Lantronix Q4 2023 Earnings Call Transcript

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September 7, 2023

There are 4 speakers on the call.

Operator

Hello and welcome to the Lantronix 2023 Q4 Results Conference Call. All participants will be in listen only mode. After today's presentation, There will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Robert Adams.

Operator

Please go ahead.

Speaker 1

Thank you. Good afternoon, everyone, and thank you for joining the Q4 fiscal 2023 conference call. Joining us on the call today are Jeremy Whittaker, our Interim CEO and Chief Financial Officer and Jacques Issa, our Vice President of Marketing. A live and archived webcast of today's Call will be available on the company's website. In addition, you can find the call in details for the phone replay in today's earnings release.

Speaker 1

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 ks and 10 Qs. Lantronix undertakes no obligation to revise or update publicly any forward looking statements to reflect future events or circumstances. Please refer to the news release and the financial information in the Investor Relations section of our website for additional details that will supplement management's commentary. Furthermore, during the call, the company will discuss some non GAAP financial measures.

Speaker 1

Today's earnings release, which is posted 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 will now turn the call over to Jeremy Whittaker, Blantronics' Interim CEO and Chief Financial Officer.

Speaker 2

Thank you, Rob. 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 Q4 fiscal year 2023 before I provide our financial targets for fiscal 2024 and an update on our CEO search. For fq4 2023, we reported revenue of $34,900,000 up 6% sequentially and down 3% from the year ago. The sequential growth of 6% was largely a function of a strong quarter for our embedded solutions products, Led by an embedded compute sale of approximately $3,400,000 to an in flight infotainment customer.

Speaker 2

We also experienced Continued contribution from our electric vehicle customer, Tog. System Solutions were relatively flat quarter over quarter And included $1,400,000 in revenue from the delivery of QED pilot production units to Gritzpertise. We saw a weaker quarter in out of band products as our larger financial customers continue to exhibit cautious Spending patterns. We expect Outovan to improve against the backdrop of the upcoming Fed buying season And sales here should increase in the September December quarters, adding a boost to gross margins. In FQ4 2023, software and services revenues were down sequentially, a function of lower design services revenue.

Speaker 2

However, there was an ebb and flow to these design projects and we expect improvement going forward. GAAP gross margin was 39.5 percent for FQ4 2023 compared to 44.4% in the prior quarter And 41.9% in the year ago quarter. The decline in gross margin was primarily a function of product mix With the biggest variances being higher embedded compute sales and lower out of band sales as a percentage of revenue during For fq1 2024, we expect our sales mix to normalize with lower compute sales And gross margins closer to the mid-40s. GAAP SG and A expenses for FQ4 2023 were 8,000,000 Compared with $9,400,000 in the year ago quarter $9,900,000 in the prior quarter. The decline in GAAP SG and A was primarily due to lower share based compensation expense and a focus on cost containment.

Speaker 2

GAAP R and D expenses for FQ4 2023 were $4,900,000 flat with the year ago quarter and down $5,100,000 in the prior quarter. GAAP net loss was $1,700,000 or $0.05 per share during FQ4 2023, Compared to GAAP net income of $2,500,000 or $0.07 per share in the year ago quarter. Non GAAP net income was $2,200,000 or $0.06 per share during FQ4 2023 compared to non GAAP net income of 2,800,000 or $0.08 per share in the year ago quarter. Now turning to the balance sheet. We ended FQ4 2023 with cash and cash equivalents $13,500,000 an increase of $650,000 from the prior quarter.

Speaker 2

Working capital was $50,200,000 as of fq42023 3 and remain steady with the prior quarter. Net inventories were $49,700,000 as of FQ4 2023, A decrease of $2,000,000 from the prior quarter. The balance of inventory includes nearly $10,000,000 of long lead time components that were prepaid by a customer. We expect to consume these components during fiscal 2024 as we deliver on the customer agreement. Now turning to the Q1 fiscal year 2024.

Speaker 2

We expect that revenue in the Q1 will be down sequentially as the revenue growth in fq4 2023 Was largely a function of a significant shipment to the customer deploying in flight infotainment systems. We don't expect this customer to contribute at a similar level in the upcoming quarter. That said, we remain confident about the fiscal year ahead of us and expect to deliver upon the fiscal 2024 guidance that we provided during our previous earnings call. We entered fiscal 2024 With record backlog, a cautious but relatively steady demand environment and new compute designs moving into production. Compute solutions, both embedded and at the system level, are expected to drive much of the growth in fiscal 2024 and beyond, led by smart grid deployments, Intelligent Vehicles and Enterprise Video.

Speaker 2

As we have previously discussed, GRIDSPORTIS is our lead Smart Grid customer with the QED, an all in one edge computing platform providing electric grid operators with real time insights And automated control of distributed energy resources. Since our last call, we've made substantial progress on getting the QED into production, which will allow us to realize the more than $40,000,000 in revenue that we have in current backlog for Gritspertise During fiscal 2024. Specifically, we completed the shipment of substantially all of the QED units Under the pilot production contract during FQ4 2023 and are ready to start mass production in the upcoming December All component shortages that would gate deliveries in fiscal 2024 have been resolved. On the demand side, Gridspertise recently increased their fiscal 2024 production order by over $0.75 And are currently negotiating the first follow on purchase order, which we would expect to drive continued growth from this customer in fiscal 2025. Furthermore, we received the final deposit that was due under the initial production contract for a grand total of $20,000,000 in deposits Based upon these factors, we are confident in the program and our ability to begin volume Production of the QED in FQ2 2024, which would result in meaningful revenue contribution during that quarter And leading to a full production ramp in the second half of fiscal twenty twenty four.

Speaker 2

More specifically, Our current production forecast indicates that we would deliver approximately $5,000,000 in FQ2 2024. We would double that amount in Q3 And deliver the balance in FQ4. Our lead EV customer, TOG is also progressing well. During FQ4 2023, we received a significant order from In addition, we continue to engage a handful of other EV opportunities with design services That have the potential to transition to meaningful supply arrangements. We're also seeing traction with other compute designs.

Speaker 2

For example, we have a high volume enterprise video collaboration design expected to ramp in FQ3 2024. Furthermore, with the recent Qualcomm announcement of their QCS8550 with increased Computing for Edge AI Processing and Wi Fi 7 Connectivity. We have had multiple engagements with customers interested in using that solution For various compute intensive applications such as autonomous mobile robots, industrial drones and edge AI boxes. Now I would like to provide the specifics for our fiscal 2024 guidance. With the backdrop of record backlog, a Cautious but relatively steady demand environment for our system solutions and new compute designs going into production, We anticipate delivering over 30% growth during fiscal 2024 and are reiterating our annual target of revenue in a range of $175,000,000 to $185,000,000 and non GAAP EPS in a range of $0.50 to $0.60 per share.

Speaker 2

Now, I'll provide a brief update on our CEO search. In June 2023, the Board engaged a 3rd party firm to conduct the candidate search. We're well along in the process and have begun performing in person interviews. While it is difficult to pinpoint the exact timing, I do expect that we will identify a qualified candidate before the calendar year end. That completes our prepared remarks for today.

Speaker 2

So I'll now turn it over to the operator to conduct our Q and A session.

Operator

Thank you very much. We will now begin the question and answer session. Today's first question comes from Scott Searle with ROTH MKM. Please go ahead.

Speaker 1

Good afternoon. Thanks for taking the questions. Nice to continue to see the reinforced outlook for fiscal 2024. Jeremy, maybe I just want to quickly dive in and get some color around the gross margins. It sounds like that's purely mix in the June quarter And you're expecting a recovery back to where we've been in recent quarters, kind of given the recovery in out of band and some of the other products.

Speaker 1

Is that correct?

Speaker 2

Yes, that would be correct. We had a really strong compute quarter and our out of band was actually down sequentially. The compute being on the lower end of our margin scale and the out of band on the higher end of the scale. For FQ1, we're expecting that to kind of flip where we're going to see much more contribution from out of hand And lower contribution from compute. And the results of that would likely be returning to gross margins closer to the mid-40s.

Speaker 1

Great. And then just looking at the top line, I thought I heard September sequentially down a little bit, just want to clarify that. But then you start to see The ramp up and the contribution from GRIDSPORTEE is ramping up. I think you said $5,000,000 in December going to 10,000,000 In the March quarter, I want to clarify that because it really implies that you continue to see that big ramp up over the course of the year and the contribution on that front. I'm wondering Two things on top of it.

Speaker 1

Gross margin profile, how is that going to impact you guys in the back half of the fiscal year? And then the follow on contract, I'm wondering what other color you could provide around that in terms of the magnitude size and timing related to that. Thanks.

Speaker 2

Yes. I think you're characterizing how we expect the year to play out. As it relates To as it relates to margin, we are expecting to maintain margins in the mid to low 40s Similar to what we saw in fiscal 2023, As grid rolls in, it's pretty close to our corporate average. That said, it will bring down margins slightly, But we do have some tailwinds as it relates to we've been experiencing lower supply chain costs And lower PPVs. And so I would expect as those lower costs roll in, we will see some benefit Which would offset some of the lower gross margin that we would get on a combined basis from Gritspertise.

Speaker 1

Great. And lastly, if I could, you talked about some of the other opportunities in different verticals, guys like TOG, etcetera. But I'm not sure if I heard a number in terms of the opportunity pipeline. I think last quarter you talked about $150,000,000 plus in opportunities. I'm wondering if there's a number That you would put on it.

Speaker 1

Thanks and I'll get back in the queue.

Speaker 2

Yes. That number has continued to grow. We're still Pursuing a large number of opportunities greater than what the company has seen in the past. A lot of that is in applications such as smart cities, smart grid, EV, automotive, As well as security and surveillance.

Operator

Thanks. Thank you. The next question comes from Mike Walkley with Canaccord Genuity. Please go ahead.

Speaker 3

Great. Thanks. And again, my congrats on reiterating the guidance and closer to grid expertise ramping. Just on grid expertise, You talked about your early negotiations for the follow on contract. If that goes well as we look out to fiscal 2025, Could that be at least another $40,000,000 or do you think it could grow off that as you have another maybe full year of production versus it ramping throughout the year?

Speaker 2

Yes. I think on the high end, we would grow year on year with the Gridsfordisse based Upon the units that they have and the pricing that we're currently talking about. And so, yes, we do have a really good, I think, opportunity to continue the business with Grisvertis And to grow year on

Speaker 3

year. Great. That's helpful. And then as it gets to use ramps or as you look at your mix throughout the year, Jeremy, is there anything to call out on gross margins? I know you're saying Q1 should bounce back kind of to that mid-forty ish.

Speaker 3

Is that A good way to think about for the full year? Is there any puts and takes how we should think about gross margin throughout the year based on your pipeline?

Speaker 2

Yes. With the models that we put together and based upon our current forecast, the gross margin profile for the full fiscal year looks Pretty close to what we had in fiscal 2023. And like I said, as I mentioned previously, we do see some benefit From greater absorption as revenue increases from some of our fixed costs and also we are seeing quite a bit of relief In both in logistics and purchase price variances, which should start showing themselves As we get into Q2 and the second half of the fiscal year. I think in addition to that, Just on the operating margin, there's also quite a bit of leverage in the business. And so as we do grow the top line, we don't Expect to add OpEx at a similar level, which would allow us to exit the year With an EBITDA margin in the mid teens.

Speaker 3

Okay. That's helpful as we think about the ramp in the model. I guess last question for me just on embedded Very strong quarter due to that $3,000,000 shipment. You talked about it down sequentially. Is this a business that builds from there and do you think it grows year over year or is most of the growth coming from IoT

Speaker 2

Yes. So on the embedded compute side, The next couple of quarters will be a little bit soft there. We have a couple of new Our number of new design wins that are beginning to ramp in Q3, which would Continue to grow that business. But in general, the compute business is driving the growth. GRIS Vertisse itself It's part of the I would call it the compute business, although it's not an embedded product and that opportunity was brought to us Through our design services on the Qualcomm processor.

Speaker 3

Great. Thanks for taking my questions. I'll pass the line.

Operator

Thank you. The next question comes from Christian Schwab with Craig Hallum Capital Group. Please go ahead.

Speaker 1

Hey, great. Thanks for taking my question. So I just want to verify that you guys still believe you can do $50,000,000 over the next few years But, Todd, is that still the production goal?

Speaker 2

Yes. And if anything, it's gotten better. We just This quarter a follow on order from TOG, which was Much greater than we had initially anticipated. So they're on track if not doing better than what we've indicated previously.

Speaker 1

Fantastic. And then my final question is, like follow-up to the first question I think from Scott, this is about 40 projects that you kind of highlighted before that could contribute $150,000,000 in annual revenue. Are any of those projects in your Expectations for next fiscal year?

Speaker 2

There are a couple that could help Fiscal 2024, I would say the vast majority of them would be projects that we'd be winning in fiscal 24 and then most likely contributing to revenue in fiscal 2025. Okay. Great. So I think more about the future With that pipeline, although some of them have a high likelihood of closing and contributing in the current fiscal year as well.

Speaker 1

Okay, great. No other questions. Thanks, guys.

Operator

Thank you. The next question comes from Ryan Koutsz With Needham, please go ahead.

Speaker 1

Yes. Just kind of drilling down on the near term, it sounds like a promising pipeline and Any contracts that with kind of the current state of the business out there in terms of are you still dealing with inventory and the And there was some Qualcomm commentary about kind of general softness in industrial IoT. Can you kind of contrast your pipeline versus near term dynamics? That would be helpful. Thank you.

Speaker 2

Yes. Starting with Channel inventories, we saw several quarters with our inventory in the channel Declining at least with our distributors. This quarter we did see it bump up a little bit, but it is within I would say our historical norms. So we're not seeing elevated inventory at our distributors. We have heard from a couple of customers and where they feel like they have Inventory that they need to burn through, but it's not necessarily systematic I think in our distributor channel.

Speaker 2

I think it's A situation where like a lot of companies with supply shortages in COVID, everybody was companies We're putting more inventory on hand because of the difficulty in getting it. We did mention previously on several calls that coming out of post COVID, we did see Some weakness in certain parts of our business. That said, most of our Growth drivers for fiscal 2024 are really driven by Large programs that we won and in particular, Gritzker Deese and Tog Where we have orders on hand to be able to drive that growth. In addition, we are seeing some new demand being generated from some of our newer product releases In connectivity, in particular, we have a nice opportunity with AT and T that we mentioned on our previous That's made some nice progress over the last quarter and that will also help with the growth next year.

Speaker 1

That's great to hear. And a quick follow-up on the competitive front, any changes? I've heard about a few kind of new entrants Kind of coming at this with industrial hardened type products in areas that you play Europe and other spots. Are you seeing much of an impact or is it a pretty stable and competitive landscape?

Speaker 2

Yes. I think we're not necessarily seeing any new entrants at this point. With our out of band product, with our recent acquisition of Uplogix, we think we've got a market leading product there. On the Qualcomm side with the design services, I think we have A great ability there to differentiate ourselves. And so not necessarily seeing anything new in those areas today.

Speaker 1

Okay, cool. Thanks. That's all I have. Appreciate it.

Operator

Thank you. This concludes our question and answer session. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.

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Key Takeaways

  • In Q4, the company reported $34.9 million in revenue, a 6% sequential increase driven by embedded compute sales and EV contributions, but experienced a sequential decline in high-margin out-of-band products, resulting in a GAAP gross margin of 39.5%.
  • Lantronix reiterated its fiscal 2024 targets of 30% revenue growth to $175–185 million and non-GAAP EPS of $0.50–0.60, based on a record backlog, steady demand, and multiple new compute designs entering production.
  • The GRIDSPERTISE QED edge computing program completed its pilot phase in Q4 and is slated for mass production in Q2, backed by a >$40 million backlog and a forecasted $5 million in Q2 revenue doubling in subsequent quarters.
  • Management highlighted improved operational efficiency, with Q4 SG&A expenses down to $8 million on cost controls and share-based compensation savings, inventory declining by $2 million, and expected supply-chain cost relief to bolster margins in H2.
  • Lantronix’s opportunity pipeline has expanded to over $150 million across smart grid, EV, enterprise video, and IoT applications, with several design wins progressing toward production and anticipated revenue contribution in 2025.
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Earnings Conference Call
Lantronix Q4 2023
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