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Lantronix Chief Cuts, Then Looks to Customers

Jerry Chase came to Irvine’s Lantronix Inc. to overhaul the long struggling maker of networking gear for industrial uses.

The job has been a delicate balancing act of aggressive internal cost cutting and corporate humility before unhappy customers.

Chase hails from Santa Clara-based Terayon Communications Systems Inc., a maker of digital video software.

He streamlined Terayon by selling two of its three unprofitable units, tripling its sales and, a few years ago, selling the company to Motorola Inc. for $140 million.

Lantronix, which makes small electronic devices that allow vending machines, thermostats, retail terminals, ATMs and other machines to be accessed via the Internet or other computer

networks, tapped Chase a year ago after former chief executive

Marc Nussbaum stepped down in 2006.

Chase has made all of the usual plays at Lantronix, which has yearly sales of about $50 million.

Last year the company cut some 40 jobs in a bid to save about $3 million a year.

It took out a $3 million loan to pay down its accounts with suppliers and negotiate better deals.

“The loan got us more favorable terms and helped bolster margins,” Chase said.

The company’s gross profit margin was 53.4% for the six months through December, up from 50.5% from a year earlier.

Lantronix saw an operating loss of $67,000 for the fourth quarter, versus a gain of $756,000 a year earlier. Restructuring charges of $128,000 drove the loss. Without charges, the company saw a small profit on operations.

The other part of Chase’s job has been to make peace with customers soured by product quality issues. Lantronix’s customers include electronics makers, governments and utilities.

Chase said he traveled to Asia four times in the past year to meet customers. He ended up taking some heat.

“When I first went to Asia last year, they criticized us somewhat for our quality,” Chase said. “But we embraced the advice and have been working a lot on our quality and delivery.”

One of Lantronix’s Japanese customers was bothered by slight differences in the colors of certain light-emitting diodes on one of its devices.

“One light would show a forest green color and another would be a tropical green,” Chase said. “Our customers in Japan would say that’s not acceptable. It needed to be exactly consistent every single time.”

Although it was a minor thing, Chase said he didn’t try to “convince the customer that their complaint wasn’t important.”

“Our approach was to take the customer’s feedback to heart and use it as an opportunity to drive quality improvements for all our customers around the world,” he said. “We said, ‘Let’s take the most stringent requirements as our new standard for quality.'”

Another criticism was tougher to get his arms around.

“They said we were too American,” Chase said. “Lantronix has never had to break down cultural and geographic barriers. Like a lot of companies, we thought we could still get away with dealing only with the North American market.”

On Lantronix’s Web site, the company added a series of tutorials and videos in a handful of languages, including French, German, Italian, Spanish, Japanese, Hebrew, Mandarin and Cantonese.

Other changes were more subtle.

“Humility is a really big deal,” Chase said. “Part of our approach is to be humble and see that there’s not just the American way, but that there are a lot of ways.”

The changes are starting to pay off.

Lantronix recently announced a deal with Japan’s Mitsubishi Electric Corp. to provide devices for digital projectors, which are sold to corporations for office presentations.

The devices allow Mitsubishi workers to get status updates on each projector so that technicians can tell remotely if a part needs to be replaced or serviced.

The monitoring helps Mitsubishi sell maintenance packages and warranty services on the projectors.

“Because we’ve been a good partner and improved our product, Mitsubishi felt more comfortable with us,” Chase said.


One of Many

Chase is the latest to try his hand at turning around Lantronix.

The company is yet to fully recover from a 2001 accounting error in which it recorded shipments to German distributor Transtec AG, only to have the products returned later, after Lantronix did a stock sale.

Lantronix ended up restating revenue for 18 months in 2000 and 2001, eliminating about $7.4 million in sales.

Former chairman H.K. Desai, who’s chief executive of Aliso Viejo-based QLogic Corp., helped straighten out Lantronix’s finances and corporate practices starting in 2002. He left Lantronix’s board in 2006.

But Lantronix’s stock, with a market value of about $30 million last week, is a shadow of the $330 million or so it was in 2001, before the accounting scandal.

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