E.E. Wang - IR Kurt Busch - CEO Jeremy Whitaker - CFO.

Analysts:.

Good day and welcome to the Lantronix's Fiscal 2016 First Quarter Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there’ll be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Ms. E.E.

Wang, Investor Relations. Please go ahead..

Thank you, Casea. Good afternoon everyone and thank you for joining the Lantronix first quarter of fiscal 2016 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 08:00 PM Eastern, 05:00 PM Pacific today through November 5, by dialing 877-344-7529 in the U.S. or for international callers, 412-317-0888 and entering pass code 10074744.

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-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 will now 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.

During the first fiscal quarter ended September 30, 2015, we continued to execute on the fundamental elements of our strategy, developing and launching smart IoT and M2M solutions, expanding our sales and marketing efforts worldwide and exercising financial discipline while investing for growth.

Growth in new IoT modules, and our new SLC 8000 advanced console manager helped to deliver sequential total revenue growth in the first quarter of FY16. Lower-than-expected sales in some of our project driven new enterprise solution led to flat new product revenues for the quarter.

We saw continued improvement in our gross margins for the second quarter in a row and a return to non-GAAP profitability during the first quarter of FY16.

On the product development front, we announced the next generation version of the xPrintServer Office, the first and only print server appliance that supports thousands of printer models and is both Apple AirPrint and Google Cloud Print certified.

We are finalizing development of a new private label custom print server for a major printer manufacturer. We expect to begin shipping this product as soon as we complete a final certification. Earlier this week, we announced an agreement with Avnet, Incorporated, a leading technology distributor.

Under the terms of the agreement, Avnet will distribute Lantronix IoT modules and solutions throughout North and South America. This agreement expands the ecosystem we are building as part of our goalof enabling the Internet of Things, and represents a significant milestone in our continued effort to expand our sales and marketing channels.

With the current outlook of opportunities, designs and project wins we expect a return to revenue this fiscal year. We remain confident that we will achieve double-digit new product revenue 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 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 2016.

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 cycles.

Net revenue was 10.6 million for the first quarter of fiscal 2016, a decrease of 963,000 compared with 11.5 million for the first quarter of fiscal 2015, and an increase of 342,000 compared with 10.2 million for the fourth quarter of fiscal 2015.

The year-over-year decrease in net revenue was primarily due to a 10% decline in Legacy Product sales, which is relatively consistent with the trend we have seen in our Legacy Products over the last couple of years. In addition, we continue to see weakness in capital spending from some of our US-based customers.

New product revenue was 1.9 million for the first quarter of fiscal 2016, compared with 1.7 million for both the first quarter of fiscal 2015 and the fourth quarter of fiscal 2015. New product revenue continues to be impacted by the project-based nature of our sales cycle.

For example, our Secure Lantronix Branch Office Manager or SLB 2 benefited from a large rollout with Verizon during the first quarter of fiscal 2015. Verizon continued to purchase the SLB 2 during the first quarter of fiscal 2016, but at a lower rate.

On a positive note we recognized revenue from the completed delivery of the first significant production order for a consumer drawn application, using our xPico Wi-Fi IoT module.

In addition, our SLC 8000 advanced console manager continued to gain traction in the console market, and revenue for this new product benefited from a project rollout at a tier one networking solutions provider.

Gross profit as a percentage of net revenue was 47.9% for the first quarter of fiscal 2016, compared with 48.5% for the first quarter of fiscal 2015, and 47.1% for the fourth quarter of fiscal 2015.

Selling, general and administrative expenses for the first quarter of fiscal 2016 were 3.7 million compared with 4.1 million for both the first quarter of fiscal 2015 and the fourth quarter of fiscal 2015. We continued to invest significantly in product development.

Research and development expenses for the first quarter of fiscal 2016 were 1.7 million compared with 1.7 million for the first quarter of fiscal 2015 and 1.8 million for the fourth quarter of fiscal 2015.

GAAP net loss was 331,000 or $0.02 per share for the first quarter of fiscal 2016, compared with a GAAP net loss of 262,000 or $0.02 per share for the first quarter of fiscal 2015 and a GAAP net loss of 1 million or $0.07 per share for the fourth quarter of fiscal 2015.

Our focus on exercising financial discipline contributed to a return to non-GAAP net income for the first quarter of fiscal 2016. Non-GAAP net income was 124,000 or $0.01 per share, compared with a non-GAAP net loss of 575,000 or $0.04 per share for the fourth quarter of fiscal 2015.

And 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 4.7 million as of September 30, 2015 compared with 5 million as of June 30, 2015.

Consistent with the prior quarter, we had an outstanding borrowings on our revolving line of credit of 700,000 as of September 30, 2015. Net inventories were 9 million as of September 30, 2015 compared with 9.5 million as of June 30, 2015.

As of September 30, 2015, our working capital was 7.6 million, which we believe is sufficient to achieve our current growth plan. For the second fiscal quarter ending December 31, 2015 we expect to see operating expenses to trend up slightly as we continue to invest in new product development.

That said, our primary focus continues to be driving revenue growth while managing spending based upon revenue expectations, preserving working capital and maintaining financial discipline. I'll now turn the call back to Kurt..

Thank you, Jeremy. As I stated on previous calls, our growth strategy is focused on disciplined and innovative product development in close collaboration with tier 1 customers, expansion of sales channels worldwide and exercising financial discipline while investing for growth.

During the first quarter we are continuing to make progress on all of these fronts. We were pleased to report improved sequential sales during the first quarter of FY16 as we achieved modest sequential revenue growth, improved gross margins, a return to non-GAAP profitability, and improved working capital.

On the product development front, we launched the next-generation xPrintServer Office, the only print server appliance supporting thousands of printers that is both Apple AirPrint and Google Cloud Print certified. We are reaching completion of a private label custom print server product that leverages our xPrintServer technology.

Designed for a top global printer manufacturer this new product is currently going through one last certification and we expect to begin shipping this product later this quarter or early Q3. We expect this project to turn into a significant long-term relationship.

Moving into the next few quarters, we are in the final stages of development of a new IoT module platform that we expect to launch during next year’s Embedded World in February. This new wireless platform is already in the sampling phase with key beta customers.

Initiate response has been very positive and we expect this to be a key revenue driver for new IoT modules. Focusing on our new product sales, we continue to attract new orders and design win opportunities for our new enterprise solutions and IoT modules.

Some examples include we delivered the first significant production order for a consumer drone application using our xPico Wi-Fi module.

In addition, we added new design wins for IoT modules from a diverse group of customers, exploring a wide range of applications, including medical, environmental monitoring, resource monitoring and commercial applications.

Where the bulk of our business continues to come from the Americas and the EMEA, we are pleased to see that our sales expansion efforts in China are starting to pay off as we saw increased design wins and opportunities coming from local Chinese companies. Most of our new IoT module customer engagements are still in the early phases.

We are aggressively expanding our design win pipeline through close customer engagements and key partner relationships. We believe that these opportunities and design wins move to production we are on target to achieve our goal of double-digit new product growth in FY16.

On the new enterprise solutions front, SLC 8000 sales continue to grow, attracting new customers from a wide range of industries including network computing, data center, video broadcast and remote management.

We recently became a Cisco Preferred Solution Partner, and expect to continue to leverage the Cisco ecosystem to drive opportunities for our enterprise solutions. We expanded the available market for the SLC 8000 by obtaining FIPS 140-2 Level 1 certification. FIPS is a security standard that IT systems that is mandatory for many U.S.

and Canadian government and military applications and is also increasingly becoming a requirement for financial services and healthcare applications.

Building on our high levels of security and robustness, along with enhanced product safety we have several recent project wins to our EDS-MD product lines of medical IoT gateways, which we expect to generate revenue in the coming year.

In Q1, we saw lower sales from some of our new enterprise solutions due to the project nature of the sales in this product line. As our pipeline of opportunities, evaluations and project wins continues to grow and convert to orders and shipments, we believe that we will achieve double-digit growth in new products for FY16.

We recently announced a distribution agreement with Avnet, a leading global electronic components distributor. The Avnet agreement is a key part of positioning Lantronix as a leading enabler for the Internet of Things.

By expanding our ecosystem through deepening engagements with top industry leaders such as Broadcom, Arrow, as well as our global network of specialized resellers and distributors we are continuing to elevate our position as an innovative provider of robust quality IoT enablement solutions that can help many small to large companies worldwide seeking to participate in the Internet of Things.

Lantronix IoT modules, enterprise products and software help to deliver leading edge security, mobility and management to make it easier and faster for a customer to deploy an IoT solution, whether it is a startup trying to launch a connected nano drone, or a multibillion-dollar medical device company, working to IoT enable existing devices.

Today we believe that the market opportunity for Lantronix continues to remain strong. As stated in our news release today, or yesterday, a study done by Vodafone and Circle Research estimates that less than one fourth of companies worldwide have yet to adopt or complete a single IoT project. Yet, nearly 80% plan to do so within the next two years.

We believe this study demonstrates the significant opportunity available to Lantronix today.

With a growing portfolio of focused IoT products that are starting to gain traction in the marketplace, expanding sales channels, and financial discipline, we believe that Lantronix is well-positioned to create significant value for our shareholders as we work to help the many companies seeking to leverage the power of the Internet of Things.

Before I turn the call over for questions, I would 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:.

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 FY16 results in late January 2016..

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect..