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.

Good day, ladies and gentlemen, and welcome to the Second Quarter Fiscal 2014 Lantronix Incorporated Earnings Conference Call. My name is Patrick, and I will be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to E.E. Wang.

Please proceed..

Thank you, Patrick. Good afternoon, everyone, and thank you for joining the Lantronix Second Quarter Fiscal 2014 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 starting at 7:00 p.m. Eastern, 4:00 p.m. Pacific today through February 7 by dialing (888) 286-8010 in the U.S., or for international callers, (617) 801-6888 and entering passcode 71047798.

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 with the SEC today and is available on our website and in the company’s SEC filings such as its 10-K and 10-Q.

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. We continue to make progress during the second quarter of fiscal 2014, achieving modest sequential revenue growth, primarily due to 11% growth in sales of our Enterprise Solutions product line, offsetting the decline in sales of our more mature OEM Modules.

At the same time, our new OEM Modules continue to generate customer interest in line with our expectations, and we are pursuing many exciting opportunities in this area. Overall, we are very encouraged by the opportunities being generated by our new product introductions, as well as our sales and channel expansion efforts.

Continuing our commitment to fiscal and operational discipline, we achieved our second consecutive quarter of non-GAAP net income and positive cash flow from operations. 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 second quarter of fiscal 2014 ended December 31, 2013.

Net revenue for the second quarter of fiscal 2014 was $11 million compared to $12.2 million for the second quarter of fiscal 2013 and $10.9 million for the first quarter of fiscal 2013.

The year-over-year decline in net revenue was primarily due to a decrease in sales for some of our mature products, which was partially offset by growth in sales of new products in our Enterprise Solutions product line.

On a sequential basis, Enterprise Solutions grew by 11%, primarily due to increased sales in the Americas, which included initial orders from new Tier 1 customers for our new SLB and PremierWave XN product families.

As expected, OEM Modules continue to be impacted by decline in sales of mature products that make up a majority of sales for this product line. Gross profit as a percentage of revenue for the second quarter of fiscal 2014 was 49.6% and within our long-term target model range of 49% to 51%.

This compared with 49.6% for the second quarter of fiscal 2013 and 49.5% for the first quarter of fiscal 2014. Selling, general and administrative expenses for the second quarter of fiscal 2014 were $4.1 million compared to $4.7 million for the second quarter of fiscal 2013 and $3.9 million for the first quarter of fiscal 2014.

Research and development expenses for the second quarter of fiscal 2014 were $1.6 million compared to $1.7 million for both the second quarter of fiscal 2013 and the first quarter of fiscal 2014.

Total operating expenses for the second quarter of fiscal 2014 were $5.7 million compared with $6.4 million for the second quarter of fiscal 2013 and $5.6 million for the first quarter of 2014.

GAAP net loss was $323,000 for the second quarter of fiscal 2014 or $0.02 per share compared to a GAAP net loss of $412,000 or $0.03 per share for the second quarter of fiscal 2013, and sequentially, a GAAP net loss of $267,000 or $0.02 per share for the first quarter of fiscal 2014.

Non-GAAP net income for the second quarter of fiscal 2014 was $191,000 or $0.01 per share compared to non-GAAP net income of $70,000 or $0.00 per share for the second quarter of fiscal 2013, and sequentially, non-GAAP net income of $220,000 or $0.01 per share for the first quarter of fiscal 2013. Now turning to the balance sheet.

Cash and cash equivalents as of December 31, 2013, were $6.1 million compared to $5.2 million as of June 30, 2013. Net inventories were $8.1 million as of December 31, 2013, compared to $8.7 million as of June 30, 2013.

As discussed on previous calls, our revenue has a history of fluctuating from quarter to quarter due to the nature of our project-based sales cycle that oftentimes has a significant impact on our quarterly operating results. The quarterly lumpiness we experience is further exaggerated due to current size and scale of our business.

Now looking forward to our third fiscal quarter, we expect an increase in operating expenses primarily related to increased marketing and product development costs.

That being said, we expect to continue to manage our spending based upon current 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..

Thank you, Jeremy.

Our results for the first half of fiscal 2014 reflect the steady progress we are making in executing on our strategic plan to drive Lantronix towards sustainable, long-term growth and profitability through disciplined and innovative product development, expansion of sales and marketing efforts worldwide and continued fiscal and operational discipline.

Revenue from our OEM Modules continues to be impacted by declining sales of mature product families. Today, most of our current revenues in this category are derived from product families that were launched more than 5 years ago and in some cases, more than 10 years ago.

While these products still generate new design wins, not surprisingly, the overall trend has been declining. A new OEM Module takes as long as 24 months to move from design win to production revenue. At the same time, these products typically have a long life cycle, often 5 years or longer.

Overall, we are pleased with the early progress we have made in our new OEM Module product families, which include the xPico and xPico Wi-Fi. As these new products move into production, we believe that our OEM Modules sales will stabilize and begin to contribute to positive top line growth in the long term.

Sales of our new Enterprise Solutions have been increasing as a result of both new product introductions and new customer acquisitions.

The 11% sequential growth we experienced in the December quarter was directly related to our disciplined new product development strategy and the worldwide sales and channel expansion efforts we initiated in fiscal 2013.

For the same period last year, most of the revenue contribution from our new Enterprise Solutions were derived from the xPrintServer product family. Now we are seeing revenue contributions from across the spectrum of our new Enterprise Solution product family.

Specifically during this current fiscal year to date, EDS-MD, PremierWave XN and our new SLB have begun to meaningfully contribute to new product revenue. These new products are gaining traction in a variety of verticals with medical device and remote machine management applications being the focus of these early successes.

We were also very encouraged with our expanded sales efforts, and new product introductions have not only generated sales with existing customers, but were heavily weighted towards new Tier 1 enterprise customers in all of our regions.

We believe this will allow us to achieve an overall trend of sustainable growth, especially as our pipeline of opportunities continues to expand. We continue to execute on our new product development strategy.

In December, we launched the newest addition of our XPort Pro product family, the XPort Pro Lx6 embedded device server, an IPv6 solution for wired M2M deployments. This OEM Module provides a drop-in upgrade to the next generation of Internet protocol, IPv6, for existing XPort customers, as well as a simple path to IPv6 connectivity for new customers.

Most recently, we announced the launch of the xPrintServer Cloud Print Edition, the latest addition of our award-winning xPrintServer mobile printing product family.

Currently the only Google-certified print server, this xPrintServer enables Google Cloud Print users to wirelessly print to their existing printer from a variety of devices such as Chromebooks, Android smartphones, tablets and laptops.

The launch of this new xPrintServer allows Lantronix to address a large segment of mobile printing market that has been underserved. We introduced this new product in early January and are very pleased with the positive media and industry response. We expect the Cloud Print Edition to begin shipping at the end of February.

We are also continuing to work closely with both new and existing partners and customers. During the quarter, we announced several new collaborations with companies that are incorporating Lantronix product and solutions into a wide range of applications.

While I cannot discuss all of these in detail, what I can say is the common thread between all of them is the desire to leverage Lantronix solutions to participate in the opportunities generated by the Internet of Things, and in particular, the convergence of mobility and M2M.

Moving forward, we'll remain focused on expanding and deepening our sales and distribution relationships so that customers worldwide can access Lantronix' rugged, secure and easy-to-deploy solutions in developing applications that leverage the power of the Internet of Things.

We've paired our revenue and product development efforts with continued fiscal and operational discipline. These efforts resulted in our achieving non-GAAP income and positive cash flow from operations for the second quarter in a row.

We're pleased with the progress we've made towards building a growing pipeline of opportunities that has the potential to drive long-term top line growth, profitability and enhanced value for our shareholders.

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 comes from the line of Krishna Shankar with Roth Capital..

I had at a couple of questions. On the OEM Modules side of the business, can you talk about -- you said the majority of it was still older OEM Modules. I just want to get a sense for when the drag factor from those declining world of products might abate so that the new products are starting to contribute to growth in the OEM Module business..

Sure. So Krishna, thank you for calling in. So from a new OEM Module, I'd like to call attention to the xPico and xPico Wi-Fi product families, those are the ones we're most excited about. The xPico product was actually released about 2 years ago, and we're starting to see first production orders of that product today.

And the xPico Wi-Fi was released around 6 months ago, and we're working on a number of opportunities. And we feel that as these opportunities ramp to production, along with our efforts to expand our sales and distribution channels, that those will stabilize the decline in some of the older OEM Modules and allow us to achieve overall top line growth..

Okay.

And then can you cite for us the opportunity for the Google Cloud Print opportunity versus what you've done in the iOS market?.

Sure, sure.

So the Google Cloud Print product, for those people not familiar with it, it actually offers the same kind of value proposition that the iOS product did with the original xPrintServer, allowing the installed base of printers that are more often than not a copy machine or a large enterprise printer in an office environment or a printer in someone's home.

What it does, it allows those printers to be part of the Google Cloud Print ecosystem and people to use Cloud Print to directly print to those printers. We feel the opportunity is somewhat -- is similar to the opportunity of the iOS space -- basically based on the size of the Android smartphone application.

So basically, the Android side versus the iOS side is probably pretty similar from that opportunity. But there's another aspect for Cloud Print that we're really excited about, is really the area of Chromebooks.

And this is where we think is going to be one of the main applications for the Cloud Print device, is Chromeboooks used in educational environment where people -- where students need to print their applications from their Chromebooks using Google Cloud Print or Google Box..

Okay. And then last quarter, you talked about the wireless M2M cellular connectivity bundle with a service provider.

How is that coming along?.

Sure. So a few quarters ago, we announced a partnership with Wyless to provide a sim in our cellular products. So we've released 2 cellular products to production so far, and we're very excited with the out-of-the-box experience.

And what this allows people to do is to buy a Lantronix cellular product and use -- and basically light it up on the network immediately as opposed to trying to find an M2M service provider to bring that product onto the network.

And we've been working closely with Wyless on a number of opportunities that we expect to become into revenue over the coming quarters or coming forward to a year time frame..

Okay. And then my final question, there's been a fair amount of excitement around the M2M and smartphone connectivity and automation space with Google's acquisition of Nest Labs.

Does Lantronix have any efforts in terms of M2M connectivity for smart appliances? And how do you view that transaction? And any sort of similar areas that Lantronix may be working on?.

Sure. So our Lantronix products have been in security and automation applications for quite some time. I mean, the company has been a pioneer in machine connectivity, I mean, probably for north of 15, maybe 20 years of connecting machines and managing them over the network.

And that has all been -- primarily focused in industrial commercial applications, and now we're seeing that type of use case showing up in the home. So though we have not announced any products today, it is a -- that type of thing is applicable to the Lantronix products and technology that we brought to market..

Okay.

And the how is the macro -- what do you see in terms of demand trends in Europe, Asia and Europe? Can you just talk a little bit about the -- on the macro environment inventory out there and what you're seeing in terms of the longer-term picture for 2014?.

So I can just comment on just kind of how the last quarter went as we saw a good amount of strength in the Americas and continued weakness in the EMEA region.

And then for us, China is really a growth area because we have very small amount of revenue coming out of the China and greater APAC area today, and we just put a new office in China in our efforts to expand our sales and marketing channel. So we definitely see some upside in that area for us today..

[Operator Instructions] I'm showing that there are no additional audio questions. I would now like to turn the call back over to Kurt Busch 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 on our third quarter fiscal 2014 results in early May..

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