Lantronix, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended December 31, 2017. Financial statements are unaudited; dollar amounts below are in millions unless noted.
Business context and results
Lantronix provides secure data-access and management solutions for Internet of Things (IoT) assets. Its product lines are IoT, IT Management, and Other; sales are managed across the Americas, EMEA, and Asia Pacific Japan.
| Metric | Three months ended Dec. 31, 2017 | Prior-year quarter | Six months ended Dec. 31, 2017 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $11.336 | $11.222 | $21.942 | $22.162 |
| Gross profit / margin | $6.314 / 55.7% | $5.812 / 51.8% | $11.908 / 54.3% | $11.512 / 51.9% |
| Operating income (loss) | $0.267 | $0.066 | $(0.346) | $(0.021) |
| Net income (loss) | $0.225 | $0.041 | $(0.416) | $(0.063) |
| Net income (loss) per diluted share | $0.01 | $0.00 | $(0.02) | $(0.00) |
Quarterly revenue rose 1.0%; six-month revenue declined 1.0%. Quarterly gross margin improved on product mix and cost reductions, and included an approximately $0.125 million benefit from sales of products previously subject to excess-and-obsolete inventory reserves. Six-month gross profit increased 3.4%. No separate operating or net margin percentage is stated in the filing.
Revenue mix and period-over-period changes
- Quarter: IT Management revenue increased 42.1% to $3.218 million, primarily on SLB deployments to two large customers. IoT revenue fell 4.0% to $7.971 million, while Other declined 77.5% to $0.147 million, reflecting lower legacy-product sales. By region, Americas revenue fell 2.5%; EMEA rose 1.6%; APJ rose 13.7%.
- Six months: IoT increased 1.7% to $16.448 million and IT Management increased 6.5% to $5.007 million; Other fell 62.2% to $0.487 million. The Other decline reflected lower xPrintServer sales, including the absence of a prior-year large customer deployment, and ongoing legacy-product declines. Americas revenue fell 5.0%, while EMEA rose 1.8% and APJ rose 8.9%.
- Quarterly operating expenses increased 5.2% to $6.047 million, including higher SG&A; R&D was essentially unchanged. Six-month operating expenses rose to $12.254 million from $11.533 million, with higher SG&A and R&D.
Cash flow, balance sheet, and debt
- Six-month operating cash flow was $0.089 million, down from $0.837 million; investing cash use was $0.076 million, mainly capital expenditures; financing cash provided was $0.337 million, mainly employee stock issuances, partly offset by tax withholding and lease payments. Cash increased $0.350 million to $8.423 million.
- At December 31, 2017, current assets were $20.463 million, current liabilities $9.506 million, and working capital $10.957 million, up from $10.391 million at June 30. Total assets were $31.109 million and stockholders’ equity $21.220 million.
- No borrowings were outstanding under the $4.0 million revolving, accounts-receivable-based credit line. Available borrowing capacity was $3.142 million, with $0.051 million in letters of credit outstanding. The facility matures September 30, 2018. The company reported compliance with its 1.0 quick-ratio requirement and tangible net worth of $11.732 million versus a $6.133 million minimum.
- Management said existing cash, available borrowing capacity, and operating cash generation should fund working capital, capital expenditures, and other commitments for at least the next 12 months. It also noted potential future capital raising, with possible dilution or additional debt restrictions; no financing is assured.
Outlook, risks, and unusual items
- No specific revenue or earnings guidance was provided. Management noted interim results are not necessarily indicative of full-year or future results.
- A resource realignment conducted from July through September 2017 generated approximately $0.527 million in severance and related charges; $0.461 million had been paid and $0.066 million remained accrued at December 31. The charges were a principal reason the six-month net loss widened.
- The company expects adoption of the new revenue-recognition standard in the fiscal year beginning July 1, 2018, using the full retrospective method. It anticipates a material impact, principally because distributor sales with return and price-adjustment provisions are expected to be recognized predominantly at shipment under the new standard; quantitative effects were not yet determined.
- The new lease standard is expected to require recognition of operating-lease right-of-use assets and liabilities; adoption is expected in the fiscal year beginning July 1, 2019, and the quantitative impact was undetermined.
- The December 2017 Tax Cuts and Jobs Act was still under evaluation; no tax effects had been recorded. Management expected the transition tax to have minimal impact and anticipated offsets to deferred-tax adjustments from the full valuation allowance. The company maintained a full valuation allowance against net deferred tax assets due to cumulative losses and uncertainty about future taxable income.
- Ordinary-course legal proceedings were not believed likely to have a material adverse effect, though litigation may involve costs and management distraction. Management reported disclosure controls effective at a reasonable-assurance level and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether IT Management growth from two large customer deployments is sustained and whether IoT and legacy-product trends improve or worsen.
- How much of the reported margin improvement persists, given product-mix and cost effects and the $0.125 million reserve-related sales benefit.
- Whether operating cash flow improves; the six-month $0.089 million inflow was substantially below the prior-year period, and working-capital movements included higher receivables and accounts payable.
- Compliance with the credit-line covenants and refinancing or liquidity needs as the facility approaches its September 2018 maturity.
- The eventual quantified effects of revenue-standard adoption and the Tax Cuts and Jobs Act, as well as any future operating-lease liabilities.