E.E. Wang - IR Jeffrey Benck - CEO, President and Director Jeremy Whitaker - Chief Financial Officer.

Jaeson Schmidt - Lake Street Capital Markets.

Welcome the Lantronix Third Quarter Fiscal 2017 Results Conference Call. [Operator Instructions]. And please do note that this event is being recorded. And I would now like to turn the conference over to E.E. Wang, please go ahead..

Thank you, William. Good afternoon, everyone and thank you for joining the Lantronix fiscal 2017 third quarter conference call. Joining us on the call today are Jeff Benck, Lantronix President and Chief Executive Officer; and Jeremy Whitaker, Lantronix 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 8:00 p.m. Eastern, 5:00 p.m. Pacific today, through May 4 by dialing (877) 344-7529 in the United States; or for international callers (412) 317-0888 and entering passcode 10105368.

During this call, management may make forward-looking statements which involve risks and uncertainties that could cause Lantronix' 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-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'll 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. As you may have seen from our press release earlier today, we delivered another solid quarter of results.

In the quarter ending March 31, we achieved $11.5 million in revenue, representing 16% year-over-year growth and also achieved our fifth consecutive quarter of non-GAAP profitability.

Contributing to our strong results in the quarter, our IT management business has shown consistent year-over-year growth driven by winning competitive bake-offs, closing and shipping some meaningful deals and expanding our channel engagement.

Q3 was no exception, as these actions contributed to the fourth consecutive quarter of more than 100% year-over-year sales growth in the SOC 8000, our industry leading modular console manager. In addition, we continue to make progress in our IoT product line.

Our IoT products also experienced strong year-over-year growth in Q3, primarily due to the strength in our wired Ethernet product family. On the strategic front, in February, we provided an early preview and demonstration of our MACH10 multidimensional IoT management software platform.

The MACH10 technology is a key part of our strategy to move up the IoT value chain and we have been pleased with encouraging early feedback we have received from OEMs, partners, system integrators and analysts that we have engaged.

Turning to our IoT gateways, last month, we previewed our new xPico 200 product family, the world's smart embedded IoT gateway, at the embedded world Conference in Nuremberg, Germany. The xPico 200 is another addition to our growing portfolio of wireless IoT gateways and we expect to start broadly sampling this product to OEM customers this quarter.

Overall, I'm pleased with the progress we achieved with both our current product lines and with the new product initiatives that have the potential to significantly impact our long term growth.

It's clear that we're moving in the right direction and we're committed to continuing to make the changes needed to drive sustainable growth and long term value for our shareholders. Before I provide some additional insight on our business, I'm going to turn the call over to Jeremy to discuss our financial results from the third quarter..

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. Now I'd like to take a few minutes to go over our results for the third quarter of fiscal 2017.

As Jeff mentioned, net revenue for the third quarter of fiscal 2017 was $11.5 million, a 16% increase when compared with $10 million for the third quarter of fiscal 2016. And a 3% increase when compared with $11.2 million for the second quarter of fiscal 2017. The growth was due to increased sales in both our IoT and IT management product lines.

More specifically, our IoT product line increased by 14% year-over-year, primarily due to large production purchases of our export embedded Ethernet solution by two customers.

In addition, our ITM product line increased by 93%, primarily due to continued sales momentum from our SLC 8000 advanced console manager solution which benefited from a couple of large customer deployments.

Gross profit, as a percentage of net revenue was 55.5% for the third quarter of fiscal 2017, compared with 48% for the third quarter fiscal 2016 and 51.8% for the second quarter of fiscal 2017.

The improvement from the year ago quarter was primarily due to product mix, as some of our higher-margin products, such as the SLC 8000 and export contributed to a larger portion of our net revenue.

Selling, general and administrative expenses for the third quarter of fiscal 2017 were $4.4 million compared with $3.5 million for the third quarter of fiscal 2016 and $3.9 million for the second quarter of fiscal 2017.

The sequential increase in SG&A was primarily due to changes -- to charges in connection with restructuring of our EMEA sales organization and variable compensation. In addition, our marketing spend was up as we participated in 2 of our largest trade shows during the quarter.

Our research and development expenses for the third quarter of fiscal 2017 were $2.1 million compared with $1.7 million for the third quarter of fiscal 2016 and $1.9 million for the second quarter of fiscal 2017.

During the third quarter of fiscal 2017, we recorded a GAAP net loss of $162,000 or $0.01 per share which included a restructuring charge of $246,000.

This compares to a GAAP net loss of 456,000 or $0.03 per share during the third quarter of fiscal 2016 and GAAP net income of $41,000 or breakeven earnings per share during the second quarter of fiscal 2017.

I am also pleased to report our fifth consecutive quarter of non-GAAP profitability, as we achieved non-GAAP net income of $484,000 for the third quarter of fiscal 2017 compared with non-GAAP net income of $189,000 for the third quarter of fiscal 2016 and non-GAAP net income of $444,000 for the second quarter of fiscal 2017.

Now turning to the balance sheet. We generated positive cash flow from operating activities of $627,000 during the third quarter. Cash and cash equivalents increased to $7.4 million as of March 31, 2017 compared with $6 million as of June 30, 2016. Net inventories as of March 31, 2017 were $7.7 million, essentially flat with the last quarter.

Working capital increased to $9.9 million as of March 31, 2017 compared with $9.1 million as of June 30, 2016. In summary, we're pleased with the continued progress that we made this quarter. Looking forward to next quarter, we expect to maintain our gross margin above 50%.

With respect to operating expenses, we expect spending to be down sequentially, although we plan to continue to invest for the longer term. I'll allow turn the call back to Jeff..

Thanks, Jeremy.

During the third quarter, we continued to make progress on the key initiatives that I laid out at the beginning of fiscal 2017, driving operational excellence to improve the financial results of our business, while also making room for investment in our growth initiatives; accelerating growth in our IT Management product line through DONs and market share gains and executing on our strategic product road map, including investing in new offerings to more broadly participate in the fast-growing IoT market.

First, let's review our progress on operational excellence. As I've discussed on previous calls over the past year, we have implemented a number of ongoing improvements throughout our organization, including product cost reductions, focused improvement in sales and marketing execution, better pricing discipline and closely managed spending.

Our March quarter results which include 16% revenue growth, improved margins and $627,000 in cash generation clearly demonstrates the impact we could have on our business with consistent execution.

This progress is all that more striking when you consider that over the last year, we added or replaced more than half of our regional sales managers, initiated a leadership transition and restructuring in Europe and made a significant new investment in building an India-based IoT software development center.

Our efforts to rebuild and strengthen our sales team in the Americas continue to pay dividends. The revitalization in our Americas sales organization has also helped to drive new opportunities and customer reengagement, resulting in more than a 30% year-over-year growth in the quarter.

As mentioned during our last call, we have been disappointed with our performance of our EMEA region.

To address this issue, we took action to restructure our EMEA sales team, put in place a new leader, hired new sales managers to focus on specific product segments and reduced overhead costs for the purpose of reinvesting in additional sales resources in the region.

You might have noticed from our filings that we took a onetime charge to complete this restructuring and it directly impacted our GAAP profitability in the quarter.

While this transition may impact our near term results, we the expect actions we're taking now will improve our design-win performance and translate into long term growth in this key region.

At a corporate level, we were pleased to recruit an Intel IoT exec, Shahram Mehraban, to the Lantronix executive team as Vice President of Marketing during the quarter.

Shahram brings IoT industry insights, business development skills and marketing leadership that will help to round out her team, including experience in building ecosystem partnerships and alliances which will be important as we engage in more IoT deployments with our OEM customers. Turning to our second initiative.

We achieved 93% year-over-year growth in our IT Management business, as we continue to gain share through competitive takeouts, effective marketing and improved channel engagement. For the fourth quarter in a row, an SLC 8000 revenues grew by more than 100% year-over-year.

The growth and increased visibility of our SLC 8000 flagship product has also contributed to increased interest in our other ITM products. The results from our IT Management sales and marketing efforts have also attracted new channel partnerships.

Last week we announced the addition of Connector Systems, a division of Ingram Micro, as our New Zealand distributor and Rahi Systems as a new reseller of our IT Management products in India.

Since the launching our new SmartAdvantage program last August, we have attracted more than 35 new resellers worldwide, who, today, are promoting Lantronix IT management and IoT device gateway solutions. Turning to our IoT efforts. We have continued to execute on our strategic product development plan.

As I've stated before, our mission is to deliver secure data access and management solutions that make it easier for companies to access the benefits of the Internet of Things.

Over the past year, I've talked several times about our focus on defining new technologies that will help companies simplify their IoT deployment efforts and expand our solutions beyond just hardware.

In line with this vision, in January, we took a major step with the announcement that we were developing MACH10, a new IoT management software platform.

This OEM centric platform leverages Lantronix' more than 25 years of first-hand experience as an IoT hardware and embedded software provider to thousands of OEMs and has been architected from the ground-up to address the gaps we see in the marketplace.

Today, most IoT platforms provides infrastructure to move data between the device and cloud, leaving the complexity of building applications around the data to the OEM. MACH10 starts where other IoT platforms stop by enabling OEMs to quickly and profitably deliver web scale IoT applications and services.

In March, we provided an early preview of this new platform at embedded world and we have already started demonstrating the platform with select IoT customers and industry analysts. The early feedback has been positive and we intend to have more customers working with the platform as we continue our development.

We expect to formally launch the first release later this calendar year. As some of you may recall, we've talked previously about how we're in the business of delivering IoT Gateway solutions. Today, there is often a lot of confusion around the different options that OEMs have for developing their smart connected products.

Many IoT solutions, such as chips and modules appear to be cheaper but require extensive added investments in time, certification and engineering resources to deliver a complete IoT solution.

Lantronix has long been known for delivering robust connectivity solutions and with our new IoT gateways, we're focusing on providing additional functionality and features that allows OEMs to further accelerate their IoT deployments.

During the third quarter, we continued to make progress on this front with the preview of our new xPico 200 product family, the industry's smallest embedded IoT gateways.

Along with the FCX 5150 and PremierWave 2050, the xPico 200 family has targeted OEMs seeking to jump start their development of smarter connected devices by providing robust wireless connectivity, enterprise-level security, industrial grade design and integrated IoT management software powered by MACH10.

The xPico 200 family will be another addition to the Lantronix growing portfolio of wireless IoT Gateway solutions. And we expect to start sampling this embedded solution with OEM customers later this quarter. Now let me wrap up. I am pleased with the results we achieved in the quarter.

Our team continues to push full speed ahead as we move toward the end of our current fiscal year and plan for the start of fiscal year 2018. While we have a lot more to accomplish, we're 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.

With that, I complete our prepared remarks for today. So at this point, I'll turn it over to the operator to initiate our question and answer session..

[Operator Instructions]. And it looks like our first questioner today is going to be Jaeson Schmidt with Lake Street Capital Markets..

Just want to start on the IT Management side.

You guys have obviously, had great success with the SLC 8000 product, can you give us a sense of where you think your market share currently is and potentially we're you could grow that to longer term in that space?.

Yes. Sure Jason. This is Jeff. We -- this is an area that -- we've spent a little bit of time with the analyst community and it's not well tracked, even though it's more than a $100 million market that we know just from looking at that the competitor filings. We believe that we're in a single-digit share position.

Obviously, with the growth that we've experienced, we can firmly and confidently say we gained share, but we still believe that we're in the single-digit range.

So even though this market is a mature market, not growing really fast, we believe there's growth opportunity for us because we have a great offering and we've been pretty focused on that segment.

We also are seeing some new opportunities in like development environments where a technology company might use our console management to develop a new storage controller or a new switch that they plan to bring to market and that's kind of interesting because there seems to be some growth opportunity in that subsegment of this space.

But that's kind of our view at this point, that we still have plenty of opportunity for share gain going forward..

Okay. That's helpful.

And then just looking at MACH10, do you anticipate needing to continue to pour in any investment on that front or I assume most of the heavy lifting has already been done?.

Yes. We're pretty far into the development as you might expect, being able to get to both the demo that we did at embedded world and some of the engagement we've had with customers and analysts. We're still in development. We still have more work to do. We have increased our investment in the team in India.

So we have continued to add resources to our software lab that we initiated there just about a year ago. We also have continued to do some select hiring in the U.S. as well, supporting that team. We added a Director of Engineering in the U.S. to further help that.

We've been able to -- really been able to accommodate that within our -- within the spend that you see. And we don't see that -- a material change there, but we will continue to invest as we go forward and engage more customers and develop more applications.

But I'm pleased that we've been able to put what's been a rather significant effort within the plan. And it was part of the restructuring we did almost a year ago to kind of give us room to put additional investment in. But that's kind of where we're right now..

Okay. And just going off that, I know it seems like there were a few kind of one-time in nature expenses in the March quarter and you expect OpEx to decline in June.

Jeremy, can you give a sense of how severe that decline will be? Are we talking more towards that December quarter OpEx level?.

Yes. So in the quarter we just reported, they is about $246,000 charge related to the restructuring that we did in Europe. In addition, it is a kind of heavy trade show quarter for us, so marketing expenses were up compared to where they were in the previous quarter.

And going into next quarter, we would to expect some of those marketing costs to come down as it's a more normal quarter. So I don't necessarily think it's a severe decline in spending but definitely a small decrease..

Okay. And then the last one for me and I will jump back into Q1.

Can you just talk about your general visibility, where it is today compared to 3 months ago? Have you seen any improvement? And kind of how we should think about the outlook, bigger picture, for the year?.

Yes.

Visibility, we've tried to put a lot of effort into our forecasts and the forecast methodology and I feel like over the course of the year, we've improved in terms of understanding our customers that we sell to and engage with, but we still sell quite a bit through the channel and our IoT products go through two-tier distribution, so that sometimes blurs things for us.

We feel pretty good about the execution that we've had. We've got a number of opportunities that we can continue to pursue. Having put up a couple of quarters of growth, when we look at the full year, we feel pretty confident that this looks to be a growth year for us.

We've been kind of hesitant to look out too much further in terms of what we might guide. But we're just kind of heads down focused on educating the plan that we laid out and demonstrating that we can gain share getting design wins for our IoT product lines and bringing MACH10 to market.

And that's a bit of a wildcard for us because it's obviously not in the plan yet. And it will take some time but we're excited that we've been able to contain the investment in that brand-new platform within our profile as you see represented here. So that's kind of -- that's about as far as I'm willing to go today.

But I'm generally feeling pretty good about the business..

[Operator Instructions]. There look to be no further questions, so this will conclude our question and answer session..

Thank you, William. At this point, we'll look forward to updating you on our progress, achievements and actions when we report out our full-year results in late August. And with that, we'll conclude the call for today. Thank you for attending..

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