Lantronix, Inc.

Good day and welcome to the Landtronic 2021 fourth quarter results conference call. All participants will be in a listen-only mode. Should you need assistance, please signal conference specialists 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 touchtone phone. And 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 Mr. Rob Adams. Please go ahead, sir.

Thanks, Chuck. Good afternoon, and thank you for joining the fourth quarter fiscal 2021 conference call. Joining us on the call today are Paul Pickle, our president and chief executive officer, and Jeremy Whitaker, our chief financial officer. 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 time tonight. through September 2nd by dialing 877-344-7529 in the United States, or for international callers, 412-317-0088 and entering the passcode 10159500. 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-K or its 10-Qs. Landtronics 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 turn the call over to Jeremy Whitaker, Landtronic's Chief Financial Officer.

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 fourth quarter and fiscal year ended 2021 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. As a reminder, our fiscal 2021 results do not include any revenue or operating costs for the acquisition of transition networks and net-to-edge. which comprises the electronics and software business segment of Communication Systems, Inc., which closed on August 2nd, 2021. For the fourth quarter of fiscal 2021, we reported record revenue of $20.6 million, an increase of 19% when compared to $17.4 million for the fourth quarter of fiscal 2020. Sequentially, net revenue was up 21% compared to $17.1 million reported in the third quarter of fiscal 2021. We exited the fourth quarter of fiscal 2021 with record backlog from a combination of increased customer demand and supply chain constraints. Gross profit as a percentage of net revenue improved to 48.8% for the fourth quarter of fiscal 2021, as compared with 37.7% for the fourth quarter of fiscal 2020 and 45.1% for the third quarter of fiscal 2021. The sequential improvement can be attributed to improved product mix driven in part by software license revenue. That said, we continue to face headwinds in supply chain costs affecting gross margin. This cost us over $2 million in fiscal 2021, and while we don't see a material change in this situation at the moment, we expect it to improve as the environment changes. as well as through anticipated price increase for Lantronics product offerings. Selling general administrative expenses for the fourth quarter of fiscal 2021 were $6.1 million compared with $4.7 million for the fourth quarter of fiscal 2020 and $5 million for the third quarter of fiscal 2021. Research and development expenses for the fourth quarter of fiscal 2021 were $3.6 million compared with $2 million for the fourth quarter of fiscal 2020 and $2.5 million for the third quarter of fiscal 2021. The sequential increase in SG&A and R&D was impacted by variable compensation costs accrued in the fourth quarter. Gap net loss was $1.1 million, or $0.04 per share, during the fourth quarter of fiscal 2021 compared to a gap net loss of $1.7 million, or $0.06 per share, during the fourth quarter of fiscal 2020. Non-gap net income was $1.7 million, or $0.06 per share, during the fourth quarter of fiscal 2021, compared to non-gap net income of $1.2 million, or $0.04 per share, during the fourth quarter of fiscal 2020. Now turning to the full year results. Net revenue for fiscal 2021 was $71.5 million, an all-time record and an increase of 19% when compared to $59.9 million in fiscal 2020. Gross profit as a percentage of net revenue for fiscal 2021 was 46.2% as compared with 44.9% for fiscal 2020. The improvement in gross margin was primarily due to product mix. GAAP operating expenses for 2021 were $36.4 million, compared with $37.4 million for fiscal 2020. As a percentage of revenue, non-GAAP operating expenses for fiscal 2021 improved to 39% of revenue, compared to fiscal 2020 at 42% of revenue. For fiscal 2021, we reported the GAAP net loss of $4 million, or 14 cents per share, compared to a gap net loss of $10.7 million, or 42 cents per share, for fiscal 2020. Non-gap net income increased by 132% to $5.8 million, or 19 cents per share, for fiscal 2021, as compared to $2.5 million, or 9 cents per share, in fiscal 2020. Cash flow from operations totaled $1.7 million in Q4. up 14% sequentially from $1.5 million in Q3, and up 86% from $914,000 in the year-ago quarter. Now, turning to the balance sheet. We ended the June 2021 quarter with cash and cash equivalents of $9.7 million, an increase of $2 million from the prior fiscal year. Working capital improved to $20.3 million as of June 30, 2021, as compared with $18.7 million as of June 30, 2020. Net inventories were $15.1 million as of June 30, 2021, compared with $13.8 million as of June 30, 2020. Now, turning to our annual outlook, which includes approximately 11 months of contribution from our recent acquisitions of transition networks and net-to-edge. For fiscal year 2022, we expect revenue growth of 45% to 75%, and non-GAAP EPS growth of 85 to 135%. I'll now turn the call over to Paul.

Thank you, Jeremy. Q4 was a watershed quarter for us here at Landtronics, and I am extremely pleased to report these results, as well as the significant momentum we carry into our next fiscal year. In the fourth quarter, we delivered record revenues of $20.6 million. For the full year, 2021 revenues were also a record at $71.5 million. We saw strong results from our software offerings, continued booking strength, and we are entering fiscal 2022 with a new record backlog. Given our results and the robust outlook Jeremy just detailed for you, we have much to look forward to in this next fiscal year. As you have probably heard from our peers or experienced in some manner yourself, the supply chain disruptions caused by the pandemic are ongoing. In the fourth quarter, component shortages and delays caused us to push out approximately $5 million of revenue into future quarters versus $4 million in Q3 and $2 million in Q2. However, you may recall that when Lantronics first noted supply disruptions over a year ago, we were one of the first companies to talk about the issue. We moved quickly to secure supply of key components and While we clearly are not immune to the problem, we are in a position to continue growing despite the challenge. Turning to our product categories, our IoT products delivered 17.5 million in Q4, up 28% sequentially and 20% year over year. Ethernet modules continued to pace the group with strong double-digit revenue growth year over year and sequentially. Wi-Fi posted a solid comeback quarter as we started to catch up with demand. mitigated somewhat by IoT gateway and telematics revenue, which moderated after a very strong third quarter. In our edge compute solutions, we continue to set the table for future revenue growth. The opportunity funnel is robust, and we continue to expand internal resources to meet demand. As customer revenues move from development kits to design services and ultimately to volume product shipments, we are circling several opportunities, each of which we anticipate could result in multimillion-dollar volume shipments. All in, for the fiscal year 2021, IoT revenues totaled $59.2 million, up 19% from 2020. With a record backlog in place and accelerating design momentum at our customers, we look forward to another strong year in fiscal 2022. Turning to remote environment management, or RIM, revenues in Q4 totaled $3 million, down 8% sequentially, but up 14% from a year ago. For the fiscal year 2021, REM revenues totaled $11.8 million, up 28% from 2020. Demand for our out-of-band products drove this growth, augmented by the continuing customer adoption of our SaaS solutions. While this business can be volatile quarter to quarter, the demand for remote management solutions is seeing an enduring uptick post-COVID. Our visibility is increasing, and we expect to continue to deliver double-digit year-over-year gains. Q4 results were bolstered by strong software licensing revenues. We continue to make progress toward our SAS and other services goals and exceeded our internal expectations for recurring revenue in 2021. While we are still in early innings, our pipeline is growing, adoption is accelerating, and we have every conviction that we are well on the way for recurring revenue to reach 10% of total revenues within three to five years. Finally, While it didn't close in Q4, we finalized the carve-out of transition networks and net to edge from CSI earlier this month, and we expect to report almost two months of revenue in our first fiscal quarter ending September. This is an exciting acquisition for us for a number of reasons. The acquired business revenues total $34.5 million in calendar year 2020, about half our current size, and as Jeremy just guided together, we expect to deliver well over $100 million in revenue for fiscal year 2022. This brings real scale and financial efficiency to our business as our go-to-market manufacturing flows are similar. The acquired product lines bring Lantronics a highly complimentary product offering, a number of sticky federal and municipal customers, and exposure to several growing smart city IoT applications. We are already hard at work meeting our new customers, and we see several revenue synergy opportunities which we expect to capture. For example, Transition Network sells its powered Ethernet switches to a number of government departments of transportation for deployment and security camera applications. The data captured is then uploaded to the cloud via cellular router that is currently supplied by one of our competitors. We have the very same capability in-house, and with the new product offerings, we can deliver a higher performance solution to our customers at a compelling price point. This is just one example of the type of revenue synergies we see and expect to deliver over time. thus accelerating our growth rate. Finally, due to the complementary nature of the products, we are confident in our ability to deliver over $7 million of operating and manufacturing expense synergies, which we expect to realize over the course of the next 18 months. A substantial piece of that $7 million was realized on day one, and this acquisition is expected to be immediately creative. Just to put the power of this accretion into perspective, in fiscal 2022, at the midpoint of the earnings guidance Jeremy laid out at the beginning of the call, we're expecting to more than double non-GAAP BPS versus fiscal 2021. In summary, we are pleased to deliver these results to guidance to our shareholders. Our team has executed well in a very challenging environment. We exited our fiscal year 2021 growing organically at a double-digit rate, and expect that trend to continue through fiscal 22. We are acquiring strategic assets, integrating them, and realizing synergies so as to drive improving cash flows. We look forward to reporting our progress to shareholders in the coming months as we continue to execute on our strategy. That completes the prepared remarks for today, so I'll now turn it over to Chuck to conduct our Q&A session.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch tone phone. If you're using a speaker phone, please pick up your handset before pressing the keys. And to withdraw your question, please press star then 2. And at this time, we'll pause momentarily to assemble our roster. And the first question will come from Scott Cyril with Roth Capital. Please go ahead.

Good afternoon. Thanks for taking my questions. Nice quarter, guys. Very, very nice to see the top-line growth as well as the gross margins coming through with some of the software contribution. Hey, just want to clarify a couple of things. A little bit of the audio was choppy, but, Paul, I want to make sure I heard correctly. Organically, you're expecting to grow at double-digit growth rates going forward. And, Jeremy, on the gross margins and OPEX front, as we're looking forward into the September quarter, OPEX was up. Looks like some variable comp catch-ups in the fourth quarter there. How should we be expecting OPEX to trend sequentially? I know you've got a lot of moving parts right now with, you know, two months of the quarter for transition networks being on board, you know, offset by some of the cost reduction plans you've got ongoing. And then also the impact of the transition networks, gross margins, as well as the software impact. So how should we think about gross margins in OPEX as we go into September quarter?

All right. I'll take the growth rate piece first. Definitely had a strong organic growth rate this past quarter. You know, we've been talking about those backlogs building, having some of those long lead time components on order. We got those in-house. We were able to deliver on those shipments on that backlog. The backlog continues to grow. I think last quarter I said we were well over four times our historical backlog. Uh, you know, averages, and at this point we're well over five times, part of that is the new programs that customers have been placing production orders for. Um, these are new programs, that's all organic business. And so we've got lots of visibility visibility on that overall, nice macro trend on the business as a whole. And there are seeing quite a bit of strength, um, not to mention a number of new POCs for the remote, uh, environment management products as well. And, you know, I'll comment real quick on the OPEX trend and then I'll turn it over to Jeremy. You know, I think the important thing to look at what we're driving as a percentage of revenue. So if you look at the last even three years, two and a half years, we've been driving that OPEX as a percentage of revenue down. And on a quarter on quarter basis, it's always going to be up and down depending on the R&D projects that we have that come on board. and certifications that we needed to drive. But overall, you should see us continue to drive OpEx as a percentage of revenue down. Jeremy, you want to comment further?

Yeah. As it relates to margins, we came off a really strong quarter, and that was helped by some pretty meaningful contribution from software licensing revenue that is expected in the future, but it's going to be kind of lumpy. And so I would I would expect margins to come down, gross margins to come down a couple hundred basis points just as we get back to our kind of normal product mix. And then we're targeting even our non-GAAP income in the low double digits. And so with that, as Paul mentioned, I would expect that while OpEx will go up because, you know, we are adding another business. As a percentage of total revenue, I would expect that to decline, in particular as we roll out the different synergies that we have planned.

Gotcha. Helpful. And, Paul, it seems like all the product categories fared pretty well in the quarter except for remote management. Yeah. Could you provide a little bit more color there? Is there anything going on in particular? Are there some component availability issues or something going on from an end market perspective? Or is this just kind of, it's a little bit of a lumpy business and expect that to get back into growth mode over the next couple of quarters?

Yeah, so RIM is definitely a lumpy business. This is kind of, it's tied to more customer capex cycles. So we end up getting large purchase orders, even though we have visibility that those things are going to happen. And we kind of watch the opportunity funnel and the design ends. We really track POCs to design ends and then look for when those purchase orders are going to get placed. So they do kind of happen in a lumpy fashion. A quarter doesn't make a trend. It was coming off of a pretty decent quarter, the prior quarter. So Q3 was pretty strong for RIM. I would expect going forward, if you'd If you just even looked at a two-quarter average, you're going to see continued growth going forward. But this business is best measured on a quarterly trend basis.

Gotcha. And lastly, if I could just dive in into the guidance for fiscal 22. Thanks for providing the longer-term perspective. But if I kind of back out some assumptions for transition networks, it's a pretty wide margin to begin with. I think it's 20, 21 million in terms of the variance over the course of the year. And the low end of that is kind of a high single-digit, low double-digit kind of organic growth rate to up to 30%. So it's a wide range there. Certainly it sounds like component availability plays a part in that, but I'm wondering if you could address the big swing factors in terms of that range as we look out over the course of fiscal 22. Thanks.

Yeah, it's a bit of a broader range. You're 100% correct, and I think it's more indicative of the times that we live in You know, we do expect, you know, as Delta variant, you know, not to bring up COVID again, but, you know, this does have a tendency to cause different localities to shut down and maybe things pause, you know, for a couple of months as people wait for case rates to drop down. Again, I think we've built in kind of the new norm caution into the guidance. But aside from that, we feel really, you know, quite strongly that we'll be You know, if we look at the Landtronics proper business that we just exited Q4, that business really is in a great position to grow. We've been turning it around for the last two years, working on new product offerings and working on our blocking and tackling a little bit better. And I think we're starting to see that result indicative of what happened in Q4. Definitely expect that to continue. I would, um, you know, where things are probably not as, uh, certain from a growth standpoint is some of the newly acquired revenue. Obviously, uh, we just, uh, just closed this August 2nd. Uh, if you look at their, you know, the prior calendar year, 34 and a half, um, in terms of, you know, they're pretty linear in the way that they ship. Uh, and there is a growth component of the business, but as we were kind of analyzing the December. close in January, we were asking them if they were seeing component shortages. Of course, we were definitely seeing them at that time were already placing the orders necessary for the future quarter revenue, but they weren't seeing component shortages at that time. I think that was perhaps a little bit of a hindsight because they were definitely seeing it in the March quarter close. And then as a result, backlog has gone up. So I do think that we've got a little bit of catch up to do operationally to get things in shape there. And as we start to leverage, you know, much larger purchase orders with our suppliers, I think that we'll be able to, we're optimistic about being able to pull that in. I will say that their demand is quite strong at the moment. The demand is stronger than what they can deliver. So that's a positive. But we're just being a little bit cautious on their ability to deliver it. So I don't really judge that revenue at double digits quite yet. But certainly the business that we've been working on for the past two years is definitely growing at a double digit rate.

Great. Thank you.

The next question will come from Ryan Kuntz with Needleman Company. Please go ahead.

Thanks for the question. What if it gives any color on your market verticals in terms of where you saw strength in Q4 and maybe where COVID is still a headwind and how you think about that over the balance, those verticals over the balance of the calendar year here?

Thank you, Ryan. Yeah, great question. So, you know, our market verticals today really is largely industrial. We do have an enterprise component as well. Industrial municipalities. So we've normally put that in an industrial bucket. We will later provide some color on it in terms of smart cities opportunities. And then that medical piece was really strong during 2020 as the industry was really playing catch up due to COVID. There was a rush of purchases that moderated a bit during the back half of 2020. But what we're seeing is new programs coming on where just about every patient monitoring the device needs to have some type of connectivity and device management. So we're seeing some nice strength in medical in particular. Industrial is definitely doing, it's pretty strong across the board. As I look at The vast majority of our base business is really rooted in that industrial vertical, and we've seen a nice uplift. I would characterize it as a macroeconomic lift. We're seeing strength in Europe as a result of that, as well as North America, even seeing some new opportunities in APAC. And then those new kind of still industrial, but you can kind of classify them as smart city applications, but The energy sector, energy delivery sector, security sector, these are more municipal applications. We've seen some new program launches and new orders placed from the likes of Flock Safety, for instance. These are security camera applications. There's just been some real strength there. And then lastly, that enterprise component that we've talked about last year, In terms of video conferencing applications, that's going rather well. Our customers transitioned to supporting Microsoft Teams as well. That's opened up a whole new SAM for them and given us a lot more volume opportunities there as well. So a little bit of strength across the board. I don't know that I see a particular sector that's hampered by COVID right now, but not from an ordering standpoint. There's just, in general, strength across the board. Sure.

Okay. I mean, in terms of headwinds, I was thinking maybe, you know, with the auto sector kind of seeing some challenges on supply chain, you're not seeing an impact on you from the industrial side there?

Well, for us, automotive is fairly new. We do have some programs in automotive, but it's mostly application development and new platform launches. Our customer TAG in Germany, I'm sorry, in Turkey rather, We do have Arrival. It's an electric cargo van based in the U.K. as well. Both of those are ramping up production, and so things are going quite nicely for us. But once again, if they wanted us to deliver 10,000 units tomorrow, we'd have a little bit of a problem doing that just because of the lead times of some of that.

Yeah, helpful. Got that. Thanks. And on the supply chain, any real shifts in terms of your – you know, your concerns, your long polls? Is it the similar characters that we've seen for the last few quarters? Are you seeing shifts into other, you know, different types of chips, analog chips, et cetera, that are becoming more of a problem for you?

It's the analog chips, you know, make signal more of the specialty processes that are not dependent on the high-volume fabs. You know, TSMC, we ran into a problem at the end of last year because of the iPhone 12 launch. Things got a little bit better for us. And then it came down to substrates. Substrates are a real problem right now. Raw materials are a real problem right now. But in terms of silicon, it's a little bit easier getting the small lithography type devices versus some of the specialty devices. We have seen some of our oscillators come back. Renaissance has come back online. And so we're starting to see a little bit of easing there with some of those components. That's why our Wi-Fi business picked up. But, um, you know, overall, I think, uh, you know, it really kind of comes down to raw materials and substrates is, uh, it seems to be the big issue and capacity is tight, uh, in general. Across the board. So I couldn't point to a single culprit at this point. One positive, uh, we talked about supply chain issues associated with logistics and increased freight costs. Those have moderated and, uh, you know, we're, we're back as percentage of revenue, at least today. We're below where we were pre-COVID, so we're doing okay there. Great. Super helpful. Thanks for that cover, Paul. That's all I have. You're welcome. Thank you, Ryan.

This concludes our question and answer session. I would like to turn the conference back over to Paul Pickle for any closing remarks. Please go ahead, sir.

Thank you, Chuck, and thank you all for joining us, and have a great evening.

Conference is now concluded. Thank you for attending today's presentation. You may now disconnect.