E.E. Wang Lukowski - IR Kurt Busch - President and CEO Jeremy Whitaker - CFO.

Jaeson Schmidt - Lake Street Capital Markets Krishna Shankar - ROTH Capital.

Good day ladies and gentlemen, and welcome to the Lantronix Fiscal 2015 Second Quarter Conference Call. My name is Steve, and I’ll be your operator for today. At this time all participants are in a listen-only mode. We will conduct the question-and-answer session towards the end of this conference.

(Operator instructions) As a reminder this call is being recorded to replay purposes. Now I'd now like to turn the call over. E.E. Wang. Please proceed..

Thank you, Steve. Good afternoon, everyone, and thank you for joining the Lantronix fiscal 2015 second 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 February 5th, by dialing 888-286-8010 in the United States, or for international callers, 617-801-6888 and entering pass code 25853751.

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 to the SEC today and is available on our Web site, and in 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 in the Investor Relations section of our Web site, 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 turn the call over to Kurt Busch, President and CEO of Lantronix..

Thank you E.E. and thank you to everyone joining us this afternoon. Our revenues for the second quarter of FY15 were affected by delays and closing some projects based opportunities. This was primarily in our Enterprise business which is tied closely to capital spending.

The second quarter revenues were down 7% sequentially from our September quarter and 2% from the same period in FY14.

While we were disappointed with this quarter’s results, based on our overall progress for the first half of FY15 we continue to believe that we will achieve our FY15 goals, which are to grow total enterprise solution sales, increase new OEM Module revenue to reverse the decline in this product line and increase engagement with larger Tier 1 sales opportunities.

I believe this because during the quarter we continue to see year-over-year growth in revenue contribution from our new products, both in enterprise solutions and OEM modules. Our continued progress in growing new product sales was instrumental in delivering net revenue growth of 2% for the six month period ended December 31, 2014.

Total OEM Module revenues were up by 13% year-over-year and 10% year-to-date, in part due to growing contributions from our new xPico product segment.

We continue to make progress on our expanded sales efforts worldwide both in growing our total pipeline of Tier 1 engagements and increasing opportunities to our manufacturers’ rep networks as well as our worldwide distributor and VAR relationships.

During the quarter of FY15 we launched our SLC 8000 and received strong reception to this new product which we believe will translate into meaningful revenue during the second half of FY15. Bottom line we continue to make progress on our plan.

We believe that as we increase engagement with Tier 1 accounts and grow new product revenues, that we are well positioned to achieve our FY15 goals. Before I go into more detail on our progress and expectations, I’d like to turn the call to Jeremy to go over our financial highlights. .

Thank you, Kurt. Please refer to today’s news release and the financial information in the Investor Relations section of our Web site 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 2015.

As discussed on previous calls our revenue has a history of fluctuating from quarter-to-quarter due to a nature of our project based sales cycle. Net revenue for the second quarter of fiscal 2015 was $10.7 million compared with $11.0 million for the second quarter of fiscal 2014 and $11.5 million for the first quarter of fiscal 2015.

The sequential and year-over-year decreases in net revenue were primarily due to project based opportunities that did not close and sales of our mature products declined more than we expected. The year-over-year decline was partially offset by growth in our new products.

Sequentially new products were down slightly as some enterprise solutions opportunities did not close as expected. Fiscal year-to-date, new product sales were up compared with the same period last fiscal year contributing to 2% net growth for the six month period ending December 31, 2014.

Gross profit margin for the second quarter of fiscal 2015 was 48.2% compared with 49.6% for the second quarter of fiscal 2014 and 48.5% for the first quarter of fiscal 2015. Gross profit margin was lower primarily due to changes in our product mix because OEM modules increased as a percentage of total net revenue.

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 second quarter of fiscal 2015 were $4.0 million compared with $4.1 million for both the second quarter of fiscal 2014 and the first quarter of fiscal 2015.

Research and development expenses for the second quarter of fiscal 2015 were $1.8 million compared with $1.6 million for the second quarter of fiscal 2014 and $1.7 million for the first quarter of fiscal 2015.

GAAP net loss was $632,000 for the second quarter of fiscal 2015 or $0.04 per share compared with GAAP net loss of $323,000 or $0.02 per share for the second quarter of fiscal 2014, and sequentially a GAAP net loss of $262,000 or $0.02 per share for the first quarter of fiscal 2015.

Non-GAAP net loss for the second quarter of fiscal 2015 was $99,000 or $0.01 per share compared with non-GAAP net income of $177,000 or $0.01 per share for the second quarter of fiscal 2014 and sequentially non-GAAP net income of $264,000 or $0.02 per share for the first quarter of fiscal 2015.

Now turning to the balance sheet, cash and cash equivalents were $5.4 million as of December 31, 2014 compared with $6.3 million as of June 30, 2014. Net inventories were $9.3 million as of December 31, 2014 compared with $8.4 million as of June 30, 2014.

As stated during our last call, we are currently in the process of transitioning to a new contract manufacturer. During this transition period we have purchased buffer stock to reduce the likelihood of product shortages for our customers.

This buffer stock contributed to the increase in net inventories we have experienced over the last few quarters and our cash balance has been impacted. We believe that it will take approximately two to three quarters for us to sell the buffer stock.

In November 2014, we filed a new shelf registration statement on Form S-3 with the SEC since our existing shelf registration was set to expire in early 2015.

While we continue to believe our cash generated from operations is sufficient to fund our growth plan, we believe that maintaining our current shelf registration and a revolving line of credit provides management with the flexibility necessary to meet our working capital needs.

For the upcoming quarter we expect operating expenses to trend up, primarily due to increased investments in sales and marketing. That said, our primary focus remains on driving long term revenue growth while managing our spending based on revenue expectations, preserving working capital and maintain financial discipline.

I’ll now turn the call back to Kurt..

Thank you, Jeremy. As I said at the beginning of this call, we continue to feel confident in our ability to achieve our FY15 goals for several reasons.

First, we continue to make progress on our expanded sales efforts worldwide, both in growing our pipeline of Tier 1 engagements and increasing opportunities through our manufactures' rep network as well as our worldwide distributor and borrower relationships.

A 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.

Over the last several quarters we’ve seen this strategy begin to deliver meaningful results with early adoption by key customers expanding a wide range of different industries such as Medtronic, Verizon, NetApp, and others.

During the second quarter of FY15, we continue to receive significant orders for new products from a number of our existing Tier 1 accounts which helped offset the decrease in material product sales.

More recently, Konica Minolta announced in early January that it was adding a Lantronix xPrintServer Cloud Print edition mobile printing solution to its Envision IT portfolio. We are very excited to be working closely with the team at Konica Minolta. We continue to increase engagement with Tier 1 accounts.

While I cannot go into details for both competitive and confidentiality reasons, what I can say is that we believe that many of these have the potential to deliver significantly to our top-line as well as increase our opportunities with customers of all sizes.

As evidenced by our results during the second quarter, at this stage the strategy is not without potential drawbacks. As Jeremy mentioned earlier, the sequential decline in our results for the second quarter was primarily due to some project based opportunities that did not close.

One or two large opportunities can have a significant impact on our quarterly results. We believe that as we continue to engage with and win more Tier 1 accounts that we will be able to grow revenues and diminish the impact of a few customer engagements affecting our top-line.

In addition to success with larger Tier 1 accounts, we are encouraged by the increase in new opportunities generated by our expanding sales efforts worldwide to our growing VAR distributor and manufacturers’ rep networks. We expect these efforts to have a greater effect on our results moving forward.

Second, during the quarter we continued to see year-over-year growth and revenue contribution from new products, both in Enterprise Solution and OEM modules. For the year-to-date total revenues were up 2% for the six months ended December 31, 2014 compared with the same period last year.

Third, total OEM Module revenues were up by 13% year-over-year and 10% year-to-date, in part due to growing contribution from our new xPico family of products.

While new OEM Module product revenues are often lumpy and unpredictable during this stage, we were pleased with our year-to-date progress and believe we are well positioned to achieve our FY15 goal of reversing the decline in total OEM Module revenues.

Fourth, on the new product front, we launched the SLC 8000, the industry’s first module console manager, continuing our commitment to on average of one new product per quarter release to production. The SLC 8000 addresses the growing needs of the data center driven by increases in cloud computing and the adaption of IoT.

Its innovative modular design allows for customizable deployment and scalability that helps organizations 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 8000’s upgradeability and scalability allows 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 initial response to this product was very positive. We expect it to be a significant contributor during the second half of FY15.

Throughout calendar year 2015 we plan to expand both our Enterprise Solutions and OEM Module product lines to provide key solutions around manageability, security and mobility.

I’m quite excited about these new offerings as they are clearly next generation products incorporating many innovative enhancements that were defined in close collaboration with market leaders. I’m looking forward to being able to share more details with you in the coming quarters.

As we enter into the second half of FY15 we are well aware there is still more progress to be made.

With a solid portfolio of new products that are delivering increased revenue contribution and a robust pipeline of Tier 1 opportunities, we believe we are well positioned to achieve our FY15 goals, and in the long term deliver profitable growth and enhanced value to our shareholders, through disciplined and innovative product development, expansion of sales channels worldwide, financial and operational discipline.

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..

Thank you, gentlemen (Operator Instructions). That question comes from the line of Jaeson Schmidt of Lake Street Capital Markets. Please go ahead..

Firstly, wondering if you guys can talk about how much new projects are actually contributing to the top line currently, whether it would be an absolute dollar percent.

And then how you see that percentage growing maybe a year out from now?.

So right now new products are greater than 10% of our revenue but we’re really focusing on growing the new product revenue.

And if you look back at our new products that we’ve been successful with, most are in the enterprise side and we’ve gotten a lot of good opportunities there and good new customers and we’re just starting to ramp our new OEM modules which actually has been helping in the last quarter..

Okay, great. And then you guys have been pretty successful winning these designs at some big customers.

Wondering if you could talk about why you are winning? Is it price, performance, a combination of the two?.

Yes, so where we’ve been playing primarily with the larger players is engaging them closely of how we can apply our own technology to solve their next generation.

So we talked to the larger players and we really engaged closely and understand what unfulfilled needs they have for the next generation and work with them in developing a brand new product and then sell that product into the open market.

We worked closely with Verizon around our SLB product, which has also been very successful in the open market; NetApp with the new SLC 1000 and then the last other one we talked about Covidien or now Medtronic. We work closely on some customized medical products.

So, it’s really all about engaging closely with the customers and building next generation products that can be offered into the open market..

Okay, really helpful.

And then lastly, before I jump back into the queue, any comments you can provide about weakness or strength on a geographical perspective, and any concerns or your thoughts on where distribution inventory currently is?.

So I'll answer the first question.

So, for us the Americas actually was the weakest territory in the December quarter and that seems to be primarily driven by project based orders or capital spending if you will, that seemed to either get pushed out or just not moving at the same speed that we were expecting, or we had experienced in the previous two December quarters.

And Jeremy I think will comment on the specifics about inventory..

Yes, sequentially inventory at distributors went up from about $1.2 million at the end of last quarter to about $1.4 million at the end of this quarter. So a little bit over $100,000. So no major concerns with that increase in inventory.

And also based upon our revenue recognition we typically defer revenue based upon the amount of inventories held in the channel..

And your next question comes from the line of Krishna Shankar from ROTH Capital, please go ahead..

Kurt, can you give us a little more color on the project-based customer delays? What products and what types of customers were they? And would you anticipate those revenues contributing to this current quarter, the March quarter?.

So we primarily saw it in the Enterprise Solution side. There was a little bit of lumpiness on the OEM Module side but I've got to say it’s mostly on the Enterprise side and primarily it was in our products that go into things like data centers and branch offices.

The most amount of lumpiness that we saw was around our SLC product line and that’s tied very closely to capital spending around datacenters or other type applications that need to manage large numbers of equipment..

Okay.

Are those temporary delays? Would you expect those revenues to contribute in this quarter or is that pushed out for the longer period of time?.

We’re obviously working close them as quickly as possible. We basically saw a slowdown and push out in that particular business and we’re trying to get those opportunities obviously closed as quickly as we can to grow that business..

Okay. And then on the OEM side of the business, you had some good success stories there.

Can you talk about any new design win activity or any additional OEMs or how the existing large OEMs are ramping business with you?.

Yes, so we’ve got some of the first -- we’re continuing to ramp on the security side for the xPico family, and then we've recently -- I don’t know if you went to CES or not, but one of our customers there has got the xPico Wi-Fi in basically a micro drone and it actually looks pretty exciting.

It's typically an Internet of Things type of application where the xPico Wi-Fi is supplying direct assets to a handheld in a drone area. Of course this is a new market for us. So I can’t really make any kind of revenue predictions. I think anybody’s guess is where the drones will go.

But we got a lot of excitement for that particular design win, and I recommend actually watching the video..

Sir, there are no questions at this time. (Operator Instructions) There are no further questions. And Now I would like to turn the call back over to Kurt Busch for closing remarks..

Thank you, operator. I would like to thank you 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 third quarter results in late April. .

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Thank you very much. Have a very good day..