E.E. Wang Lukowski - SVP, PondelWilkinson Inc Kurt Busch - President and Chief Executive Officer Jeremy Whitaker - Chief Financial Officer.

Krishna Shankar - ROTH Capital.

Ladies and gentlemen, welcome and thank you for joining the fourth quarter 2014 Lantronix earnings call. My name is Ryan, I'll be the operator on the event. (Operator Instructions) Now, I'll turn the call over to Ms. E.E. Wang..

Thank you. Good afternoon, everyone, and thank you for joining the Lantronix fourth quarter and fiscal year 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 09:00 PM Eastern, 06:00 PM Pacific today through August 28, by dialing 888-286-8010 in the United States or for international callers, 617-801-6888 and entering passcode 16447251.

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 expectation.

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. During fiscal 2014, I am happy to report, we made substantial progress on the core elements of our strategic growth plan that help to offset the decline of our mature products. First, we continued discipline and innovative product development.

We released to production five new offerings, which included Enterprise Solutions that address remote management, cellular and mobile printing needs. OEM Modules for both wired and WiFi secure device networking.

And to complement our product offerings, we launched our M2M Professional Services to facilitate the product development of custom IoT applications and solutions. Second, we continued expansion of our sales efforts worldwide.

In FY '14, we deepened distributor and borrower relationships in the EMEA, APAC and Japan region, which led to an 11% growth in international Enterprise Solution sales. We expanded sales coverage in the Americas with the addition of manufacturers' representatives and key North American territories. We opened our first office in Mainland, China.

And we achieved early results from focused engagements with Tier 1 customers, as we had several wins begin to generate revenue. These wins were in the areas of medical devices, data center, hospitality, security and telecommunications.

Third, we continue to exercise financial and operational discipline, which resulted in a non-GAAP income of $948,000 in FY '14, reversing FY '13's non-GAAP loss of $935,000. This represented a $1.9 million improvement in non-GAAP profitability. In short, we did what we said we would do.

Now, we are entering FY '15 with a strong pipeline of opportunities. And as we continue to focus on engagements with both new and existing Tier 1 customers, we believe that we are well-positioned to achieve long-term profitable growth.

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 fourth quarter of fiscal 2014.

Net revenue for the fourth quarter of fiscal 2014 was $11.1 million compared to $11.1 million for the fourth quarter of fiscal 2013 and $11.6 million for the third quarter of fiscal 2014.

The sequential decrease in net revenue was impacted by an expected decline in sales of mature products, which were partially offset by increased sales of new Enterprise Solutions.

As discussed on previous calls, our revenue has a history of fluctuating from quarter-to-quarter due to the nature of our project-based sale cycle that often times has a significant impact on quarterly operating results. For the fourth consecutive quarter, we achieved gross profit margin within our target model range of 49% to 51%.

Gross profit margin for the fourth quarter of fiscal 2014 was 50.1% compared to 44.7% for the fourth quarter of fiscal 2013 and 50.9% for the third quarter of fiscal 2014. The year-over-year increase in gross profit margin was primarily the result of lower manufacturing overhead.

Selling, general and administrative expenses for the fourth quarter of fiscal 2014 were $4.1 million compared to $4.3 million for the fourth quarter of fiscal 2013 and $4.2 million for the third quarter of fiscal 2014.

Research and development expenses for the fourth quarter of fiscal 2014 were $1.7 million compared to $1.8 million for the fourth quarter of fiscal 2013 and $1.8 million for the third quarter of fiscal 2014.

GAAP net loss was $213,000 for the fourth quarter of fiscal 2014 or $0.01 per share compared to a GAAP net loss of $1.1 million or $0.08 per share for the fourth quarter of fiscal 2013, and sequentially a GAAP net loss of $130,000 or $0.01 per share for the third quarter of fiscal 2014.

Increased revenue from new products and continued operational and financial discipline contributed to our fourth sequentially quarter of non-GAAP income.

Non-GAAP net income for the fourth quarter of fiscal 2014 was $206,000 or $0.01 per share compared to a non-GAAP net loss of $665,000 or $0.05 per share for the fourth quarter of fiscal 2013, and sequentially non-GAAP net income of $331,000 or $0.02 per share for the third quarter of fiscal 2014. Now, turning to our fiscal year results.

Net revenue for fiscal 2014 was $44.5 million compared to $46.7 million for fiscal 2013. As discussed on previous calls, we continued to experience a decline in our mature products. A large portion of this decline was offset by our focused engagements with Tier 1 customers that resulted in several wins with new products during fiscal 2014.

In addition, our sales expansion efforts contributed to an 11% increase in international Enterprise Solution sales during fiscal 2014. Selling, general and administrative expenses for fiscal 2014 were $16.4 million compared to $18 million for fiscal 2013. During fiscal 2014, we invested in research and development at a similar pace to fiscal 2013.

Research and development expenses were $6.7 million during fiscal 2014 and 2013. GAAP net loss for fiscal 2014 was reduced to $933,000 or $0.06 per share from a GAAP net loss of $2.8 million or $0.19 per share for fiscal 2013.

Contribution from new product revenue and continued operational and financial discipline resulted in an improvement to our fiscal 2014 operating results as compared with fiscal 2013.

During fiscal 2014, we generated non-GAAP income of $948,000 or $0.06 per share, representing a complete reversal from fiscal 2013, when we recorded a non-GAAP net loss of $935,000 or $0.06 per share. Now, turning to the balance sheet. Cash and cash equivalents as of June 30, 2014, were $6.3 million compared with $5.2 million as of June 30, 2013.

Net inventories were $8.4 million as of June 30, 2014, compared with $8.7 million as of June 30, 2013. We believe that net inventories could increase over the next few quarters, as we transition a portion of our Enterprise Solutions products to a new contract manufacturer.

For the upcoming first quarter, we expect operating expenses to increase slightly as a result of our annual audit that takes place during the first quarter.

That 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 financial discipline. I'll now turn the call back to Kurt..

increased topline growth in Enterprise Solution business; new OEM Module revenue that will grow to reverse the revenue declines from our OEM Module product line; increased engagement with larger sales opportunities; and ultimately, long-term profitable growth 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 question..

(Operator Instructions) And our first question comes through from Krishna Shankar with ROTH Capital..

Kurt and Jeremy congratulations on good disciplined execution during the fiscal year.

I wanted to get a sense for the decline of the legacy products, where we are with respect to that cycle? And when we might see kind of an inflection from the new product design wins and revenue ramp offsetting the decline of the legacy products?.

So we're basically seeing a decline in legacy products in both our Enterprise Solutions as well as our OEM Modules. We've been able to counteract the decline in Enterprise Solutions with products that we launched in the marketplace effectively engaged with large Tier 1 accounts that generated early revenue.

On the OEM Modules, being that it's much like a semiconductor sell, it's a much more longer sales cycle. And we are expecting those revenues to start ramping in later '15 to counteract the decline of those OEM Modules.

So if we're not at that critical math now, I mean it feels like we're very close to it, when with the new OEM Modules starting to ramp later this year and the enterprise stuffs basically counteracting the decline today..

And then how much of the sequential slight decline in revenues was due to seasonality in places like Europe?.

You know, I'm not really sure about from a seasonality point of view for this quarter, typically at least last year we saw more of the seasonality with Europe actually in the September quarter and not so much in the last quarter that we closed out..

And then, the new M2M Professional solutions business, what type of hardware and software are you deploying within that sort of vertical? And what's your business strategy there versus the Enterprise Solutions and the OEM Module business-wise, that sort of carved out as a separate business for you?.

Sure. So it's not so much a separate business, but it's a way of enhancing both the OEM Modules and the Enterprise Solution.

When we have look at that the Internet of Things instead of looking at one big market, it's really a collection of a whole bunch of smaller markets, and each one of those smaller market has specific needs and customizations required. So last year we had a relatively large OEM in the security space needing a custom design to go for an access control.

And then, right now, we're working on a number of Tier 1 opportunities, where we are taking Lantronix technology and building custom products through our Professional Services organization that would basically be, what's the best way to describe it, basically be mass market products or at least versions of mass market products, but the Professional Services is designed to do the customization on our technology to get our customers from concepts to production..

And I guess, you get professional service revenues associated with this customization also, right?.

Yes, we do. And typically we see it as, is kind of around 10% of the product revenue. So it's really not substantial from a revenue standpoint, but it definitely is quite critical in getting the revenue from the concepts point over the finish line into production..

And Jeremy, I saw this new products ramp up, especially in the second half of fiscal year '15.

Do you feel that you have enough resources on the balance sheet in terms of cash and then inventory built? Can you talk about some of the cash requirements for the next 12 months as you ramp up some of these new products significantly?.

We currently believe that we have sufficient working capital for our current growth plan. So at this point, we don't view any difficulty from a working capital standpoint..

And then, I guess, gross margins, kind of in your target range already.

Well, how much more upside could there be to gross margins? You had a very nice bump from fiscal year '13 to '14, what's the longer-term trajectory of gross margins with some of these new products?.

Longer-term, we still think that our target model is where we'll be operating..

So where you are now already in terms of gross margin is kind of the target model for gross margin?.

So our target model was 48% to 51% in the last few quarters, at least four quarters, we've been operating in that range..

And we have no other questions in the queue. So I'll pass it back for any closing comments..

Thank you, operator. I would 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 fiscal 2015 first quarter results in late October..

Thanks everyone for your time and your participation. And have a great rest of the day..