Value Find: Lantronix, Inc.
A recent changing of the guard in management and the board of directors of a little-followed microcap network device play suggests an emerging value situation worth investigating.
Irvine, Calif.-based Lantronix, Inc. (Nasdaq:LTRX) has remained a story of unfulfilled potential for its shareholders in recent years. The $56 million market capitalization company is a leading player in the emerging device networking market. Lantronix’s secure communication solutions provide remote access, management and control of virtually any electronic device via the Internet. The company’s products are used in markets ranging from security, industrial and building automation to medical, financial, government, consumers electronics and appliances.
While the long-term future of the device networking market looks bright, a world here-and-now filled with interconnected devices can’t come soon enough for Lantronix. The company’s annual sales have nudged up only modestly over the past few years, to $55.3 million in fiscal 2007 from $49 million in fiscal 2003. Losses have been reduced over this stretch, but sustained profitability has still proven elusive. This situation could be about to change. Last month, the company announced the appointment of Jerry Chase as the company’s new chief executive. The hiring of Chase follows a year in which the company has also made significant changes to its board of directors. Four of Lantronix’s five directors have joined the board over the past year.
Chase joins Lantronix following a successful previous turnaround stint. From 2004 to 2007, Chase was CEO of digital video equipment maker Terayon Communications. Under Chase, Terayon sold two of its three unprofitable units and grew revenue in its remaining division to $60 million from $24 million. In April 2007, Terayon was acquired by Motorola, Inc. (NYSE:MOT). Chase’s compensation package with Lantronix includes accelerated vesting of a portion of his stock options depending on the stock’s performance, beginning with Lantronix’s share price staying above the $1.50 level on a sustained basis. Lantronix closed at $0.93 a share on Monday, around the middle of a 52-week range of $0.47 to $1.72.
Chase takes over a name that has posted sluggish results recently, but doesn’t look far away from achieving sustained profitability. For the second quarter ended Dec. 31, Lantronix reported revenue of $15.3 million, a 3% increase from a year earlier, and net income of $1 million, or $0.02 a share, compared with essentially breakeven results a year ago. These most recent results included $0.27 million worth of other income and a tax benefit, while the year-ago results included $0.7 million in income related to the sale of an investment. Lantronix ended the year with $7.2 million in cash and $0.8 million in long-term liabilities and capital lease obligations.
Looking ahead, Lantronix is guiding for fiscal third-quarter revenue of $14.3 million to $14.7 million, an 8% to 11% annual increase, and a loss per share of breakeven to $0.01. Lantronix’s cash balance is expected to remain flat to down $0.5 million sequentially. The company describes the third quarter as its “seasonally slow” period of the year. Looking at the bigger picture, Lantronix believes the device enablement market is growing annually in excess of 10% and claims that it is the leader in the space. Of course, Lantronix’s top line has been lagging this projected industry growth rate. Lantronix blames its inconsistent financial performance on too much focus on engineering and technology, and not enough on meeting its customer and partner requirements. The addition of Chase and a new board could be just what Lantronix needs to turn the corner.
Clearly, several of Lantronix’s directors and the firm’s largest shareholder are literally buying into this strategy. Over the past month, three Lantronix insiders have purchased in excess of $740,000 worth of company shares on the open market. Serial entrepreneur Bernhard Bruscha, the founder of Lantronix and the company’s largest shareholder with a 34% stake, has done over $670,000 of this insider buying. The two other major holders of the stock are Empire Capital Management and Heartland Advisors. The two investment firms each hold 10% stakes.
Over the past few years, Lantronix has traded on average for 1.5 times to 1.6 times sales. The sole Wall Street analyst who follows the stock expects Lantronix to post revenue of $58.3 million this fiscal year and $64.5 million next. Given the low capital intensity of Lantronix’s business and gross margins of 50%-plus, a valuation for the name of $87 to $97 million, assuming the business can show signs of accelerating growth, seems reasonable. This works out to a potential share price of $1.50.
Of course, Lantronix is a volatile stock, as witnessed by it fetching just $0.50 a share as recently as mid-January. Plus, Lantronix is a small company in what is still very much an emerging market. Further, Chase may be an accomplished turnaround player, but a prolonged recession and pullback in tech spending could overwhelm the company’s new strategy.
Bottom line, this is currently a decidedly difficult market for speculating in microcap names. That said, I think Lantronix (LTRX) is a speculative play worth keeping tabs on, particularly below the $0.80 level.
About the Author
Contributing author Matt Ragas is an investment writer and analyst with ten years of experience analyzing small and microcap stocks, with a particular emphasis on value and turnaround situations.
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