. In the December quarter we release to production the EDS-MD, a next-generation advanced medical aggregator based on our award-winning EDS device enablement product line. Specifically designed for the stringent requirements of the medical market, the EDS-MD provides mission-critical device aggregation and allows central and remote management of multiple medical devices.

In January we released to production the xPrintServer - Network Edition, the first member of an entirely new device management product line that allows Apple iOS users to print to virtually any network printer. Since its introduction in mid-December the industry response to this solution has been phenomenal with the xPrintServer - Network Edition receiving numerous industry awards and accolades.

In addition to being showcased at CES, Embedded World and Macworld, the xPrintServer was demonstrated at the Morgan Stanley Emerging Technology and Media conference in February and the 2012 ROTH Capital conference in March. While awards and accolades are valued endorsements that can make potential customers aware of a product and its merits, the proof is in the sales. And I'm happy to report that we've been very pleased with the sales response to this product to date.

In February 2012 we launched the PremierWave-XN, a next-generation external device server and part of our award-winning PremierWave device enablement product family. About the size of a deck of cards, the XN is a dual band multi-port serial device server offering both WiFi and Ethernet connectivity that enables remote access and easy management of machines over the network and across the Internet.

This solution is primarily used in industrial applications. We began sampling this product in January of 2012 and released to production at the end of the March 2012 quarter.

Also in February 2012 we launched the xPico, the world's smallest embedded device server. Smaller than a quarter, the xPico offers security, browser and network capability in a low cost form factor that will allow us to address new applications that were previously closed to us due to size or price constraints. The xPico was released to production this April 2012.

While the design in cycle for a product like the xPico is typically anywhere from nine to 18 months, the longevity of this type of product can be six years or longer. For example, this year we celebrate the 10th anniversary of the launch of the XPort product family which continues to be a strong contributor to our device enablement sales worldwide.

In summary, since December of 2011 we've released to production four new products, demonstrating our commitment to aggressive engineering and market execution.

Looking forward to the coming quarters, we expect to release our first device servers with cellular interfaces, our first analog or sensor device servers, new members of the xPrintServer family as well as additional new members of current product families. Our new products will continue to leverage Lantronix' strong platforms and bring new levels of functionality and ease-of-use that will further strengthen and expand our sales opportunity.

Today I am pleased to report that we have achieved many of the initial goals we discussed with investors back in September of 2011. These goals made up the first steps of our strategy and, combined with the recent capital transactions, have established the foundation from which we intend to build the Lantronix business moving forward.

We intend to build from this foundation and pursue long-term value for our shareholders in the same way that we've achieved the positive results Jeremy and I are reporting to you today with a relentless commitment to financial and operational discipline and an energetic and innovative mindset in bringing to market new products to make sense for both our customers and Lantronix.

Before turning the call over for questions I'd like to think my Lantronix colleagues, our shareholders, our partners and our customers for your ongoing support. Operator, we'd like to open the call for questions.

(Operator Instructions). Paul Johnson, Nicusa Capital.

A couple of questions I guess for Kurt and forward Jeremy, separates. It sounds like the gross margin was hurt a little bit in the quarter partially because of absorption, partially because of expediting freight. Can you -- it sounds like you would have shipped more if you had had more product in stock. Is that fair or is -- you've got it, you just happened to get it there; it just was expensive getting it there?

Yes, we did end the quarter with some unfulfilled backlog. A lot of that likely would have gone into the distribution channel as inventory and it's hard to put our arms around how much of that could've been revenue. But we were impacted by supply constraints during the quarter.

Are you confident you'll be able to get those supply constraints under control in the current June quarter?

Thank you for your question, Paul. We're doing everything that we can to remove the supply constraints. And actually the working capital raise that we just completed will definitely help in that matter.

The second question, so [I'll bounce] up there and come back because I had another question on the gross margin. Kurt, what was the biggest constraint for not having more liquid working capital? It sounds like being able to meet demand.

Actually the only -- the biggest constraint for the March 2012 quarter, if I understand the question correctly, really was on the demand side. So we did end with some supply constraints, as Jeremy said. But we do believe most of that probably would have gone into distribution inventory.

So not necessarily into ultimate revenues, but clearly you had some customers that did not get all the product they wanted in the quarter.

Exactly.

And part of that is supply chain and part of it is [net] working capital, both of which you've been working on -- obviously the working capital is sort of the problem -- constraints have gone away.

That is correct.

If you -- Jeremy, not to pin you down, but it sounds like gross margins would have been higher in the quarter if you hadn't had the freight acceleration and the lower absorption. Order of magnitude, a lot higher, a little bit higher?

We don't give specific -- we're not going to give specifics on that. But it would have been a little bit higher.

All right. So you ended the quarter with things that would have suggest the quarter could have been a little bit better if you'd had the working capital, frankly?

Yes.

Inventory turns. Do you have a target -- not necessarily a specific, but you brought inventories down a lot, sort of the lowest level they've been in an awfully long time. Is there more to go, are you sort of where you want to be and then you'll just work on the mix of it or --?

Yes, I think at this point we're about where we want to be. I mean our target is three to four and as we begin to release new products and as revenues increase we may need to slightly increase inventory levels. So we're -- I think we're pretty close to where we think we should be in that three to four range.

And if -- obviously you guys have talked about growing -- absolute dollars of inventory could -- you would love them to go up because you need to because you're growing revenue. So I assume we should sort of think about turns roughly in here, the level will track revenue, as you grow revenue actual inventory dollars could go up?

That is correct.

High quality problem, right? Kurt, on the recent road show you guys started talking about a longer-term business model. Can you kind of review that and the [pieces growth], profitability, things like that?

Yes, actually I'll -- perhaps I probably should refute -- refer everyone on the call to the recent 8-K that describes the long-term model. But I'll let Jeremy actually walk through the actual numbers.

Yes, was there a specific question that you had on that, Paul?

Well, just to talk about it, because you guys have put out now a longer -- you've been in -- the new management has been there for a little while, you've gotten your sense of the operation; there was lots of progress in terms of operating metrics in the current quarter. Obviously the new products are starting to ship. Profitability is going up.

You've got, I don't know -- I haven't looked all the way back -- but better operating results than you had in an awfully long time. And now you're starting to talk about a longer-term model. I don't know, I'd just love to have you walk through it, that's new news. Obviously you put it out there with some level of confidence. I'd just love to touch on it for a moment, if we could.

Sure. The basic assumptions we made were a growth rate in the low to mid-teens and also the assumption that we bring our margins back up to our corporate historical average of between 49% to 51%. This last quarter we had 48.8%, so we've made good progress in getting the margins up to where they need to be for the target model.

And with that sort of revenue growth rate and that gross margin level we believe that within the next one to two years we can have a target model with non-GAAP operating income or non-GAAP income of 3% to 6% compared to I think the first half of 2012 which was about negative 6%.

So we think there's quite a bit of leverage in our model and we do assume some slight increases in OpEx primarily in sales and R&D that will need to be made to support the mid-teen -- the low- to mid-teen revenue growth that we have in this model.

Helpful. Final question I guess back to Kurt. Last call I asked what was the most important metric from the outside we should look for. And you had suggested new products would be an important one from your perspective.

Obviously now you're throwing out I assume some profitability measures, not meaning over the next three or six months but over the next couple years. I assume those are the two you'd want us to look at -- continuing new product shipments, development as well as increased profitability, increased financial metrics?

Yes, Paul. Actually right now I'd like to emphasize that many of the initial goals that we set out to achieve, basically reduction of inventory, increase of margins, putting the management team and the strategy in place.

I think that now it is all at the foundation, along with the recent capital raise, really puts the foundation of Lantronix moving forward. So now really the way to measure the Company is on the financial results and those financial results are going to be driven by the new product introductions.

Got it. Excellent, thank you.

Thank you, Paul.

Krishna Shankar, ROTH Capital.

Can you talk about how bookings were during the quarter? And I guess I know that you don't give guidance, but can you give us some sense for -- based on bookings and what you see in terms of business trends, what kind of growth trajectory and what we might expect for the June quarter?

Krishna, we don't give -- as you know, we don't get guidance, but we can say that our current bookings today are in line with the previous quarter.

Okay. And the growth in the June quarter will be -- can you describe what will be some of the drivers for growth in the June quarter between some of the new products that you have and the core products that you're already shipping? How will the growth -- where will the growth come from?

We're not giving that level of detail at this point, Krishna, I'm sorry.

Okay. But you are seeing very good traction with the xPrintServer and now that you have working capital I guess you could fulfill more demand for the Apple xPrintServer application?

Exactly.

Okay. And then PremierWave-XN and xPico, I guess that could take six to nine months in terms of getting to volume revenues?

Yes, so typically if you review the three types of products that Lantronix offers, the embedded products such as the xPico can take anywhere, let's say a year to really ramp into decent production volumes, yet they live up for quite some time, say five years or six years plus.

And then the external products such as the PremierWave-XN have a qualification cycle but not quite as long as a design-in cycle. So typically you start seeing orders in the three to six month time frame and then ramp from there.

And then the IT management products such as the xPrintServer, with the results we saw in the previous quarter, you can see revenue in those products pretty much immediately from launch or from -- as soon as these things get into production.

Okay. And then the supply constraints in the March quarter, was that due to some of the issues that we had in Thailand and in the contract manufacturing supply chain, or what kind of supply constraints were these?

These supply constraints were primarily self generated due to a working capital crunch within the Company.

Okay. All right. And then I missed the part where you talked about the cellular version of the -- the cellular version of the product and then also the sensors. Can you just highlight again the state of development of those two new products, the cellular version of PremierWave and then the sensor?

Yes, so, the question is regarding what is our plans for the cellular as well as the analog sensor products. So the cellular products and the analog sensor products will be going to full production in this calendar year.

The cellular product is very long or very far along in its development. We are currently in beta testing of the cellular products and we expect to go to production in the near future. The analog product is a little bit farther out and we are doing I'd say active internal testing on the analog product.

Great, thank you. Congratulations on the good results and good luck going forward.

Yes, thank you for your questions, Krishna.

(Operator Instructions). J.D. Abouchar, GRT Capital.

I just had a question, following up on Krishna's, about the analog and cellular markets; those are big new opportunities for the Company. What -- do we have the distribution channel in place for this? Is this a different sale? And how does this affect SG&A and the ability to penetrate those markets?

So the cellular product is really an ideal fit for the current distribution channel. We currently sell into our customer base both wired and wireless solutions, which are primarily WiFi solutions or actually entirely WiFi solutions today. And those customers have been asking us for cellular products today.

So the distribution channel is very straightforward, it's the same value proposition, the same ease of use of Lantronix products, new network interface, new -- same sales channel and more often than not actually selling more to the same customers. So that's a very nice fit and a very nice way for us to grow revenue in the near future.

The analog sensor products are a little bit different. Many of our current customers are interested in these types of products, so it does fit nicely into the current sales channel. But we will be developing new sales channels that are somewhat new to Lantronix, but still very much related in selling the analog sensor product.

So I think they're both a nice fit, but there will definitely be some more expansion on the sales side on the analog products. To answer your question on the SG&A area is -- we currently believe that we have the sales force to do this, but we are slightly expanding the sales force. We do have some open [reps] in both sales and engineering today to help with our growth strategy.

Great. And just can you quantify maybe -- the Company is working on a pretty thin shoestring there in terms of working capital and you mentioned that sort of affected supply constraints and therefore, to some extent, sales. What sort of -- does it help us though, now that you've got some working capital, be more solid -- does that help in just perception in sales going forward and maybe the ability to negotiate better supply contracts because you can -- you have a little bit more visibility and can buy stuff a little bit longer term?

We definitely expect it to help in all of those things.

Great. Thank you, guys.

Thank you very much for your questions.

With no further questions I would like to turn the call back over to management for closing remarks.

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 our year-end fiscal results.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may disconnect at this time. Have a great day.