E.E. Wang – Investor Relations Jeff Benck – President and Chief Executive Officer Jeremy Whitaker – Chief Financial Officer.

Analysts:.

Good day everyone and welcome to the Lantronix’s Fiscal 2017 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 that this event is being recorded.

I would now like to turn the conference over to Ms. E.E. Wang. Please go ahead..

Thank you, William. Good afternoon everyone and thank you for joining the Lantronix fiscal 2017 first quarter conference call. Joining us on the call today are Jeff Benck, Lantronix’s President and 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 3, by dialing 877-344-7529 in the U.S. or for international callers, 412-317-0888 and entering pass code 10094900.

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 website, 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 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 Jeff Benck, President and CEO of Lantronix..

Thank you E.E., and welcome to everyone joining us for this afternoon’s call. Our results for the first quarter reflect the momentum we are building through execution of our strategic plan. The actions we’ve implemented over the last few quarters translated into a solid start for fiscal 2017, as we made progress in each of our three key initiatives.

First, driving operational excellence that led to year-over-year and sequential revenue growth, significant improvement in gross margins and our third consecutive quarter of non-GAAP profitability.

Second, accelerating growth in our IoT, IT Management business through improving the up closure rates, competitive takeaways and deeper channel engagement. This led to the second consecutive quarter of more than 200% year-over-year growth and SLC 8000 sales. Third, executing on our new product development plan and investing in strategic offerings.

Last Thursday, we launched the SGX 5150 an advanced IoT device gateway, a project that’s been under development over the past year. SGX 5150 joins the PremierWave 2050 as our latest IoT gateway product and represents another milestone in our strategy to help our customers accelerate their path to the promise of the connected Internet of Things.

Before I provide some additional color on our business during the first quarter, I’m going to turn the call over to Jeremy to discuss our first quarter financial results. .

Thank you, Jeff. 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.

Just a reminder and as stated on our last call, we have reorganized our product lines in the categories that reflect the markets we are primarily focused on.

IoT which includes our IoT Gateways and Building Blocks such as the XPort, UDS, XPico, PremierWave, SGX and EDS product families and IT Management which includes our IT infrastructure and management solutions such as the SLC 8000, SLB, and Spider product families.

In addition, we’ll be reporting results for non-focused and end-of-life products as Other. Now I’d like to take a few minutes go over our results for the first quarter of fiscal 2017.

Net revenue grew to $10.9 million for the first quarter of fiscal 2017 compared with $10.6 million for the first quarter of fiscal 2016 and $10.5 million for the fourth quarter of fiscal 2016. The increase in net revenue was primarily due to sales of our SLC 8000 Advanced Console Manager which grew 58% sequentially and 203% from the year ago period.

Gross profit as a percentage of net revenue was 52.1% for the first quarter of fiscal 2017 compared with 47.9% for the first quarter of fiscal 2016 and 47% for the fourth quarter of fiscal 2016. The improvement was primarily due to lower overhead cost, a reduction in charges for excess inventories and improved product mix.

Selling, general and administrative expenses for the first quarter of fiscal 2017 were $3.8 million compared with $3.7 million for the first quarter of fiscal 2016 and $3.4 million for the fourth quarter of fiscal 2016.

The sequential increase in SG&A was primarily due to an increase in personnel cost including sales, commissions and variable compensation related to our improved financial performance.

Our research and development expenses for the first quarter of fiscal 2017 were $1.9 million compared with $1.7 million for the first quarter of fiscal 2016 and $1.8 million for the fourth quarter of fiscal 2016. The increase was primarily due to higher personnel related expenses as described earlier.

During the first quarter of fiscal 2017, we reduced our GAAP net loss to $104,000 or $0.01 per share compared with GAAP net loss of $331,000 or $0.02 per share for the first quarter of fiscal 2016, and a GAAP net loss of $247,000 or $0.02 per share for the fourth quarter of fiscal 2016.

Non-GAAP net income was $265,000 or $0.01 per share for the first quarter of fiscal 2017, compared with non-GAAP net income of $124,000 or $0.01 per share for the first quarter of fiscal 2016 and non-GAAP net income of $121,000 or $0.01 per share for the fourth quarter of fiscal 2016.

Now turning to the balance sheet, cash and cash equivalents were $6.1 million as of September 30, 2016 compared with $6 million as of June 30, 2016. Sequentially net inventories increased from $6.6 million to $7.4 million as we began an effort to increase inventory levels to meet an increase in customer demand.

Working capital was $9.2 million as of September 30, 2016 compared with $9.1 million as of June 30, 2016. As of September 30, 2016, we had no borrowings outstanding on our line of credit. In summary, we are pleased with the progress we made this quarter.

Looking forward to next quarter, we expect to maintain gross margin at around 50% based upon our recent efforts to optimize pricing and our continued focus on manufacturing costs. Turning to operating expenses, we expect spending to be in line with the first fiscal quarter as we continue to drive discipline across the organization.

I’ll now turn the call back to Jeff. .

Thank you, Jeremy.

On our last call, I outlined three key initiatives for fiscal 2017; driving operational excellence across the business, fueling continued growth in our IT Management business through share gains and executing on our strategic product roadmap including investing in new offerings to more broadly participate in the fast growing IoT market.

First, looking at our progress in operational excellence, the change that we began making in fiscal 2016 from rationalizing our product line to implementing more ROI focus discipline in our marketing spend to investing in additional sales and engineering resources, all help to drive revenue growth, substantially reduce our GAAP losses and increase our non-GAAP net income during the first quarter of fiscal 2017.

Better sales execution and improved processes helped us achieve our strongest top-line results in eight quarters. During the quarter, we continue to add new sales resources to bring new skills and capabilities into the team. It will take time for these additions to have a significant impact but I’m already pleased by the progress we are making.

In July, we announced the official opening of our IoT software lab and subsidiary in Hyderabad, India. The new lab brings additional software skills and capacity to the team and is already playing an important role in the execution of our expanded IoT strategy.

Turning to our second initiative, we continue to drive growth in our IT Management business through share gains enabled by sales execution, effective marketing and improved channel engagement.

The SLC 8000 revenues grew by more than 200% year-over-year for the second quarter in a row and by nearly 60% sequentially from the fourth quarter of fiscal 2016. I’m particularly proud of the sales team for continuing to build on our fiscal 2016 momentum by closing some key large deals during the first quarter.

These deals were ones were we displayed key competitors and represent market share gains for Lantronix. In late August, we announced the new channel program, Smart Advantage, IT Management solutions.

The new program combined with our other channel engagement efforts have been instrumental in attracting new IT resellers as well as enhancing our relationship with existing partners. Our team has continued to engage in new, large IT management opportunities and we expect some of these deals will close during the current quarter.

With the revitalized team and channel in place and a leadership product, I feel that we are in a good position to continue making progress on this growth initiative. Finally, we continue to execute on our strategic product development efforts.

As I’ve stated before, we are in the business of delivering secured data access and management solutions that make it easier for companies to access the benefits of the Internet of Things, whether it is embedded IoT gateways that help moving trains communicate arrival time accurately to busy commuters or IoT device gateways that are used to securely connect thousands of medical devices to hospital information systems or IT management appliances that help to ensure network reliability for millions of cable subscribers watching on-demand entertainment.

In line with this vision, last week we announced the launch of our latest IoT solution, the SGX 5150, an advanced IoT device gateway and a key milestone in our strategic product development, featuring multiple device connectivity interfaces, advanced WiFi features, leading edge device access and management features and enterprise grade true port security.

SGX 5150 provides a flexible, secure and robust solution for organizations seeking to IoT enable virtually any business machine or asset. Moving ahead, we are applying our Lantronix OEM knowhow to developing advanced software solutions that will help companies simplify and accelerate enterprise IoT deployments.

These solutions will complement and add more value to our new gateway offerings by enabling end users to securely access the data generated by their smart machines and assisting OEMs in creating value added business models. Now let me wrap up.

I’m pleased with the solid start we achieved in the first quarter of fiscal 2017 and I believe it demonstrates that we are building momentum. Our team continues to move full speed ahead.

While we have a lot more to accomplish, we are 100% aligned, committed and fully believe that our plan is one that will allow us to win in the marketplace and achieve greater value for our shareholders. Before I open the call for questions, I want to thank my team for their continued hard work and execution.

We look forward to sharing our continued progress with all of you on our next earnings call. Operator, we’d now like to open the call for questions. .

Thank you. We will now begin the question-and-answer session. [Operator Instructions]. And our first questioner today is Jaeson Schmidt from Lake Street Capital Markets. Please go ahead sir. .

Yes thank you for taking my questions and congrats on your really solid quarter.

Just want to start with – have you noticed an increase in the size of the deals you’re going after or from a strategy point, are you guys focused more on larger sized deals going forward?.

Thanks, Jaeson. If you’re asking kind of around our -- we really have two focused product lines, right, IoT and IT Management products. As it pertains, IT Management products, we talked in the script about some large deals that we’ve closed that were competitive takeout and also ones that we’re pursuing.

I would say the deal size, it’s a mix, where we see customers that need a few units and then we see some very larger deals with someone’s doing enterprise deployment. So we probably participated and won some bigger deals and the pipeline is represented by a good number of those going forward.

So that might be a little bit of a shift, but it’s probably more of just a broader pipeline not just customers that have used us before but also getting a lot more competitive deals that in the past we may not have been aware of and participating there.

But I answered in the context of IT Management, did you mean it that way or were you also asking about IoT?.

Pretty much both segments, if you don’t mind. .

No, not at all. So on the IoT side, there’s a lot of OEM in and those deals I would say that we do particularly well in kind of mid-sized deals that require some unique technologies that may be the particular customer or doesn’t really want to do on their own.

We’ve also had larger design in over the years with bigger customers in the IoT space as well, but they tend to be a long time in development and when they come out and we integrate it into something, it takes time for them to ramp over the period, it can be multiple years that we’ve been designed in and we’ve enjoyed a long tail on that.

I would say, what probably stands out is more different this quarter and kind of what we see going on is some of the bigger deals on the IT Management side of things. That’s my feeling right now. .

No, thank you. That’s really helpful.

And if I could just sneak one last one in just concerning OpEx how should we be thinking about that trending going forward?.

Hey Jaeson, it’s Jeremy. As in the prepared remarks, we believe OpEx will remain relatively consistent going into the next quarter here. .

Okay. .

And sorry was just going to add to his comments, from an OpEx standpoint, there’s quite a few moving parts across the business and we’re investing in some areas and we’ve been rationalizing spend our others, while there’s quite a few moving parts we’re trying to give you some indication as to at least in the near term how we’re looking at spending in the efforts that we’re focused on.

.

Okay, perfect. Thank you. .

Sure. .

[Operator Instructions] It looks like we have no further questions, so this will conclude our question-and-answer session. I would now like to turn the conference back over to Jeff Benck for any closing remarks..

Thank you, operator. I’d 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 our second quarter results in late January. I might also add we will be participating in the upcoming LD Micro Investor Conference in Los Angeles in December.

For more information, please contact E.E. at investors@ lantronix.com. Thank you for your participation and with this we’ll end the call. .

The conference is now concluded. Thank you all for attending today’s presentation. You may now disconnect your lines..