Lantronix, Inc.

Good day and welcome to the Landtronic's fourth quarter 2022 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, corporate development, and investor relations. Please go ahead, sir.

Thank you, and good afternoon, everyone. Thanks for joining the fourth quarter fiscal 2022 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, you can find the call-in details for the phone replay in today's release. 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 10-K and 10-Qs. Landtronics 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 mandatory commentary. Furthermore, during the call, the company will discuss some non-GAAP financial measures. Today's 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 will use. With that, I'll now turn the call over to Jeremy Whitaker, our Chief Financial Officer. Jeremy?

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 of fiscal 2022 before I hand it over to Paul for his commentaries. For the fourth quarter of fiscal 2022, we reported record revenue of $35.9 million, an increase of 74% when compared to $20.6 million for the fourth quarter of fiscal 2021, and up 11% sequentially as compared to $32.3 million reported in the third quarter of fiscal 2022. The year-on-year increase was driven by organic growth of 29% in addition to the contribution from our acquisition of the TN companies. Gross margin was 41.9% for the fourth quarter of fiscal 2022 as compared with 42.1% in the prior quarter. Selling general administrative expenses for the fourth quarter of fiscal 2022 were 9.4 million compared with 6.1 million for the fourth quarter of fiscal 2021 and 8.3 million for the third quarter of fiscal 2022. Research and development expenses for the fourth quarter of fiscal 2022 were $4.9 million, compared with $3.6 million for the fourth quarter of fiscal 2021 and $4.5 million for the third quarter of fiscal 2022. The year-on-year increases in SG&A and R&D were largely driven by the acquisition of the TN companies at the beginning of our fiscal year. Gap net income was 2.5 million, or 7 cents per share, during the fourth quarter of fiscal 2022, compared to a gap net loss of 1.1 million, or 4 cents per share, during the fourth quarter of fiscal 2021. The increase in gap net income was primarily due to non-cash income related to our most recent acquisition. Non-gap net income was 2.9 million, or 8 cents per share, during the fourth quarter of fiscal 2022, compared to non-GAAP net income of $1.7 million, or six cents per share, during the fourth quarter of fiscal 2021. Now, turning to the full year results. Net revenue for fiscal 2022 was $129.7 million, compared to $71.5 million in fiscal 2021, representing an all-time record and an increase of 81%, driven by organic growth of 31% and contribution from the acquisition of the TN companies. Gross profit as a percentage of net revenue for fiscal 2022 was 42.9% as compared with 46.2% for fiscal 2021. The decline in gross margin percentage was primarily due to product mix and increased supply chain costs during fiscal 2022. Gap operating expenses for fiscal 2022 were 60.6 million, compared with $36.4 million for fiscal 2021. Non-GAAP operating expenses for fiscal 2022 were $44.8 million compared to $28.2 million for fiscal 2021. As a percentage of revenue, non-GAAP operating expenses for fiscal 2022 declined as a percentage of revenue to 35% as compared to 39% of revenue in fiscal 2021. For fiscal 2022, we reported a gap net loss of 5.4 million or 16 cents per share compared to gap net loss of 4 million or 14 cents per share for fiscal 2021. The increase in gap net loss was primarily due to non-cash acquisition related costs. Non-gap net income increased by 97% to 11.4 million or 33 cents per share for fiscal 2022. as compared to 5.8 million or 19 cents per share in fiscal 2021. Now turning to the balance sheet. We ended the June 2022 quarter with cash and cash equivalents of 17.2 million as compared to 9.7 million in the prior fiscal year. Working capital increased to 54.5 million as of June 30th, 2022 as compared with 51.8 million as of March 31st, 2022. Net inventories were $37.7 million as of June 30, 2022, compared with $33.2 million as of March 31, 2022. Now turning to our annual outlook. For fiscal year 2023, we are targeting revenue of $149 to $162 million, representing growth in a range of approximately 15% to 25%. In non-GAAPs, EPS in a range of 39 to 44 cents per share, representing growth in the range of approximately 18 to 33%. We expect the revenue and earnings growth to be more heavily weighted in the second half of the fiscal year, as our two largest design wins are expected to ramp into full production during the second half. I'll now turn the call over to Paul.

Thank you, Jeremy. I am pleased to report results today because I am not only reporting on our fiscal fourth quarter and 2022 year end results, but I am also laying out for you, our investors, what is expected to be an exciting fiscal 2023 for all of us. Starting with Q4, as Jeremy revealed to you, revenues for the quarter totaled $35.9 million, up 74% year over year and 11% sequentially. For the year, we grew revenues an impressive 81% and 31% organically. While we intend to continue to build on capabilities and competencies through M&A, it is our ability to grow organically that will be the true test of our operating philosophy, as well as our ability to integrate and manage those acquisitions. Q4 results were solid, with our outperformance coming against the backdrop of ongoing supply chain disruptions and increased costs, which continue to temper profit growth. During Q4, we were able to secure additional semiconductor supplies that we had originally expected in the September quarter, which helped us to exceed our initial revenue expectations. Despite these additional shipments, we still saw late shipments to customer request date increase to approximately $10 million, up from just over $7 million last quarter. We are starting to see supply improving for some of our components, but on the whole, it remains a mixed bag as we continue to see long lead times for a number of important products. Looking at requested shipments for our fiscal first quarter ending in September, we expect a slower start to our fiscal year versus Q4. However, our operations team will continue to aggressively source supply in hopes of meeting customer requested delivery dates. In aggregate, we expect the supply chain to continue to improve over the remainder of the calendar year. As we turn to our product discussion, we are reporting on the business with three new product classifications which better describe and give insight into our business. Those are embedded solutions, system solutions, and software and services. Embedded solutions will continue to include devices such as SIPs, SOMs, and subassemblies, which are ultimately embedded within a customer's products. System solutions are our standalone box products, though they may be a complementary part of a larger IoT solution of sorts. And finally, our software and services will include software licensing, SaaS, and other services with recurring revenue as well as design services. Looking at our fourth quarter, embedded IoT solutions totaled $18.4 million, up 20% sequentially and 68% year-over-year, and represented 51% of total revenues. For the full year, embedded IoT solutions totaled $61.8 million, up 60% year-over-year, and 48% of revenues. Results were driven by record compute revenues comprised of our enterprise video conferencing products, as well as our security and surveillance solutions. As we look to fiscal 2023, it is going to be another exciting year for Lantronics, and we are pleased to announce that we have received our initial production purchase order from the electric vehicle manufacturer, TOG. For TOG, we developed a complete automotive infotainment computer that can interchange different SIPs or system and packages and processor capabilities, thus allowing TOG to customize its solution depending on the vehicle. It will handle all of the camera processing, driver guidance, and various consumer applications expected in today's modern cockpits. We expect to begin volume shipments of this device appreciably in the second half of our fiscal year. Turning to system solutions, revenues in Q4 totaled 14.6 million, or 41% of revenues, down 2% sequentially, but up 154% year over year, with most of that growth coming from acquisition. For the full year 2022, system solutions totaled 59 million, or 46% of revenues, up 144% from fiscal 2021. We also expect a strong showing from systems in 2023, as we have now signed our pilot production agreement for the Quantum Edge Device Compute Platform with Smart Grid Energy customer, Enel. Pilot production of approximately 1,000 units should commence in our second fiscal quarter. After receiving an additional award this quarter, we currently have production awards for a total of 39,000 production units. As previously guided, we conservatively expect this project to contribute $10 to $20 million of revenue in fiscal 2023. Looking at software and services, revenues in Q4 totaled $2.9 million, up 36% sequentially, and accounting for 8% of total revenues. For the full year, software and services totaled $8.9 million, or 7% of total revenues, up 2% year over year. We exited the fiscal year with a high-margin subscription, ARR, of approximately $900,000. While shy of our goal of $1 million to $1.5 million exit rate this fiscal year, we continue to make progress on this front with continued uptake by our customers given our slated release of compelling new software products and services. As we look toward 2023, we continue to tackle a robust design funnel, focusing on those designs that give us the best long-term volume potential. As we reflect on the last three years, we have accomplished much. We have significantly expanded our opportunity with a company better equipped with the capabilities and competencies to address today's emerging IoT market. We have optimized our go-to-market strategy and delivered on stated synergy targets by efficiently integrating our acquisitions. Against the challenges and constraints of the current environment, we delivered better than 30% organic growth in fiscal year 2022, and revenues have almost tripled from three years ago. But we have more to do as the positive secular market trends are just beginning to manifest. As we look toward fiscal 2023, we intend to continue delivering for the benefit of our shareholders. In summary, we are pleased with our fourth quarter and year-end results posted today, and we look forward to a breakout year in 2023 as recent design wins ramp into production. While supply chain and related logistics issues will continue, we feel we have enough demand and visibility to drive results in line with our fiscal year 2023 guidance. That completes the prepared remarks today. So we'll now turn it over to the operator for Q&A.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. And to withdraw your question, please press star then two. And at this time, we'll pause momentarily to assemble our roster. And the first question will come from Mike Walkley with Canaccord Genuity. Please go ahead.

Great. Thanks for taking my questions, and congrats on the strong fiscal 2022. I guess, Paul, just in terms of your guidance, can you just help us maybe think about the seasonality for the year? It sounds like it's a much stronger second half of the year. You know, congrats on the TOG and the NL deals. Any, should it be a steady sequential increase from maybe a down sequential September quarter or how you're thinking about how that linearity plays out in the year given supply issues also?

Yeah, I'd say it's, you know, the Q1 is less seasonality and it's more a product of, you know, some of the supply chain limitations that we're running into. You know, you don't really get the answers out of the component suppliers. And sometimes you're able to, you know, they have upside demand that they deliver to you late in the quarter. You're able to convert that. I think, you know, that's what's kind of happening in Q1. We had slated product that was due to be delivered on our dock in September. And then we were able to bring that into the June quarter, which, of course, you know, as soon as we can convert product and components into product and deliver that to our customers, it's pretty critical that we get that out the door. In terms of these larger programs, we've had long-term visibility. Some of the award letters have allowed us to place long lead time purchase orders in place at no risk to us. And so we're able to really kind of schedule and deliver to those forecasts. So that's why we've got pretty good visibility in the December quarter and beyond. And that's some of the limitations we're running into for the September quarter.

Great, thanks. And then just on TOG, now that you've got that order, can you remind us kind of the long-term opportunity with them and the timing when that hits the model?

Yeah, so, yeah, they're doing a plant opening in October. You know, the assembly lines are being qualified today or going through. They're actually in place and producing bodies and are going through qualification. I was there this past quarter, visited the plant, so their production is pretty much in line to start kind of that January 23 timeframe. So the plant's opening in October. You can expect some components to be delivered in the December timeframe, but bulk of that delivery will come in the latter half of our fiscal year and continue on through 2023. And if we think in terms of total unit opportunity, first purchase orders for 25,000 sips at this point. And their first year forecast, I think, is roughly 30,000 and moving to 60,000 the year thereafter. But plant capacity is basically, I think, at max 167,000 units. Great. Thanks.

Last question for me, and I'll jump in, too. Just Jeremy, with the product new divisions and the product mix changing in fiscal 23, anything to think about on gross margins to be somewhat stable or maybe a little down given some of these new projects ramping?

Yeah, so I would, you know, as it relates to some of our largest design wins, such as Enel with the QED and then also with TOG, Those tend to be on the lower end of our scale, so there will be some downward pressure as it relates to that. That said, we do, you know, with the higher revenue, we'll get some better absorption. And with the, you know, expected uptick in some of our higher margin areas like services, that will also give us a little bit of relief. I think also in the second half of the year, we may begin to start seeing some relief as it relates to some of the different supply chain costs beginning to normalize. So like I said, I think from a straight product mix, some downward pressure, but some of that will get offset by some of these other areas as we progress through the year.

Yeah, Mike, I'll give you two other pieces of color as well. You know, we just at the end of July, I believe it is, we're off that transition services agreement with CSI. So kind of final integration warehouse move completed. That was basically $1.2 million a year that doesn't repeat in fiscal 2023. And this particular quarter was, you know, the purchasing of components was a little bit more normalized. It'll take a while for PPVs to kind of work through the P&L, but freight was just – we saw a significant increase in freight, upwards about 50%. You know, you couldn't forecast that kind of increase. I don't see those types of increases, you know, repeating, and so we should be on the downward trend in terms of some of those additional supply chain costs.

Great.

That's very helpful. Thank you. The next question will come from Scott Cyril with Roth Capital. Please go ahead.

Hey, good afternoon. Thanks for taking my questions. Nice to see the strong organic growth, guys. Maybe just to jump right in, in terms of the June results, OPEX was elevated. I'm wondering if that's more of a normalized number, if there's any one-time impact in there. And then, Paul, to follow up on some of your comments related to gross margins, freight was elevated as well. Component supply chain remains difficult. But it sounds like things are improving going forward. I'm wondering what the magnitude of the impact was in the June quarter and how we should think about that going into September and beyond and that trajectory over the course of fiscal 23.

Yeah, it's hard for us to kind of project what freight is going to be going forward. It was a significant uptick kind of halfway through the quarter. And I think as we get back to a more normalized environment, we could start to utilize some lower cost shipping lanes as well. So I don't think that they necessarily continue to tick up, but should normalize. And I think we'll be able to whittle those down. I will state, as I have stated before, that I do think that we have quite a bit of improvement to be had on the COGS line, just in the way that we've kind of executed the purchasing, supply chain management, commodity management, I should say. And then as we get into a more normalized environment, I think that just brings it all back around. In terms of OPEX, I'll let Jeremy give you a little bit of color there, but just simply say that we did have some R&D projects that had to go to certification, those certifications were at least a part of the uptick in OPEX. I wouldn't look at the OPEX number as a normalized number, something that's going to continue to repeat. We did add some one times in there as well, some variable comp. Any other color you want to highlight, Jeremy?

No, I was going to point out the variable comp. which was higher than what we saw in Q3. And I would expect that to normalize in Q1 and have a lesser impact.

Hey, Jeremy, is there, you know, can you quantify the gross margin impact in the June quarter? And also, Paul, just to clarify, I think in your comments as well, you talked about $10 million up from $7 million. So there's basically, you know, kind of $3 million was left on the table in effect this quarter for various component availability issues.

Yeah, I'll cover the late customer request date. We were making pretty good progress. We actually expected to whittle down that $7 million. We did get some significant uptick in demand in the quarter. If I look at ordering patterns, they were actually pretty good. We're seeing some of the ordering patterns starting to request product in the out-quarters as well, so customers are getting a little bit more visibility and are able to plan a little bit better. I think that will kind of help us on our supply chain costs and not having to go out to the spot market. But, yeah, it was unfortunate that we saw that uptick in late to customer request date. But on the positive demand for the quarter was really strong. If you take that $3 million and add it to our results, it gives you a good indication of where the quarter demand rate actually was.

And if I could just lastly follow up on some of Mike's questions around the guidance, nice to see that 15% to 20% outlook for the year. You did mention that it starts a little bit slower in September. I'm wondering kind of what that means sequentially in terms of the trajectory of revenues. And then given the timelines for some of the larger opportunities with DOG and with Enel, it sounds like they start to ramp up in the back half of the fiscal year. So a couple of questions in there. With You know, given that you're seeing 30% organic growth, you know, 15% to 20% seems like it's a relatively modest number. I guess I'm wondering, what are you factoring in in terms of an L contribution and TOG contribution in the year? And then kind of given what sounds like a back-end loaded year, is it correct to be assuming that you're exiting fiscal 23 probably somewhere in the $45 million plus range per quarter, somewhere in that ballpark?

Yeah, that's a safe assumption. I mean, if we're going to do $150 million at the midpoint next year, you know, we have to have some quarters that are starting with a four. And we do expect that to happen. In terms of contribution, I'm a little conservative on the contribution of the NEL just, you know, especially with new programs that are ramping up. We expect it to start to affect our December quarter. Um, you know, that still remains true. We're saying 10 to 20, it's probably more on the order of $20 million. Um, and you know, right now we're, we're dialing in a one 50 midpoint. We think that 20% growth is pretty good. Um, you know, internally, I think we have line of sight, uh, some possibilities of being a little bit better. Um, but we're, we're trying to be prudent here, plan it out, uh, try to, uh, I guess, rationalize our customer expectations in terms of their ramps as well. So, you know, we'll provide additional color as we're able to move further along in the fiscal year. Great. Hey, thanks so much. Congrats on the quarter.

Yeah, and for further clarification, that midpoint is about 155. Thank you.

The next question will come from Christian Swab with Craig Howlam Capital Group. Please go ahead.

Hey, thanks for taking my question. So I guess it's like, you know, what is your, you know, we could do the math, but why are gross margins going to be, you know, is it, it's kind of confusing because we talk about we're not adding a lot of potential revenue from the big programs at lower gross margins, but your implied gross margins for your revenue guidance, you know, is kind of below, you know, what we've kind of been operating at, you know, lately and certainly last year. So can you help give us clarity there, please?

Yeah, I think if you, you know, obviously if you do the math, it's right in line with what we have been driving. I think if we look at what our stated operating model is, it's 10% a bit of margins. We're just slightly below that 9%. doing okay in today's environment. We'd like to be driving 10% quite solidly. And so right now the EPS guidance is right in line with that revenue guidance. So it's not really an expectation of gross margins drifting downward. We think we can actually improve that as we go through the year. But at this point in time, trying to forecast exactly what's going to happen over this next fiscal year We're trying to be prudent and just anticipate some of those supply chain costs coming out, you know, out of the P&L a little bit later. But I do think that there's certainly the potential for upside. But at this juncture, this is what we feel is prudent to forecast.

Okay, that's fair. What do you believe, what do you guys are assuming your organic growth rate is on a go-forward basis or over the course of the next year?

x you know a couple of the name big program webs so uh what we're forecasting is 20 percent that's that's what i think we can we can dial in i think we've got line of sight to do better than that as the year goes along um but they're you know some some of these windows you know given what these production ramps are expected to do It could move in and out of that last June quarter, some of the bigger quantities that ramp up. And so we're just trying to forecast what we currently see today. Does that make sense?

Yeah, I guess I'm just trying to gauge, you know, just how conservative we're trying to be. I mean, if we're on the high end of revenue expectations for next fiscal year, you know, for a NEO, I mean, that's pretty much, you know, that puts you near the top end of your growth expectations that you're outlying today. So, you know, that kind of suggests a lot of conservatism, you know, and many other programs, as well as a couple of other big programs that we've talked about. Am I thinking about that right?

You are. I think that kind of makes sense the way you're framing it. You know, bear in mind this program starts to ramp really at the end of the December quarter and more appreciably in our third fiscal quarter, so that March quarter. There is one other supplier that Enel has some dependency on. That has been the long pole in the tent. We've been ready to go since the September timeframe. September quarter timeframe. So this particular quarter that we're in, uh, as, uh, Nell has requested, but, uh, the other vendor has not necessarily delivered what they've needed to deliver because of some of their supply chain dependency. So, um, you know, given the fact that we have some dependency on that other vendor, it's, uh, not, you know, it's, it's, I think it's prudent, uh, to anticipate, uh, be a little bit more conservative anticipating some of those same type of supply chain disruptions happening, And so when we look at it, we see it starting to happen in December quarter with a ramp up that could be quite steep, but at the same time, you have to ramp up production on a 4U compute box. So it should move pretty steadily up from that timeframe through the end of the calendar year.

Okay. That's great. One last question, if I can squeeze it in here is, Is there any update for us on, you know, the M&A landscape and recent valuation changes, at least in the public markets here in tech this year? Can you give us any update on any potential funnel, or are you seeing more stuff to look at, or has nothing really changed?

We have had some additional meetings. I'd say that the opportunities are great. a bit more actionable of late, and the conversations are a bit more numerous than they have been. Valuation certainly helps. You know, we went through that kind of VC cycle last year where things were quite good, and I think people wanted to go, you know, make a run of it for themselves, raise money. A lot of those players are, you know, things didn't pan out the way quite like they thought that they would, and so we're now having discussions again. So, I think it's a good environment. At the same time, we want to make sure that we pick the right asset. Given all the growth that we have going on, I think we can afford to be a bit picky and pick something that's a decent value, but also strategically aligned. But there's definitely a couple of tuck-ins out there that are definitely actionable. So it's a good environment. Valuations are a bit more reasonable. Starting to see some depressed assets, which is kind of a good sign as well. you know, it could present a good buying opportunity.

Great. No other questions. Thanks, guys.

The next question will come from Jason Smith with Lake Street. Please go ahead.

Hey, guys. Thanks for taking my questions. Just two quick ones. First, could you just comment on what you're seeing in the distribution channel from an inventory standpoint?

Sure. That one's kind of easy. We saw distribution throughout the channel decrease, so they sold out more than they purchased. A bit disappointing in terms of having to go bang on distributors and say, hey, you're already at minimum stock levels, and if we're just going to ship directly to your customer, we'll just cut you out of the loop and recoup that margin. But We did see those inventories come down. I think that's a good sign. There's nothing building up in the channel, but I think it does kind of indicate a little bit of hesitancy out there in terms of today's environment and wondering what might happen. So I do think that these are intentionally bringing that down. We look at it to make sure things aren't building up so that we don't have a whiplash effect, but they're in pretty good shape right now for us anyway.

Okay, that's helpful. And then just a clarification. I know you mentioned that you could ship more in the June quarter, hence sort of the outperformance, but I'm just trying to get a sense on, was this characterized, would you characterize this as sort of pull forward in demand and some of the softness here starting fiscal 23 is just sort of that air pocket or is the softness starting this year really just a function of the supply chain still?

Yeah, I don't see it as a pull forward. So we exited this quarter with $10 million of revenue that customers requested in the June quarter. They wanted it. We couldn't deliver it. So that went up by $3 million over the previous quarter. So I kind of look at that number. The reason why we've been tracking that number is because it's a good indicator of demand. So demand still appears to be strong, at least for us. I will say that I, you know, we've been talking about our base business, you know, that kind of long sales cycle, industrial business that's several years old. It was growing at a double-digit rate. It really shouldn't be growing at a rate quite that strong. So we've been talking about expectations of that moderating around this June timeframe. I think we're starting to see that and it's at mid to high single digits growth as opposed to double digit growth, which is more appropriate for that business. So a little bit of catch up has been done, but as indicated by the late to CRD shipments, despite being able to beat our revenue expectations in the June quarter, we still didn't meet everything that customers requested. If I could get enough supply, be able to ship against that late-to-CRD number of 10 million and be able to certainly outperform in the September quarter, it's just we're truly at a juncture at this point where we're supply chain constrained.

Okay. Got it. Thanks a lot, guys. Thanks, Jason.

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

Thanks for the question. Most of them have been answered, but I wanted to ask about your new product segments here and what your expectations are going forward as it relates to your backlog and your pipeline opportunities, even if it's not quantitative, maybe some qualitative directional expectations there, and also kind of help us understand how to bridge your legacy segments around REM and IoT into the new definitions and what sort of verticals drive which sorts of categories. Thank you.

Yeah, I think we'll be providing some reconciliation. Jeremy, you can correct me if I'm wrong, you know, where we kind of will provide, you know, the older, the previous segments and then the new segments side by side. So you get a sense of what both of those are doing. I think as we look at solutions, Enel will be a big part of that. So in terms of absolute dollars, total system solutions have higher ASPs attached to them. and so that particular segment can substantially outperform all the others. But we do like the sticky embedded business as well. You design into a customer's platform, and they just continue to buy those sub-assemblies and deliver those. We've had strong growth in that segment as well. Qualitatively, I would say we'll probably get decent growth out of both, with maybe systems edging out embedded towards the second half of the year as that NL platform starts to shift because there are a lot of dollars attached to that. And then in terms of software and services, we wanted to provide visibility to how we're doing on the software side and talk about it in a meaningful way. As we still look at high margin ARR, still very early innings, but we wanted to report on that goal that we had for this fiscal year. In addition to that, I wouldn't expect the design services business to grow at an appreciable rate. That's not a good indication of what the business is actually doing because most of that revenue is leveraging you know, hardware revenue, residual hardware revenue that would enter, that would be accounted for in an embedded or a solution category. So we kind of look at that more meaningful in that software and services bucket is really kind of the software play. And so we'll continue to track that number, provide some visibility for that.

Yeah, Paul, and I can confirm that we're disclosing both the previous classification and the new classification, both in our earnings release and in the form 10-K. So investors can see the new and the old classifications as we transition.

Perfect. Thanks. And, Paul, is there an updated target for a mix of software services or software as a standalone we should think about at all?

Not at this time, but we are going through and looking at some of the programs that we have and are totaling that. I will update a target over this next year, or probably at this next quarter we'll give an update in terms of what our target exit rate is for the year. Thank you.

Thank you. The next question will come from Scott Cyril with Roth Capital. Please go ahead.

Hey, Paul, just a quick follow-up from an industry standpoint. Given the Semtech serial wireless or the pending combination, are you seeing any implications for your business in terms of more opportunities opening up, you know, particularly on the module front or otherwise? Thanks.

Yeah, it's an interesting one. I think, you know, if you look at that semiconductor consolidation cycle, some would argue that it's run its course and then you would possibly want to start to move up the food chain, I think as we get some successes in specific areas related to specific technologies, compute being one of those, I think we become an attractive asset to either invest in or acquire. So I think it's expected to happen in more verticalized segments, I think, is a reasonable expectation. But it is interesting, some of the technology partnership discussions that we're having these days, and it's all around semiconductor guys. So one of the things about – it's intuitive if you think about it. Today's semiconductors are getting more and more complicated, and somebody has to unlock that potential. More often than not, customers just don't have the ability and the expertise inside to really leverage all that a semiconductor has to offer. somebody like us that's able to take Qualcomm platform and turn it into an end product for a customer really becomes a valuable asset. So that's a value proposition that we're definitely exploiting. Clearly is driving some results. That's where a lot of our success is happening in terms of revenue. And I would expect those technology partnerships to become more important to us in the future.

Great. Thank you.

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

Thank you for joining us today and have a great week.

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