Good day, and welcome to the Lantronix 2019 Q3 Results Conference Call and Webcast. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will 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 Mr.

Shahram Mehraban, Vice President, Marketing. Please go ahead..

Thank you, operator. Good afternoon, everyone, and thank you for joining the Lantronix third quarter fiscal 2019 conference call. Joining us on the call today are Paul Pickle, 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 our company’s website. In addition, a phone replay will be available starting at 8:00 P.M. Eastern and 5:00 P.M. Pacific today through May 24 by dialing 877-344-7529 in U.S., or for international callers, 412-317-0888 and entering passcode 10130426.

During this call, management may make forward-looking statements, which involve risks and uncertainties that could cause our 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 publicly – or update publicly any forward-looking statements to reflect future events or circumstances.

Please also note that during this call, the company will discuss design wins, which are defined by the company as a verbal or written commitment from a customer to use the company’s products in their designer implementation. There is a risk that some of these design wins may not enter into production.

Furthermore, during the call, the company will discuss some non-GAAP financial measures. Today’s earnings release, which is posted on 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.

With that, I’ll now turn over the call to Jeremy Whitaker, Lantronix’s Chief Financial Officer..

Thank you, Shahram, and welcome to everyone joining us for this afternoon’s call. I’m going to provide the financial results, as well as some of the business highlights for our fiscal third quarter, before I hand it over to Paul for a few remarks.

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 commentary. We delivered a solid quarter with continued top line growth and increased profitability.

For the quarter ended March 31, 2019, we reported $12.3 million in net revenue, an increase of 6%, compared to a $11.6 million for the third quarter of fiscal 2018 and $12.1 million for the second fiscal quarter of 2019. Year-to-date, net revenue grew by 10% for the nine months ended March 31, 2019.

Net revenue from our IoT product line was down sequentially by 1%. In general, our core IoT product revenue remained stable and the accelerated growth for this product line continues to be predicated upon new product rollouts at our OEM customers. As discussed on our last call, these OEM product rollouts are ramping slower than anticipated.

Net revenue from our IT Management product line was up 63% from the year ago quarter and a 11% sequentially. The growth was driven by a record quarter for SLC 8000 out-of-band management solution, which included a large deployment by American Express for use in their enterprise data centers.

In addition, our SLB remote branch office solution contributed to the growth, as JPMorgan Chase continued to rollout our solution. Furthermore, I’m pleased to report that one of our distribution partners received an order for our newest cloud-based centralized management software application for remote management of our IT Management products.

Gross profit as a percentage of net revenue was 57.4% for the third quarter of fiscal 2019, as compared with 56.8% for the third quarter of fiscal 2018 and 55% for the second quarter of fiscal 2019.

The sequential improvement in margin was primarily due to product mix, as we had a record quarter for sales of our SLC 8000, which is one of our highest-margin products. Additionally, we benefited from our ongoing efforts to mitigate tariff expenses, which includes moving our contract manufacturing from China to Southeast Asia.

Selling, general and administrative expenses for the third quarter of fiscal 2019 were $3.9 million, compared with $4.2 million for the third quarter of fiscal 2018 and $4.2 million for the second quarter of fiscal 2019. The sequential decline was related to lower compensation costs in connection with the departure of our previous CEO.

We continue to invest in new products. Research and development expenses for the third quarter of fiscal 2019 were $2.4 million, compared with $2 million for the third quarter of fiscal 2018 and $2.3 million for the second quarter of fiscal 2019.

GAAP net income was $857,000, or $0.04 per share during the third quarter of fiscal 2019, compared to GAAP net income of $344,000, or $0.02 per share during the third quarter of fiscal 2018, and GAAP net income of $277,000, or $0.01 per share during the second quarter of fiscal 2019.

I’m pleased to report our 13th consecutive quarter of non-GAAP profitability, as we achieved non-GAAP net income of $1.3 million, or $0.05 per share for the third quarter of fiscal 2019.

This compares to non-GAAP net income of $767,000, or $0.04 per share for the third quarter of fiscal 2018, and non-GAAP net income of $790,000, or $0.03 per share for the second quarter of fiscal 2019. Cash and cash equivalents were $18.2 million as of March 31, 2019, as compared to $9.6 million as of June 30, 2018.

Working capital improved to $26.8 million as of March 31, 2019, an increase of $13.3 million, as compared with $13.5 million as of June 30, 2018. The increases in cash and working capital primarily relates to our September 2018 public offering.

As expected, net inventories increased to $9.8 million as of March 31, 2019, compared with $8.4 million as of June 30, 2018, and we expect inventory to remain at current levels.

As discussed on our last call, we have been executing on a plan to reduce our exposure to China manufacturing by moving the contract manufacturing of a large portion of our products to facilities in Southeast Asia. We expect manufacturing substantially all of our products in Southeast Asia during our first quarter of fiscal 2020.

Through good execution by our operations team, we were able to limit our tariff costs during the third quarter to approximately $75,000, representing an amount well below our initial forecast of $200,000. We anticipate a similar level of tariff-related costs during the fourth fiscal quarter as we experienced in the third fiscal quarter.

Now I will provide guidance on revenue and earnings for the fourth quarter of fiscal 2019. Considering our current outlook, we expect to deliver net revenue in a range from $11.4 million to $12.2 million. We expect GAAP diluted earnings per share in a range from $0.00 to $0.02 and non-GAAP diluted earnings per share of $0.02 to $0.04.

Now I would like to introduce our new CEO, Paul Pickle. Paul joins us after having most recently served as COO and President of Microsemi Corporation. As you may be aware, Paul started on Monday of this week. And over the last few days, he has been actively getting acquainted with the team and getting up to speed on the company.

So with that quick introduction, I’ll now turn the call over to Paul..

Thank you, Jeremy. I have to say, it’s already been an eventful few days here at Lantronix, and I look forward to continuing to dive into the operation over the next couple of quarters. This June marks Lantronix’s 30-year anniversary.

And during that time, Lantronix has provided reliable industrial grade networking products that have enabled mission-critical applications for thousands of customers worldwide. In recent years, the product offering has been expanded to target growth markets and IoT and IT Management.

As we all know, IoT is growing across a number of verticals, including industrial, medical, energy, transportation and retail as end customers in these segments are rapidly adopting IoT technologies to transform their businesses.

IT Management is also growing beyond the traditional enterprise and cloud data center applications with the adoption of software-defined networking and edge computing solutions, as more and more data center class products are being deployed at the edge to address the computing challenges that comes with the projected growth and connected devices.

Lantronix has an incredible base of royal customers to whom we can expand our current engagements as we navel them to accelerate their digital transformation vision. Our premium solutions are delivered and supported by a highly talented and technical team.

In recent times, the company has substantially improved its financial performance, while executing on product development. Given our strong cash position, all cards are on the table in terms of executing our strategy, both organic and inorganic.

The hallmark of every great organization is an ability to respond quickly to market requirements and dynamics in the most efficient way possible delivering solutions that customers want at a price they expect, combined with a determined and responsible leadership team.

I’m grateful for the opportunity to lead the company in these next chapters of the growth. So at this point, I’ll turn it back over for Q&A..

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Your first question comes from Jaeson Schmidt with Lake Street. Please go ahead..

Hey, guys, thanks for taking my questions. I just want to start with your commentary on the continued slower ramp in the IoT business.

Do you expect that to persist here in the June quarter? And relatedly, can you just remind us sort of what’s the reason behind some of the slower ramps?.

Yes. I – I’ll turn it over to Jeremy. In the few days that I’ve had, I have had a chance to look at some of the tibiae [ph] that sales team put together. I’ll say, for the most part, it appears that this is going to continue probably for a couple of quarters.

It’s probably largely dependent on some of the implementations that customers have had in getting those calls down for their products and rolled out and some dependency on CapEx cycles at their customers.

Would you say that?.

Yes. I would say, yes, in general that’s what we’re seeing at customers. We discussed this a little bit on our call last quarter and that we had higher growth expectations for IoT business much of that being driven by the design wins that we have with customers out there.

And as Paul mentioned, what we’re seeing is, while we’re not necessarily seeing designs go away, what we’re seeing is that our customers in our OEMs that their ability to enter the market with their products is happening at a rate that’s slower than what we had anticipated..

Yes. We haven’t seen any new requirements come back from the customers in terms of changes. So the designs are there. It’s just a matter of when they ramp up..

Okay, that’s helpful. And looking at the ITM segment, you guys showed some really nice growth there.

Any additional color on how the customer engagement pipeline has tracked over the past quarter? And if this growth is being driven by a couple customers, or if it is the addition of new customers?.

It’s a combination of both. The team has really over the last couple of quarters really focused on driving proof-of-concepts with customers and what that entails is getting demo units into them and getting them to try their product.

And we believe that as we drive more proof-of-concepts, ultimately that drives more opportunities and more sales in this product line. So it’s been a combination of both, some larger customers doing rollouts and also we believe it’s – there’s also more of a run rate business that – that’s happening as well..

Okay. And the last one for me, and I’ll jump back into queue.

How should we think about OpEx for this calendar year?.

Yes. So, in light of the current outlook on the revenue, we are looking to moderate SG&A spending a bit, but we are continuing to invest in R&D. So, in general, I would think that OpEx is going to remain relatively flat as we look ahead to next quarter..

Okay. Thanks a lot, guys..

Thank you. Your next question comes from Rich Valera with Needham & Co. Please go ahead..

Hi, guys, this is Roger Boyd on for Rich. A couple of questions. Just want to dig deeper on the IoT products. I think last call you had mentioned, you had around 35 wins for the xPico series.

I wonder if you could give an update on that number and maybe sort of an update on kind of the cadence of how you’re expecting to ramp? And then on export edge, you’ve been shipping that product for a little over a quarter.

Just wanted to see if you have any qualitative feedback on how that product is being received?.

Okay. Starting with the designs on the wireless – on the xPico, we’ve had an increase in design wins throughout the quarter, six new design wins this quarter, so we’re up to about 41 for that progress. So we’re continuing to see some good traction in design win activity with that product..

Wired has been actually going, not just designing, but wired IoT revenue has been going up, even though the wireless has been pushed out as well?.

Yes, correct. So we have seen on the wired side with the Ethernet business, in particular, with the export and some of the other wired products that has been performing at expectation or even a little bit better. As it relates to some of the new designs on the export edge, that’s a recent – been recently entered into the market.

So that will take longer time before we start seeing any meaningful revenue from that product related to the design wins..

Yes. And I think primarily, if you kind of look at the market segment that we have some of the design interaction with, it’s – from my past experience, it’s not totally unexpected. In medical, you’ll quite frequently see production ramps push out as they pass security audits.

There is a hip of compliance that they have to go through and continue with additional certification. So medical and industrial – medical is notorious a little bit longer cycle, industrial can can push out as well did in security..

Makes sense. Thanks for the color. And then it sounds like you had a nice win with ConsoleFlow in the quarter.

Just wanted to see if you had anymore color on how the software at go-to-market is going?.

Yes. So we are seeing some nice traction with proof-of-concepts on ConsoleFlow. There’s about a dozen proof-of-concepts that are ongoing. We believe that this will allow the sales team to incrementally add revenue on a subscription basis to customers that would also be buying our SLC 8000 for our SLB branch office manager.

And as I mentioned on the call, we did our – one of our partners received the first order of ConsoleFlow. And we think that will provide more stickiness to the hardware as well..

It’s early innings, but there’s a lot of interest around ConsoleFlow specifically..

Good to hear. That’s it for me. Thanks..

Thank you. This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Paul Pickle for any closing remarks..

Thank you, Lexie. I look forward to updating you guys on our next fiscal – on our fiscal Q4 results in August. And with that, I’ll say thank you, and have a nice day..

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