創力 (LTRX) 2018 Q2 法說會逐字稿

Good day, everyone, and welcome to the Lantronix Second Quarter Fiscal Year 2018 Conference Call and Webcast. (Operator Instructions) Please do note that today's event is being recorded. I would now like to turn the conference over to Shahram Mehraban, VP of Marketing.

Thank you, Will. Good afternoon, everyone, and thank you for joining the Lantronix Second Quarter Fiscal 2018 Conference Call. Joining us on the call today are Jeff Benck, Lantronix' President and Chief Executive Officer; and Jeremy Whitaker, Lantronix' Chief Financial Officer.

A live and archived webcast of today's call will be available on the company's website at www.lantronix.com. In addition, a phone replay will be available starting at 8 p.m. Eastern, 5 p.m. Pacific today through February 1 by dialing 1 (877) 344-7529 in U.S. or for international callers by dialing 1 (412) 317-0088, and entering passcode 10115345. During this call, management may make forward-looking statements, which involve risks and uncertainties that could cause Lantronix' results to differ materially from management's current expectations. We encourage you to review the cautionary statements and risk factors contained in the earnings release, which was furnished to the SEC today and is available on our website and the company's SEC filings, such as its 10-K and 10-Qs. Lantronix undertakes no obligation to revise or update publicly any forward-looking statements to reflect future events or circumstances.

Also, please note that during this call, the company will discuss some non-GAAP financial measures. Today's earnings release, which is posted on Investor Relations section of our website, describes the differences between our non-GAAP and GAAP reporting and presents reconciliations for the non-GAAP financial measures that we use.

I'll now turn the call over to Jeff Benck, President and CEO of Lantronix.

Thanks, Shahram, and welcome to everyone joining us for this afternoon's call. I'm pleased with how our team executed in the second quarter. We continue to make great progress on strengthening our business as we grew revenues 7% sequentially, achieved solid year-over-year gross margin improvement, delivered our eighth consecutive quarter of non-GAAP profit, and recorded our strongest GAAP profitability in 10 years. We also generated cash for the fifth quarter in a row, and our improved operating margins helped us increase our cash position to $8.4 million.

On the IT management front, the business grew 42% year-over-year in the quarter. Thanks to record sales of our SLB branch office manager. As we have mentioned on previous calls, we believe that we could reignite the growth in this product line, and we are starting to see the fruit of our renewed sales focus.

In second quarter, we closed 2 major deals and rolled out SLBs to one of the top 3 banks in the U.S. as well as one of the top 3 U.S. mobile network operators.

We also made great progress in the quarter on our IoT initiatives by launching MACH10 Global Device Manager and our xPico 200 family of embedded IoT gateways. In fact, we achieved general availability of the xPico 240, and started shipping production units of this Wi-Fi IoT gateway to our first customer who manufactures automated guided vehicles or AGVs. These AGVs are being deployed to move packages and warehouses for one of the largest Chinese e-commerce companies. This industrial customer achieved production qualification with the xPico 240 at a record pace, which bodes well for the potential of this new wireless IoT gateway family.

Before I provide some additional color on our business, I will now turn the call over to Jeremy to discuss our financial results for the second quarter.

Thank you, Jeff. Please refer to today's news release and our financial information in the Investor Relations section of our website for additional details that will supplement my financial commentary.

Now I'd like to take a few minutes to go over our results for the second quarter of fiscal 2018. Net revenue for the second quarter of fiscal 2018 was $11.3 million compared with $11.2 million for the second quarter of fiscal 2017, and $10.6 million for the first quarter of fiscal 2018. The sequential increase was primarily due to growth of our IT management product line, driven by record sales of our SLB.

Gross profit, as a percentage of net revenue, was 55.7% for the second quarter of fiscal 2018, compared with 51.8% for the second quarter of fiscal 2017 and 52.7% for the first quarter of fiscal 2018. The year-over-year improvement in margin was the result of lower costs, tighter pricing discipline and lower charges for excess and obsolete inventories.

Selling, general and administrative expenses for the second quarter of fiscal 2018 were $4.2 million compared with $3.9 million for the second quarter of fiscal 2017 and $4 million for the first quarter of fiscal 2018.

Our research and development expenses for the second quarter of 2018 were $1.9 million compared with $1.9 million for the second quarter of fiscal 2017 and $2.2 million for the first quarter of fiscal 2018.

I am pleased to report that through a combination of improved top line, record gross profit margin and disciplined spending that we delivered GAAP net income of $225,000 or $0.01 per share during the second quarter of fiscal 2018. This compares to GAAP net income of $41,000 or $0.00 per share during the second quarter of fiscal 2017 and the GAAP net loss of $641,000 or $0.04 per share during the first quarter of fiscal 2018.

We also maintained our non-GAAP earning streak with our eighth consecutive quarter of non-GAAP profitability as we achieved non-GAAP net income of $689,000 for the second quarter of fiscal 2018, an improvement of 55% as compared with non-GAAP net income of $444,000 for the second quarter of fiscal 2017 and non-GAAP net income of $306,000 for the first quarter of fiscal 2018.

Now turning to the balance sheet. Cash and cash equivalents increased to $8.4 million as of December 31, 2017, compared with $8.1 million as of June 30, 2017. Net inventories were $7.1 million as of December 31, 2017, compared with $7 million as of June 30, 2017. Working capital improved to $11 million as of December 31, 2017, compared with $10.4 million as of June 30, 2017.

Now I will give some insights in the gross margin and operating expenses for the third fiscal quarter. We expect gross margins to remain in the range of what we have seen during the last couple of quarters. We expect operating expenses to increase sequentially by a few hundred thousand due to the annual reset of employment taxes in the U.S. and the addition of new resources to meet our 2018 operating plan. I'll now turn the call back to Jeff.

Thanks, Jeremy. Now let me provide you with an update on our 3 strategic initiatives for this fiscal year. First, to increase the number of IoT wireless gateway design wins; second, to continue our share gain momentum with our IT management products; and lastly, to establish our IoT software business with the launch of MACH10, our IoT platform.

On our first initiative, we continue to make great progress by launching our latest embedded IoT gateway, the xPico 240 in early December. As mentioned earlier, we began shipping production units to our first customer who was shipping their new product with our wireless solution. We have achieved a number of additional design wins for our xPico 240 and expect to close more this quarter and next. We also started sampling the xPico 250 product in December, which adds Bluetooth connectivity to the xPico 240 feature set, and opens up additional use cases, expanding our addressable market.

We are also pleased with the progress on our SGX 5150 IoT device gateway. During this past quarter, we have seen the initial ramp of SGX 5150 with one of our strategic OEM customers, who is using our device to wirelessly connect their high-value medical equipment to hospital networks. Further, we have seen more engagement within the system integrators' channel with multiple proof of concepts and pilots in the manufacturing vertical. The SGX 5150 is being used to connect factory tools and machinery to access data securely for use cases, such as predictive maintenance and yield optimization using the Microsoft Azure platform.

In addition, we've made good progress in the resource management integrator channel, working very closely with an OEM who has qualified our gateways to work with their controllers deployed in the field -- which will help us scale our business in that segment.

While more of our development spend is focused on WiFi, we are finding that wire connectivity is still the preferred technology of choice for many industrial IoT applications, and we have seen solid demand and an increase pipeline of design wins for our export wired Ethernet products. This increased interest in our wired offerings has reinforced the importance of these core products and supports continued investment in this space. To that end, we will be sharing some exciting enhancements to our wired road map in the coming months.

Now turning to our second initiative. We've continued to drive share gains with our IT management products, enabling us to grow faster than the market over the past year. Our flagship SLC 8000 offering recovered well in the second quarter and saw a 47% sequential growth. We continue to add new customers every quarter, and we are engaged in several large enterprise RFPs tied to data center refreshes and Cisco switch deployments that represent significant opportunities for us to continue our growth trajectory.

As discussed on our last quarter conference call, we've been investing further in leadership enhancements to our IT management product family. In fact, earlier this week, we announced some innovative functionality that we added to our SLC 8000 offering that allows IT managers and administrators to not only manage their switching infrastructure, but now also monitor the performance of their network at the same time. We are developing further enhanced capabilities for IT management products that we will be unveiling later this year.

Finally, moving to our third initiative, which is focused on establishing our IoT software business. During the second quarter, we launched our MACH10 Global Device Manager at the IoT Solutions World Congress in Barcelona, Spain. We received strong reception and great coverage following our announcement at the event, where we partner with the Industrial Internet Consortium, and we're part of their industrial IoT pavilion. MACH10 Global Device Manager is a ready-to-use IoT application suite that enables OEMs and system integrators to quickly deliver secure and robust web scale device management for their connected machines. We are engaged in several large company proposals and running active field trials. We are finding that the time it takes to evaluate our solution and integrate into the OEM products is similar to the design cycle of our OEM hardware offerings. While this has implications for a potentially slower time to revenue than initially thought, we understand the OEM design in cycle well, and appreciate the importance of continued investment in support of OEMs in this space.

We are continuing to invest in the MACH10 technology platform with plans to offer new SaaS offerings for our line of IoT gateways and IT management hardware in the coming months. These SaaS offerings will enhance our hardware products and give us a competitive advantage while making us more strategic to our OEM customers as we provide a larger piece of their IoT solution. I will share more on these new offerings as we progress during the year.

Now let me wrap up. I'm very pleased with our performance in fiscal Q2 and the momentum we carry into the second half. We delivered revenue growth and record gross margins, which resulted in 6% non-GAAP operating margins and GAAP profitability, once again, demonstrating the leverage in our business model. We are clearly making progress on our key initiatives throughout the first half of our fiscal year, with the recent wireless product launches, the ramp on our new gateway products and the share gains in IT management. I look forward to updating you on our progress as we continue our journey.

That completes our prepared remarks for today, so I will now turn it over to the operator to conduct our Q&A session. Operator?

(Operator Instructions) And our first questioner today will be Jaeson Schmidt with Lake Street Capital Markets.

I just want to start on the IT management side. You guys have shown some really strong traction over the past few quarters here. Just curious if you could talk a little bit about how big the customer pipeline currently is, what kind of visibility you have going forward there? And more so, why you guys are finding so much success there?

Yes, sure. It's Jeff. Thanks, Jaeson, for the question. We did have a good quarter for our IT management business. It recovered nicely. I mean, first quarter, we were -- we have, I think we had mentioned a deal that moved out of the quarter, which we closed early in October. A couple of contributing factors are SLB, which is our branch office solution -- had a really great record quarter -- had a couple of really large deployments that rolled out in the quarter, which, of course, we've been working on for multiple quarters. But specifically to your question, we look for that business to continue to improve over what it did last year, albeit we don't expect it to be record necessarily this quarter. But we do think in general that, that will be a nice contributor to the family of offerings. We also like the pipeline on the SLC 8000. We've got -- I don't have the specific number in front of me, but we've got a number of deals obviously that we are working at any given time. We also -- I mentioned in the script that we have a couple of very large enterprise RFPs, which are proposals that we're in proof of concepts on -- we can't always count that we're going to win every one of those, but some of these are pretty meaningful. So we feel pretty good about how we're positioned. And then we also just announced an enhancement to our SLC 8000. It gives us some network performance capability that the competition in this space doesn't have. And that has the opportunity to actually replace another appliance that might be in the data center and expand our use case. So when you add up all that together, we feel pretty good about the IT management business and what we've been able to do. We had growth in the first half, we look for it to grow on a full year basis as well. The rest kind of comes down to how we execute on some of these big deals.

How should we think about the size of the enterprise potential deals compared to the current ones you've already won -- not so much specific amounts, but are these double the opportunity for you guys? Or how should we think size-wise going forward?

They all vary a little bit. There's -- one of them just offhand is in similar size to what we might see -- what we might have already seen. One of them is very large -- would be many multiples of some of the deals that we've seen recently. But even in our own, we might have a small customer deploy 5 to 20 appliances. We might have a customer deploy 100, if they're going across more than 1 data center or a big deployment of a larger company, but we've also seen them in the multiple hundreds. And usually when that happens, you see it happen over a number of quarters. So there's some good continual momentum that comes from that. But a couple of these are pretty significant. So they're definitely needle movers if we were to win that. Again, we're not -- it's a competitive space. We think we stack up well, but we feel pretty good about the pipeline.

Okay. And the last one for me, and I'll jump back in the queue. I know you mentioned gross margin will stay in the range you've seen -- derivatives this fiscal year. How should we think about it longer term? Is -- are these newer products and kind of overall mix helping pull gross margin higher? Or is it really just the pricing environment and some improved efficiencies being the primary drivers?

I think we've -- I think it's a number of factors which we kind of talked about. We've been focused on costs, we've been trying to be smart about our pricing strategies. We feel pretty good about the sustainability, which is why you see us continue to kind of tick up our guidance a little bit there. Jeremy said, we see them in the range in the last 2 quarters. The last 2 quarters were higher than a year ago quite a bit. So yes, we said north of 50 earlier in the year. We're probably in a little -- a couple of points above that, and we have the potential to do that. I think we feel like it's pretty sustainable. I will say, as our IoT business grows and some of the wireless solutions might be a little lower margin maybe than some of our other offerings, but our -- some of our core products like the IT management family is above gross margin. And so it kind of balances out quite well, of course, our wired Ethernet with xPort is also kind of above corporate margin. And then as we build the software business, that will come with associated higher margin. But we do have other business where we're going to be more aggressive, and some of the WiFi-embedded business is likely to be on the other side of that. But we feel pretty good about -- this has been inching up nicely here, and it's sustainable.

(Operator Instructions) And our next questioner today will be Nehal Chokshi with Maxim Group.

And congrats on that gross margins results, strong profitability results and the sustainability that you're talking about or the things that you're doing that's allowing that gross margin to expand. On the MACH10 product offering, I think you mentioned that you do expect to roll this out as a Software as a Service, and it's not bundled in -- as part of the IT management solutions. Is that correct? Did I hear that correctly?

Yes, that is correct. We -- you reference IT management and we really -- the first offering global device management is really tied -- or really supports our IoT products more directly. But it's not required, like we can have customers that are interested. In fact, we do have some customers engaging us that have their own -- already have their own IoT offering, but need a software solution for device management. We certainly expect to leverage our own in our own customers that are buying our hardware already. But we do see this as really as an enterprise license agreement, and that's the way we're approaching the market. And we really see it as ultimately an independent product line. We do intend to expand the use of it across more of our hardware offerings, like IT management, and we'll talk more about that in the coming quarters as we continue to invest there. But right now, we just launched last quarter formerly, and we're engaged in a number of customers and learning it as we go in this space. And we're excited about it, but we know it takes -- it's going to take -- we've got to continue to focus on it and continue the investments as we develop this product line.

So do the discussions that you're having with your customers, as they look to -- I presume they are beta-ing it at this point in time. They haven't deployed it in the production yet. Is that correct?

Yes. We haven't driven any revenue yet, that is true. We really -- we're calling it a pilot, maybe not beta anymore because we're -- because the product is launched formally. But we have a scheduled pricing strategy that allows you to do a trial period without paying for it, and then converting into a development license, and then ultimately, going to production. So it is an OEM product because the product is very much focused on industrial OEMs that are looking to provide an IoT software solution for not only our gateways or gateway they're using potentially, but also for the machines connected to that. So the development cycle that goes with that, it's much like the designing of our WiFi solutions. And so there's a time period associated, and we recognize that the developers are -- we want the commitment and we want them to be investing with us, but then as they come to market, we'll see it in annuity as they launch with our solution and deploy it with their platforms.

And have you had discussions as far as what would be the pricing metric, i.e. x dollars per device that MACH10 manages -- how have you guys...

Yes, we have talked about that. We are approaching it more within enterprise -- I mean, I'll give you this much. It's competitive, so I'm sensitive about being very specific. But there are a lot of players out there that are -- a couple of bucks a device per month or whatever. We've taken more of enterprise license approach saying, it's a development tool, it's a tool you use to deploy with your solutions. And from that standpoint we look at it as -- there's an investment associated with it, but then we're not so much concerned about, oh, if I'm deploying 100 devices or 1,000, that you get me on the per price solution, and that's kind of how we're approaching it. But the deals will vary a bit depending on the particular end user and their intended use and what they're deploying it with.

And then the strength that you're seeing in the overall business, do you feel like that's correlated at all with the MACH10 development that you've had in the pipeline? Has that been a driver of increased traction at all?

It's certainly for our existing customers that we've engaged, we become more strategic because we can talk about the broader solution. We're not just talking about selling them an embedded gateway or a device gateway. Now we can talk about a broader IoT solution. And I directly heard customers say, "well, I have to think about you guys differently because you're becoming more strategic as I look to partner with you on more than just the hardware." But in terms of -- I don't know that's been a huge needle mover yet. In fact, I view MACH10 as a bit of a -- it's a bit of a wildcard for us because I don't think investors, in general, are valuing that. Of course, we haven't delivered the revenue yet, so there's expectations and hope there. But certainly, from our standpoint, we don't feel like that's totally baked in. The strength that we've seen in the business is frankly just takes -- come from the focus and us hitting on all cylinders. We made a ton of changes over the last year in terms of getting the right team on the field, changes in sales, changes in marketing. Our engineering pipeline has gotten better, and we've got better products. So there's a lot of factors that have contributed to it here. I do think having a strategy that talks about IoT solutions and being able to offer more to the OEMs we sell to is helping maybe tangentially, but it's hard to directly correlate that.

(Operator Instructions) And it looks to be no further questions. So this will conclude the Q&A session. I would like to turn the conference back over to Jeff Benck for any closing remarks.

Thank you, operator. We look forward to updating you on our progress, achievements and actions when we report our third quarter results in late April. So with that, this ends our call.

And the conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.