Lantronix, Inc.

Good day, and welcome to the Lantronix, Inc. Fiscal 2020 First Quarter Results Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Amber Tinz. Please go ahead.

Good afternoon, everyone, and thank you for joining the Lantronix First Quarter Fiscal 2020 Conference Call. Joining us on the call today are Paul Pickles, Lantronix President and Chief Executive Officer, Jeremy Whitaker, Lantronix Chief Financial Officer, and Jonathan Shipman, Vice President of Strategy. A live and archived webcast of today's call will be available on the company's website. In addition, a phone replay will be available starting at 8 p.m. Eastern, 5 p.m. Pacific today through December 13th by dialing 877-344-7529 in the U.S. or for international callers, 412-317-0088 and entering passcode 1011 and Matt Stringham. 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 relief 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. Plantronics undertakes no obligation to revise or update publicly any forward-looking statements to reflect future events or circumstances. Furthermore, during the 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. With that, I'll now turn the call over to Jeremy Whitaker, Landtronic's Chief Financial Officer.

Thank you, Amber, 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 first quarter of fiscal 2020 before I hand it over to Paul for his commentary. 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. For the quarter ended September 30, 2019, net revenue was at the upper end of our guidance range as we reported $12.7 million in net revenue compared to $12.3 million for the first quarter of fiscal 2019 and $10.2 million for the fourth quarter of fiscal 2019. Gross profit as a percentage of net revenue was 48.6% for the first quarter of fiscal 2020. as compared with 55.2% for the first quarter of fiscal 2019 and 56.6% for the fourth quarter of fiscal 2019. The sequential decline in gross margin was primarily due to product mix as a result of our recent acquisition. In addition, we expensed $171,000 to cost of goods sold in connection with the amortization of manufacturing profit and inventory that we assumed as part of the Maestro acquisition. Selling general and administrative expenses for the first quarter of fiscal 2020 were $4.5 million compared with $4.3 million for the first quarter of fiscal 2019 and $3.6 million for the fourth quarter of fiscal 2019. Research and development expenses for the first quarter of fiscal 2020 were $2.6 million compared with $2.2 million for the first quarter of fiscal 2019 and 2.2 million for the fourth quarter of fiscal 2019. The increases in SG&A and R&D were primarily due to headcount and related costs assumed in the recent acquisition of Maestro. Gap net loss was 2.5 million or 11 cents per share during the first quarter of fiscal 2020 compared to gap net loss of 83,000 or 0 cents per share during the first quarter of fiscal 2019 and a gap net loss of 1.5 million or six cents per share during the fourth quarter of fiscal 2019. Included in the gap net loss were approximately 1.7 million of acquisition and severance related costs. Non-gap net income was at the top of our guidance range as we were breakeven our zero cents per share for the first quarter of fiscal 2020. This compares to non-gap net income of $883,000 are $0.04 per share for the first quarter of fiscal 2019, and non-GAAP net income of $722,000 are $0.04 per share for the fourth quarter of fiscal 2019. Cash and cash equivalents were $12 million as of September 30, 2019, as compared to $18.3 million as of June 30, 2019. The decrease in cash was primarily related to our acquisition of Maestro in July 2019. Working capital was $19 million as of September 30, 2019 as compared with $26.7 million as of June 30, 2019. Net inventories were $12.4 million as of September 30, 2019 compared with $10.5 million as of June 30, 2019. The increase was primarily due to inventories assumed in the July acquisition of Maestro. Now, turning to our recent announcement of the intrinsic acquisition. First, let me recap the terms of the transaction. Under the terms of the agreement, Lantronix will pay approximately $11.5 million in cash and issue approximately 4.3 million shares of its common stock to intrinsic shareholders, which equates to total consideration of approximately $26 million. Taking into account their existing cash, this is less than one times their revenue for the last 12 trailing months. The transaction, which is subject to approval by the shareholders of Intrinsic and customary closing conditions, has been unanimously approved by the board of directors of both companies and is expected to be completed in January 2020. Following the transaction, Intrinsic shareholders are expected to own approximately 16% of the outstanding sharers of the common stock of Lantronics. Now, let me give you some perspective of the total potential contribution that Intrinsic brings. For the 12 months ended June 30, 2019, their revenue was approximately $25 million, which brings additional scale to the combined entity. From an earnings standpoint, we expect the transaction to be accretive to non-GAAP EPS during the first full quarter that it contributes to our operations. Longer term, we are targeting $2 million in annual cost synergies as we integrate supply chains, eliminate redundant public company costs, and realize other operating efficiencies. As it relates to financing the transaction, yesterday we announced that we had secured additional financing for the intrinsic acquisition with an amendment to our existing loan and security agreement with Silicon Valley Bank. Per the terms of the agreement, SVB will provide us with a $6 million term loan payable over four years at an interest rate of prime plus one. In addition, we increased our revolving line of credit from $4 to $6 million to provide access to additional working capital if needed. Assuming that the intrinsic transaction closes in January 2020, we would expect to increase our fiscal 2020 growth rates as previously discussed. Revenue growth target increases from 15% to 25% and non-GAAP EPS growth target increases from 30% to 35%. Now, I will provide guidance on revenue and earnings for the second quarter of fiscal 2020. We expect net revenue of $12.5 to $13.5 million and non-GAAP net income per share of $0.02 to Sixth Sense. I'll now turn the call over to Paul. Thank you, Jeremy.