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

Krishna Shankar – ROTH Capital.

Presentation:.

Good day ladies and gentlemen, and welcome to the Lantronix, Inc. Fiscal 2015 First Quarter Earnings Conference Call. My name is Jasmine, and I'll be your operator for today. (Operator instructions) And I would now like to turn the conference over to your host for today, Ms. E.E. Wang. Please proceed..

Thank you, Jasmine. Good afternoon, everyone, and thank you for joining the Lantronix fiscal 2015 first quarter 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 November 6, by dialing 888-286-8010 in the United States or for international callers, 617-801-6888 and entering pass code 26457522.

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 to 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 reconciliations 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. As I said on our last call, our FY15 goals are growing total Enterprise Solutions sales, increasing new OEM modules revenue to reverse the decline in this product line, and increase engagement with larger tier 1 sales opportunities.

Our results for the first quarter of FY15 reflect continued progress on our plan as we recorded year-over-year and sequential revenue growth and achieved our fifth consecutive quarter of non-GAAP profitability. Our top line growth can be largely attributed to increased contribution from new product introduction.

Revenue from new Enterprise Solutions outpaced the decline of Legacy products, resulting in a 4% year-over-year growth and the second consecutive quarter of total Enterprise Solutions growth. Revenue in our OEM Modules product line also was up sequentially and year-on-year in large part due to wireless and new product sales.

The majority of new product revenue is being generated by solving significant IoT issues around security, management and mobility in close collaboration with tier 1 lead customers. These customer relationships have been critical to our new product definitions and have greatly facilitated early revenue ramps.

Before I go into more detail on our progress and expectations, I 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 2015.

Net revenue for the first quarter of fiscal 2015 was $11.5 million compared to $10.9 million for the first quarter of fiscal 2014 and $11.1 million for the fourth quarter of fiscal 2014. The year-over-year and sequential increases in net revenue were primarily due to increased sales of new products.

Gross profit margin for the first quarter of fiscal 2015 was 48.5% compared to 49.5% for the first quarter of fiscal 2014 and 50.1% for the fourth quarter of fiscal 2014. The decrease in gross profit margin was primarily the result of higher costs related to manufacturing overhead and to a lesser extent product mix.

Over the long term, we continue to target a gross profit margin in the range of 49% to 51%. Selling, general and administrative expenses for the fourth quarter of fiscal 2015 were $4.1 million compared to $3.9 million for the first quarter of fiscal 2014 and $4.1 million for the fourth quarter of fiscal 2014.

Research and development expenses for the first quarter of fiscal 2015 were $1.7 million and relatively consistent with both the first quarter of fiscal 2014 and the fourth quarter of fiscal 2014.

GAAP net loss was $262,000 for the first quarter of fiscal 2015 or $0.02 per share compared to a GAAP net loss of $267,000 or $0.02 per share for the first quarter of fiscal 2014, and sequentially a GAAP net loss of $213,000 or $0.01 per share for the fourth quarter of fiscal 2014.

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

Non-GAAP net income for the first quarter of fiscal 2015 was $264,000 or $0.02 per share compared to non-GAAP net income of $220,000 or $0.01 per share for the first quarter of fiscal 2014, and sequentially non-GAAP net income of $206,000 or $0.01 per share for the fourth quarter of fiscal 2014. Now, turning to the balance sheet.

Cash and cash equivalents were $6.3 million as of both September 30, 2014 and June 30, 2014. Net inventories were $8.5 million as of September 30, 2014, compared with $8.4 million as of June 30, 2014.

As stated during our last call, we believe that net inventories could increase over the next few quarters, as we transition some of our production to a new contract manufacturer, which may also impact cash. On September 30, 2014 we amended our $4 million revolving line of credit to extend the maturity date to September 30, 2016.

In addition, the amendment substantially increased our borrowing capacity from $1.7 million as of June 30, 2014 to $3.2 million as of September 30, 2014. There are no existing borrowings on the line of credit.

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 quarterly operating results. For the upcoming quarter, we expect operating expenses to trend up in part due to headcount-related costs.

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..

Thank you, Jeremy. Our results reflect the steady progress we are making on our strategic plan to drive Lantronix towards long-term profitable growth through disciplined and innovative product development, expansion of sales channels worldwide and continued financial and operational discipline.

As I discussed previously, the core part of our product development philosophy involves close collaboration with Tier 1 lead customers to address the security, management and mobility challenges that we believe are foundational to the Internet of Things.

In the last quarter, the majority of our top line growth can be attributed to this element of our strategy.

As we continue to see increased contribution from new products that were developed through early engagements with market leaders and we have seen adoption by key accounts spanning a number of different industries, including telecommunications, healthcare, hospitality, data center and retail.

Recently we launched the SLC 8000, the industry's first modular console manager. This product addresses growing needs of the data center driven by increases in cloud computing and the adoption of IoT.

The SLCs innovative modular design allows for customizable deployment and scalability that helps IT professionals reduce cost by providing secure, centralized, out-of-band management for most IT equipment.

Not only does the SLC 8000 manage the vast majority of current networking equipment, its modular design allows for infield upgrades to future management interfaces.

The new SLC’s upgradeability and scalability allows our customers to work with today’s increasingly diverse installed base of devices, as well as providing support for cutting-edge equipment now and in the future. The SLC 8000 was launched in early October at trade shows in the US, Europe and Japan.

We have been very pleased with the initial response to this product and we expect it to be a significant contributor in FY ’15. Our go to market strategy includes partnering with top providers to deliver seamless integration with Lantronix products.

During Q1, we announced a marketing and technical partnership with Server Technology, a leading producer of high-quality rack mounted power solutions.

Through this partnership our console management customers can now have seamless integration and interoperability with Server Technology’s solution allowing both system and power management for large-scale deployments from a single user interface.

Today Lantronix has a growing number of partnerships with leaders in the end to end and IoT space that allow our customers the freedom and ability to connect easily with wireless services, device cloud, analytic engine and hardware solution. During FY ’15 we expect to deepen these relationships and to continue to expand our network of partners.

On the sales front we continue to make progress on our sales efforts worldwide. In August we celebrated the one year anniversary of the opening of our Mainland China office. While we are still in the early stages in this region, we are pleased with the traction to date and in the long term we expect this region to be a significant contributor.

In Europe, expanded efforts related to our Enterprise Solutions have created several key opportunities for our new wireless product that we expect to be major growth drivers for this region. In the Americas we continue to build out our manufacturer rep network in key geographies.

The addition of manufacturer’s reps has increased the number of sales people that are presenting our product and expands the number of opportunities we can pursue. We continue to manage our business with strong financial and operational discipline.

These efforts resulted in our achieving 6% year-over-year revenue growth and for the fifth consecutive quarter non-GAAP profitability. While we are pleased with our efforts for the first quarter, our focus remains on our long-term objective of profitable growth and enhance value for our shareholders.

In summary, today Lantronix has a solid portfolio of new products that are gaining traction in the marketplace and expanding presence within the worldwide markets that includes key relationships with tier 1 customers and leading industry players and operational and financial discipline that has delivered five consecutive quarters in non-GAAP profitability.

Before I turn the call over for questions, I 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 our first question comes from the line of Krishna Shankar with ROTH Capital. Please proceed..

Yes, Kurt, can you give us an update on some of the large OEM deals that you are working on in several vertical markets, how they are proceeding and can you give us some examples of these deals as they ramp into production for you?.

Sure. Thanks for calling in Krishna.

So we have been working with a number of large OEMs over the last year plus to define new products and basically the process is we work with large OEMs where we can apply Lantronix technology to fulfill an unserved need that they have, work with them closely so that they can go to production relatively quickly after we release the products to production, and then we sell those products to the general market.

So they are not quite custom, but they are fulfilling the need seen from some of the larger OEMs, and the ones I like to talk about are ones that have been significant contributors to the new product revenue over the last year and those areas have been in say telecom/retail area with Verizon in the retail stores.

We have had a nice agreement there that has been contributing nicely. On the wireless side we have been working well with [Covidien] around healthcare and then on some data center type things we have been working closely with NetApp. And we always have a number of these going and it is really driving our new product introductions.

We are quite happy with it and so far it has been primarily driving the top line revenue on the enterprise side of things, on the Enterprise Solutions side, but we are working with this to also increase revenue on the OEM Modules and we think overall the tier 1 engagements are going to be the main driver at least for early revenue.

As these products enter the marketplace then they will start getting more of the long tail revenue with many of the smaller customers..

(Operator instructions) there are no remaining questions in queue at this time. I would like to hand the call over to management for any closing remarks..

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 second quarter results in late January..

Thank you very much. This concludes today’s conference. Thank you for your participation. You may now disconnect. So you all have a great day..