E.E. Wang Lukowski Kurt F. Busch - Chief Executive Officer, President and Director Jeremy R. Whitaker - Chief Financial Officer and Principal Accounting Officer.

Krishna Shankar - Roth Capital Partners, LLC, Research Division George Melas-Kyriazi - MKH Management Company, LLC.

Good day, ladies and gentlemen, and welcome to the First Quarter Fiscal 2014 Lantronix, Inc. Earnings Conference Call. My name is Regina, and I'll be your conference operator for today. [Operator Instructions] As a reminder, today's event is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Ms. E.E.

Wang. Please go ahead, Ms. Wang..

Thanks, Regina. Good afternoon, everyone, and thank you for joining the Lantronix First Quarter Fiscal 2014 Conference Call. Joining us on the call today are Kurt Busch, Lantronix's Chief Executive Officer; and Jeremy Whitaker, Lantronix's Chief Financial Officer.

A live and archived webcast of today's call will be available on the company's website at www.lantronix.com. In addition, a phone replay will be available starting at approximately 7:00 p.m. Eastern, 4:00 p.m.

Pacific today through November 7 by dialing (888) 286-8010 in the U.S., or for international callers, (617) 801-6888 and entering passcode 92698261. During this call, management may make forward-looking statements, which involve risks and uncertainties that could cause Lantronix’s 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 with the SEC today and is available on our website and in the company’s SEC filings such as its 10-Ks 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 in the Investor Relations section of our website, describes the differences between our non-GAAP and GAAP reporting and presents reconciliation for the non-GAAP financial measures that we use. I would now like to introduce Kurt Busch, President and CEO of Lantronix..

Thank you, E.E., and thank you to everyone joining us this afternoon. In the first quarter of fiscal 2014, sales for Enterprise Solutions grew, primarily due to the ongoing efforts to expand our sales channels. This partially offset the decline in sales for some of our mature OEM Modules, which resulted in a decrease in overall revenue.

I'm pleased to report that through fiscal and operational discipline, we recorded non-GAAP net income and reduced GAAP loss for the first quarter of fiscal 2014. Overall, we're encouraged by the opportunities being generated by our new products and the expansion of our sales channels.

Before I go into more detail on our progress and expectations, I'd like to turn the call over to Jeremy to go over our financial highlights.

Jeremy?.

Thank you, Kurt. Please refer to today's news release and the financial information in the Investor Relations section of our website for additional details that will supplement my financial commentary. Now I'd like to take a few minutes to go over the highlights of our results for the first quarter of fiscal 2014.

Net revenue for the first quarter of fiscal 2014 was $10.9 million compared to $11.2 million for the first quarter of fiscal 2013 and $11.1 million for the fourth quarter of fiscal 2013. The year-over-year and sequential decline in net revenue was primarily due to a decline in unit sales for some of our mature OEM Module products.

At the same time, we saw year-over-year and sequential growth in our Enterprise Solutions product line, primarily due to increased contribution from international sales as a result of ongoing efforts to expand our sales channels.

Gross profit, as a percentage of revenue, for the first quarter of fiscal 2014 was 49.5% and within our long-term target model range of 49% to 51%, as compared to 48.8% for the first quarter of fiscal 2013 and 44.7% for the fourth quarter of fiscal 2013.

Selling, general and administrative expenses for the first quarter of fiscal 2014 were $3.9 million compared to $4.3 million for both the first quarter of fiscal 2013 and the fourth quarter of fiscal 2013. The fourth quarter of fiscal 2013 included severance costs of $208,000.

Research and development expense for the first quarter of fiscal 2014 was $1.7 million compared to $1.6 million for the first quarter of fiscal 2013 and $1.8 million for the fourth quarter of fiscal 2013.

Total operating expenses for the first quarter of fiscal 2014 were $5.6 million compared with $5.9 million for the first quarter of fiscal 2013 and $6.1 million for the fourth quarter of fiscal 2013.

As expected, operating expenses for the first quarter of fiscal 2014 were lower as a result of the cost-cutting measures we began implementing during the fourth quarter of fiscal 2013.

GAAP net loss was $267,000 for the first quarter of fiscal 2014, or $0.02 per share, compared to a GAAP net loss of $430,000, or $0.03 per share, for the first quarter of fiscal 2013 and sequentially, a GAAP net loss of $1.1 million or $0.08 per share for the fourth quarter of fiscal 2013.

Non-GAAP net income for the first quarter of fiscal 2014 was $220,000 or $0.01 per share compared to non-GAAP net income of $48,000 or $0.00 per share for the first quarter of fiscal 2013 and non-GAAP net loss of $665,000 or $0.05 per share for the fourth quarter of fiscal 2013. Now turning to the balance sheets.

Cash and cash equivalents, as of September 30, 2013, were $5.8 million compared to $5.2 million as of June 30, 2013. Net inventories were $8.5 million as of September 30, 2013, compared to $8.7 million as of June 30, 2013.

As discussed on previous calls, our revenue has the tendency to fluctuate from quarter to quarter due the nature of our sales cycle and as a result of project-based purchases that oftentimes have a significant impact on our quarterly operating results.

The quarterly lumpiness we experienced is further exaggerated due to the current size and scale of our business. That being said, we expect to continue to manage our spending based upon revenue expectations with a primary focus on driving long-term revenue growth while preserving working capital and maintaining fiscal discipline.

I'll now turn the call back to Kurt..

First, driving new product revenue growth; second, expanding our existing sales and distribution relationships to increase visibility of our products; third, continuing our commitment to new product execution; and finally, demonstrating strong fiscal and operational discipline. During the first fiscal quarter, we made progress in each of these areas.

Overall, we saw a continued traction from several of our new Enterprise Solution products, as well as some contribution from new OEM Modules, which was in line with the typical sales cycle of our products.

Much of the growth in our Enterprise Solution product line this quarter was the direct result of our efforts that began in fiscal 2013 to expand Lantronix sales and distribution channels which drove new customer wins worldwide, and this helped to offset a slowdown in the Americas.

In August, we announced the official opening of our office in Shanghai, China, which represents a significant step in Lantronix's efforts to expand our sales in Asia.

On the heels of our mainland China office opening, we announced the first strategic sales relationship with JD.com, one of China's largest e-commerce sites, which, in August, began carrying Lantronix line of xPrintServer mobile printing solutions. More recently, we've expanded our U.S.

sales force and added manufacturing reps to address the growing opportunities generated from our new product offerings.

While it takes time to develop these relationships and generate market presence, we are pleased with the progress that we've made since starting our expansion efforts in fiscal 2013, and we fully expect that these efforts will begin to take hold as we move forward in fiscal 2014 and beyond.

We continued our commitment to new product development with the launch of 2 new wireless products during the September quarter. In August, we launched into production our xPico Wi-Fi OEM Module. Slightly smaller than the U.S.

postage stamp, the xPico Wi-Fi is a good example of our focus on introducing products that address the convergence of mobility and machine-to-machine. We're very encouraged by the response of this module, which represents a new, innovative platform that will serve as the foundation for future products and applications.

Given the design cycle and revenue ramps associated with OEM Modules, we expect the xPico Wi-Fi to ramp in fiscal 2015. In September, Lantronix launched our first 3.5G cellular product, the PremierWave XC HSPA+.

This second edition to our PremierWave cellular product line delivers leading-edge 3.5G M2M connectivity for devices previously unable to connect via wired or Wi-Fi. In September, we announced a partnership with Wyless to bundle our PremierWave XC family with their industry-leading MVNO services.

This combination allows our customers to experience an easy, out-of-the-box, M2M deployment that provides one of the fastest ways and -- fastest ways to fully connect their devices and equipment to a cellular network. In contrast, the typical deployment, which takes 90 days or longer.

Today, we announced a partnership with BIXOLON, a leading manufacturer of receipt printers that deliver iOS printing solutions for retail and point of service customers or POS. We believe that smart devices and mobile printing can play a significant role in enhancing the retail customer experience.

With more and more retailers planning to adopt mobile POS solutions, we believe that the industry represents a promising market for our mobile printing products. We're very encouraged by the response we have received from our new wireless solutions, both Wi-Fi and cellular.

Combining with the progress made in expanding our sales and margin efforts, we expect Enterprise Solutions growth in fiscal 2014 and we expect our new OEM Modules to ramp in fiscal 2015 as more and more businesses and organizations expand their efforts to leverage the Internet of things.

Over the next few quarters, we expect to launch additional wireless and mobile printing solutions, as well as significant product upgrades that will further position Lantronix as a provider of a broad range of solutions targeted at the convergence of mobility and M2M systems.

For competitive reasons, I can't talk about these upcoming products in any detail. But I will tell you that these are all directed at further expanding our opportunities in the M2M marketplace. Balancing our revenue growth and product development efforts, Lantronix continues to execute on our commitment to strong fiscal and operational discipline.

These efforts resulted in achieving positive non-GAAP income and reducing GAAP loss during the first quarter.

While we would've preferred a stronger start on the revenue front in fiscal 2014, we continue to make significant progress in developing a growing pipeline of opportunities that has the potential to deliver long-term top line growth, profitability and enhanced value for our shareholders.

We've put in place the fundamental building blocks for our future success by implementing a solid product development platform, initiating an effort to expand our sales and distribution channels and generate wider visibility for Lantronix products worldwide, and at the same time, establishing strong fiscal and operational discipline.

Progress takes time but we are committed to executing on our plan. We've already started to see early positive results that reaffirm our belief that our efforts will ultimately position Lantronix as the preferred leader in delivering secure, feature-rich and easy to deploy M2M solutions.

Before I turn the call over for questions, I'd like to thank 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] And your first question today comes from the line of Krishna Shankar with Roth Capital..

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

markets and the international markets recently?.

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

Okay.

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

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

Okay.

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

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

Okay. And then you mentioned that the legacy business continued to be a drag on revenue growth.

But can you give us some sense for what portion of the total revenues are now, sort of from a legacy camp versus the new growth products?.

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

Okay.

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

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

And we do feel that our new product growth will outstrip the decline in legacy products in the long term..

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

market now?.

So we saw the U.S. was impacted primarily with our OEM Modules. And there was a few things going on there. We had a couple of large customers that have irregular buying cycle that influenced the U.S. as well as one of our largest products, the XPort, it's a small product but it's a large revenue contributor.

It's going through a transition from one version to the next, and we've seen some irregular buying patterns in the XPort as well. And those both adversely affected the U.S. revenue..

Okay.

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

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

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

Quick question on the gross margin. It had a nice rebound.

Can you maybe provide some color there?.

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

Okay. Is -- I guess, this is within your target range.

But do you think that is actually -- you'd be able to repeat that for -- you'll be able to stay there for fiscal '14?.

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

Okay.

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

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

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

Sure. So we put in place a very disciplined typically described as a phase-gate process in the company to really -- that's very important in driving home, really for the company, the importance of coming out with innovative products that are fulfilling an unfulfilled need by the customers and offer a strong ROI for the company.

And this is something that hasn't been in place for the company for some period of time.

And being able to really put a disciplined process from, basically, the opportunity of the product to the definition of the product and a clear feature set, a clear customer base, has allowed us to come out with products basically on schedule, addressing customer needs, and has allowed us to keep up with this -- with our commitment of coming up with one product every quarter..

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

Where do you see the bigger opportunity, in Wi-Fi or cellular?.

At this point, it's really hard to say between the 2 of them. People will typically -- if they have Wi-Fi, they will go with Wi-Fi first.

And then cellular is typically the connection of last resort or the connection for any kind of a remote application, say whether it's like oil and gas or any kind of -- usually, the utility-related M2M applications require cellular. And typically, you have to pay for some service in that case. So it's obviously a -- the last thing anybody wants to do.

But we do see good opportunities in both cellular and Wi-Fi. But today, we both see them as the best growth opportunities for Lantronix..

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

Thank you, operator. I'd like to thank you all for your participation on our call today. We look forward to updating you on our progress, achievements and actions when we report on the second quarter of fiscal 2014 in late January..

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