Lantronix, Inc.

Q3 2023 Earnings Conference Call


spk01: Good day and welcome to the Lantronics third quarter results conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist 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 a touch-tone phone. 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 Rob Adams.
spk00: Please go ahead. Thank you. Good afternoon, everyone, and thank you for joining for the third quarter fiscal 2023 conference call. Joining us 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. You can find the call-in details for the phone replay in today's earnings 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 its 10-K and its 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 management's commentary. 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 will use. With that, I'll now turn the call over to Jeremy Whitaker, Lantronics Chief Financial Officer. Jeremy?
spk04: 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 third quarter of fiscal 2023 before I hand it over to Paul for his commentary. For the third quarter of fiscal 2023, we reported revenue of $33 million, up 5 percent sequentially and up 2 percent from the year-ago period. GAAP gross margin improved to 44.4 percent for the third quarter of fiscal 2023, compared to 43.8 percent in the prior quarter and 42.1 percent in the year-ago quarter. Selling general administrative expenses for the third quarter of fiscal 2023 were $9.9 million, compared with $8.3 million for the third quarter of fiscal 2022 and $9.8 million for the second quarter of fiscal 2023. Research and development expenses for the third quarter of fiscal 2023 were $5.1 million, compared with $4.5 million for the third quarter of fiscal 2022 and $5.1 million for the second quarter of fiscal 2023. The year-on-year increases in SG&A and R&D were largely driven by headcount we assumed in the September 2022 acquisition of Uplogix. Gap net loss was $3.1 million or $0.08 per share during the third quarter of fiscal 2023, compared to a gap net loss of $3.2 million or $0.09 per share during the third quarter of fiscal 2022. Non-gap net income was $2.1 million or $0.06 per share during the third quarter of fiscal 2023, compared to non-GAAP net income of $2.8 million, or $0.08 per share, during the third quarter of fiscal 2022. Now, turning to the balance sheet, we ended the March 2023 quarter with cash and cash equivalents of $12.8 million, as compared to $6.8 million in the prior quarter. Working capital was $49.9 million as of March 31, 2023, as compared with $50.6 million as of December 31, 2022. Net inventories were $51.7 million as of March 31, 2023, compared with $49.2 million as of December 31, 2022. The increase in inventories over the last several quarters was primarily due to the purchase of long lead time components to support the ramp of our supply arrangement with Gridspertise, an inventory assumed in the September acquisition of Oblogix. Now turning to our outlook. For the fourth quarter of fiscal 2023, we are targeting revenue of $33 to $36 million in non-GAAP EPS in a range of $0.06 to $0.08 per share. For fiscal 2024, we are targeting revenue of $175 to $185 million in non-GAAP EPS in a range of $0.50 to $0.60 per share. I'll now turn the call over to Paul. Thank you, Jeremy.
spk03: We are pleased to deliver sequential growth in March, and as you can see in our guidance, we look toward delivering continued sequential growth in our fourth quarter. As you might imagine, we, like our investors, are intensely focused on the state of the economy and our business. In fiscal year 2023, our results have been good, but below our expectations. Results have been hampered by the normalization of demand for our classic products, delays in the QED program, which pushed out those revenues into the following fiscal year, and our distributors, who for the last three quarters have been ordering less from us than they are selling through to their customers in order to lean their inventories. But importantly, the table is set for impressive growth in fiscal year 2024. We have achieved much, and we are poised to make significant progress towards our intermediate term goal of $250 million in annual revenue. I can talk a little bit more about our expectations for FY24 and beyond later in my prepared remarks, but first let's report on Q3 2023 results and our expectations for the remainder of the fiscal year. Turning to our March results, in our fiscal third quarter, embedded IoT solutions totaled $16.1 million, up 17% sequentially and 5% year-over-year, representing 49% of revenues. Sequential revenue growth was largely driven by our embedded Ethernet and Wi-Fi solutions, as well as our embedded compute products. On the Ethernet and Wi-Fi front, improving supply chain dynamics allowed us to ship it to pent-up demand. On the compute side, EV and automotive shipments are ramping on schedule, and the opportunity funnel is growing. Early-in customer demand for the TOG electric vehicle platform has exceeded expectations in new engagements with Fisker, Ghost, Renault, Volvo, and Daimler contribute to a growing pipeline, which we expect will translate to revenue in late fiscal year 2024 and 2025. Elsewhere within embedded, we saw some softening in our more classic network interface card products. The customer base for these products is largely federal in nature, and as can be the case with our federal customers from time to time, we are experiencing some delays relative to our forecasts. We are actively working with our public sector partners to address this and are confident that this is a temporary setback. Nevertheless, looking ahead, we see continued strength from embedded wired and wireless products, driven by continuing supply chain improvements and steady demand, coupled with compute-sum growth from EV and automotive. Turning to system solutions, revenues here totaled $14 million, or approximately 43% of revenues, down 6% sequentially and 6% year over year. Within system solutions, sales of our remote environment management products were up, thanks to increased buying from our communication customers. However, we acknowledge a continued temporary weakness in the financial sector, leading to delayed orders for these products. We expected to bounce back in the coming quarters, switch revenues tempered as well after recent seasonal strength. Looking at software and services, revenues in Q3 were approximately were approximately $2.9 million flat sequentially and up 36% year-over-year. We continue to make progress in selling high-margin recurring revenue with some additional contribution coming from our recent acquisition. ARR from Software and Services at the end of March remained above $5 million. For fiscal fourth quarter 2023, while we have noted some slowness in our turns-driven business and our distributors' continuing focus on leaning out their inventories, we enter Q4 with a record backlog strong bookings, improving supply chain and logistics dynamics, and an expectation of sequential growth. Turning to fiscal year 2024, we have a strong outlook, and our visibility into demand has never been better. We anticipate delivering over 30 percent growth during the next fiscal year. We are poised to begin shipping our QuantumEdge device while we pursue a pipeline of opportunities that could drive double-digit growth at Landtronics over the next several years. Today's customer engagement continues to improve, bringing quality, high-value opportunities into the pipeline. Looking at our top prospects, Lantronics is pursuing more than 40 opportunities that total over $150 million in peak annual revenue in applications such as smart cities, smart grid, EV and automotive, as well as security and surveillance, and telematics. This is an incredible departure from the business we inherited four years ago, and we are just about to hit our stride. We need only modest performance from our classic products to meet our growth target due to market share gains and new customer revenue despite a softening macroeconomic environment. We expect to deliver on that pipeline of opportunities I referenced and set the table for more of the same in fiscal year 2025. We look forward to reporting on our results in the near future. And with that, we'll start our Q&A session.
spk01: Chad? Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you'd like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. And the first question will be from Mike Walkley from Canon Chord Genuity. Please go ahead.
spk02: Great. Thanks for taking my question. And great to see the guidance for next year. I guess, Paul, just you could break down the Fiscal 24 guidance for us a little more. You know, you want to call out a contract, but how should we think about the timing of the grids expertise contract entering Fiscal 24, maybe linearity as it ramps? And I think, and I didn't catch the number, but you said 40 projects of $140 million. If you could correct me on that. How much of that might be considered in fiscal 24 if that's not in the model and could be upside if it hits earlier?
spk03: Okay, sure. So if we look at that contract, you know, the statement that we made in the past is that it will ship appreciably in FY24, but we do expect, you know, some contribution in FY25. And it's not the, you know, there is certainly potential upside to that. You know, we're looking at the total production schedule. If we kind of look at a September quarter start to that production, we would expect that to ramp as you would typically ramp production into December with a strengthening number and then, you know, continue over the next several quarters. And so the $40 million is just really kind of the first step. to realizing that contract, but certainly there's lots of additional opportunity. And so it was 40 opportunities and $150 million, and most of those opportunities, the revenue, we do get some contribution in FY25, but that's really more of a mass production number that is appreciable in FY25. But we do have some programs that we've been working on over the past year and a half and let's say even two years that do, if these programs go well, they do provide some additional upside potential in FY24. So right now we're giving a guidance to the midpoint number of 180. We feel like that is potentially a conservative number, but right now that's the current outlook.
spk02: Great, thanks. And just to follow up, Paul, you indicated your regular terms business, you just needed a modest contribution to hit that number. Can you kind of put that into context? Is that just slight growth or flat with some inventory clearing at your distributors? Maybe what's your assumptions to modest help from that side of the business and how long you think it's going to take your distributors to maybe to draw down inventory to levels they want to have it?
spk03: So that last half of the question is pretty interesting. I think Disney would prefer inventory levels of zero, and if we could just drop ship to their customers, that would be preferred. But I think if you compare against last fiscal year that turns business, we kind of talked about it. It was doing double-digit growth, and it really shouldn't. Historically, you're talking mid-single digits is probably the right number. There's a little bit of an ebb and flow to it. And so, you know, we saw that correction in the, you know, towards the end of the year. It has moderated and it has slowed the past couple of quarters. I'll say the last three quarters. But as of today, we've seen that turns business booking trend increase a little bit. So, We're cautiously optimistic that we see a bottom that turns business correction or moderation. And in terms of what we need out of it, honestly, at this point, we could probably tolerate, you know, a slight decline in that business and still readily, you know, as long as we get execution on new programs, we'll readily hit those numbers.
spk02: Great. Thanks. And last question for me, and I'll pass the line. You mentioned TOG. Sounds like that's going even above your expectations. And some of those other auto manufacturers, can you remind us how long it might take to transition trials with those into design ones and shipments? Is that more of a one- to two-year type thing or even longer?
spk03: Well, we started production with TOG, so we are shipping to them, albeit in modest volumes. But they just started to release those cars to the public or civilians. And so it will take them a little while to ramp up. Things are still moving along quite nicely, but I'm referencing really their deposit program. They sold, you know, to the tune of 4X the number of vehicles in pre-orders than they expected to, and they certainly can't meet all of that demand in the short term. So we're expecting some upsized orders out of them going forward, but that is probably some meaningful revenue that we'll fold into this next year. In terms of those other engagements, you know, they really are slated for FY25 production runs. We'll get some engagement, some level of contribution out of them in FY24. There is one program that is slated to contribute in the last quarter of FY24, but most of those engagements, our engagements probably do go about a year and a half in length and sometimes a little bit longer. But we've been working on them for quite some time and have been doing some development. So we're comfortable at this point talking about it in terms of FY25. Great.
spk02: Thanks for taking my questions. I'll pass the line.
spk01: Thank you. And the next question is from Jason Schmidt from Lake Street. Please go ahead.
spk07: Hey, guys. Thanks for taking my questions. Paul, in your prepared remarks, you've mentioned some improving supply chain dynamics and some product lines, but just curious if due to supply chain headwinds, there was any revenue that couldn't be fulfilled in March.
spk03: Yeah, we had about a million dollars that we couldn't meet. You know, we did due to supply chain, and a portion of that was due to a customer changing his SKU on us at the last minute, and so it falls in this next quarter. But, you know, supply chain is largely, you know, pretty good. Logistics costs have come down. Component costs continue to come down. You're going to see a little bit of support in the gross margin line as a result as, you know, that inventory flushes through over the next several quarters. But we do still occasionally have, you know, one or two components per BOM that is problematic. We did see some NXP pushouts this past quarter. But largely it's okay and it's manageable, but there are a handful that are still somewhat tough.
spk07: Okay, that's helpful. And then you noted record backlog. Curious if you could share that number.
spk03: I don't really want to give a total backlog. You know, essentially we've got that contract is now fully in the backlog number, and so it's a rather large number. as you can imagine, but we'll just say that we're in good shape. Starting backlog for the quarter ticked up nicely, so at this point for Q4, we're in a better position than we have been in previous quarters in terms of numbers needed to make the quarter. So things are just overall pretty healthy, good bookings trends in quarter, requested bookings trends, so I think we're in pretty good shape. Okay.
spk07: And then just the last one from me, maybe this is for Jeremy. I mean, growth margin picked up nicely sequentially. How should we think about that trending the rest of this calendar year?
spk04: Yeah, I think for the rest of the year, we'd kind of expect a similar performance in margins. It could be somewhat impacted by mix. On a positive note, we are seeing logistics costs tempering quite a bit from what we saw earlier in the fiscal year. So I think there is some potential upside from there if that continues and also into the next fiscal year. And then we are starting to see, you know, PPV costs coming down. So from a cash standpoint, we are paying a little bit less for inventory, but, you know, we're still continuing to amortize off some of those previous costs that we incurred. So I wouldn't expect to see benefit to the P&L from that until we get into the next fiscal year. So we do have some improvements, I think, you know, that are coming. But I would say for the next, you know, quarter or so, we'd expect it to be pretty consistent with where we've been.
spk07: Okay. That's helpful. Thanks a lot, guys. Thank you.
spk01: The next question will be from Ryan Kuntz from Needham. Please go ahead.
spk06: Thanks for the question, and I appreciate all the great color on the EV opportunities. I wonder if you could, Paul, reflect on some of the others you've been engaged with, whether it's, you know, government, smart city, et cetera, and, you know, which ones are, you know, performing kind of generally to plan, where there's some weaknesses, and where you see the most opportunity, you know, in fiscal 24 for upside. Thanks.
spk03: Yeah, I think that, you know, the toughest thing about IoT that just about everybody would reflect on nowadays is, you know, the fragmentation of the market. You end up in a lot of different use cases, and, you know, that's one of the strengths and the capability that we've built is we're able to address a disparate number of opportunities, but there's a few that I would highlight. We've got a program going on with Owl Labs, a bit more enterprise, faster time to revenue on this particular one, but audio-video conferencing platform that should drive some pretty decent volumes. And so that'll be a nice add for us. We continue to work with the New York DOT on a couple of proof of concepts for, let's call it SmartPoll applications. Right now there's not a lot of color that I could give on that program until New York gets a little bit further along and And so it's a bit of an IoT application, ThinkMesh network, surveillance, a number of different things that go into that program with a single pane of glass management backbone attached to it. So we're pretty excited about that one. There's 750,000 polls in New York City, so it would be significant volume over a number of years. And obviously, it's got a lot of application in other municipalities. One other one I might highlight, we recently got a new specification and are on the approved vendor list for AT&T to monitor, attach an IoT device to generators, several different types of generators, assess the status, the operational status, and the health, predictive maintenance, with a SAS platform as well. And those are all attached to base stations in an AT&T network. Pretty excited about that one. That one would be fairly near-term revenue as well. But it's a little bit early on in the process. So it's a little bit of customization on the hardware side from our standpoint, and then a ramp up in order to meet their needs. But we're working very quickly to make that happen. And the only other ones I would probably highlight at this point is we've got some engagements with P3. It's an Android automotive OS company that looks to provide a digital cockpit experience. And as we look at their customers, largely Tier 3 type, Tier 2 numbers, We do the hardware for a lot of customers in that market, like with an ART on a Bugatti platform, but they would like to standardize a telematics experience for in-cockpit, and this gives us an opportunity to do one development and roll it out across several platforms in automotive applications, and it leverages the work that we did at TOG, so we're pretty excited about that one as well.
spk06: That's great stuff. And AT&T stuff you mentioned, was that wireless or wireline side?
spk03: It's wireless.
spk06: Got it. And how about any quick commentary on the competitive environment, any changes there? You know, DG's been putting up some pretty good numbers of late, and just in general, what are you seeing in the space?
spk03: Yeah, I think, you know, in terms of competitors, there's definitely in certain areas, you know, we know that hardware is not a particular business model that we're especially fond of. We don't want to have to compete in commodity spaces. We want to utilize those commoditized hardware platforms or pieces in order to kind of pull through a larger play. I'd say it's similar to a DigiStory in that they're leveraging a much larger product and technology base in a particular space. We are making the same inroads, albeit in different verticals and different use cases. But I think anybody that kind of thinks in terms of just providing hardware, instead of looking at a software hardware solution or platform solution, bringing in additional pieces, there's a lot of struggling right now. It kind of comes down to who has the part available in the timeline that a customer wants it. And if your lead time is a week longer or than somebody else's, then they'll end up picking up whatever's on the shelf. And it feels like a buyer's market nowadays unless somebody's really looking at a total solution. So we think that that provides us a little bit of insulation against some of the softening and market demand.
spk06: Got it. Super helpful, Paul. Thank you.
spk01: Thank you. And the next question is from Scott Searle from Roth Capital. Please go ahead.
spk05: Good afternoon. Thanks for taking my questions. Hey, Paul, just to follow up on that pipeline, I think you said it was $140 or $150 million. I'm wondering if you could calibrate us in terms of what your win rates have been and the close rates have been on that front. And as well on the software front, I was wondering if you could give us some idea in terms of where are you seeing the highest attach rates right now and the opportunity for that going forward?
spk03: Okay. Yeah, so win rates, you know, Our win rate is actually really good, but I would caution you to say that it's been fairly early innings. We don't really lose a lot of opportunities that come our way, mostly because when we start talking about them as opportunities and in the pipeline, they're already qualified, they're already funded, and so in a lot of respects, we end up signing statement of work or customization efforts on these programs, and once they do that, it's really kind of a pretty predictable thing that it will close. The question is, is do they hit their forecasts or not? You know, obviously NEAT was a new customer for us in 2020. It was a new application. They blew the number out of the park, but largely because COVID happened and everybody got to remote work environments. And aside from that, probably would have been a little bit slower increase. I think FLOC also, great customer, great program, great ramp. also very opportunistic with a lot of the strife that's going on. People started to focus on security. So some of it has been fortuitous, but very early innings. But now that we're talking about some of these engagements, our win rates generally are really good. I mentioned Fisker. Fisker is a name that's come around a few times. They're pretty well-funded. We'd like to say that third time's the charm, but we're pretty confident they'll push some volumes as well. Each guy we assess, and I think as we look at FY25, we're feeling pretty good about this list. Numbers might go up or down. Scott, I forgot the last question, the last half of that question.
spk05: Just on the software front, Paul, where are you seeing the attach rates and the opportunity both today in terms of where you're getting the attach rates and where you see that looking forward in fiscal 24-25?
spk03: Yeah, the attach rates are going really well in REM especially. This is customer-based. It prefers on-prem solutions. We have several on-prem solutions. And then we built out a specialized network management tool that really gives them, it's not just a single pane of glass where you're managing your devices. But the reality is it's more of a network management tool that gives you higher order functions, allow you to really drill down on what's happening inside a data center. So specialized tools that deliver what customers need. We see a lot of success there. On the AT&T front, for instance, that software attachment is going to be largely dependent on the method of security that we implement. And right now we're going through their network certification, and so far things are looking pretty good. So, you know, the higher order security that we brought forward, so when you're talking about industrial applications, those are the customer cares. You know, if you look at the TOG program we actually built, into our platform and OTA function. And so these are the types of things that we have experience with and we can bring. If you're talking about a low-end IoT application that's deployed in the masses, you know, I'm not sure that we'd have the same level of traction there, but that's not the market that we're targeting.
spk05: And lastly, if I could, you mentioned on the console server front, right, financial markets. has been a vertical that you guys have had success in. I'm wondering if you could provide a little bit more color on when you think there might be a recovery timeline associated with that. And lastly, inorganic opportunities, kind of wondering what you're seeing out there, if there's rationalization in terms of valuations that companies are looking for in this type of market. Thanks.
spk03: Okay. On the console servers, you know, financial markets, we saw some hesitancy. I think we actually mentioned it on an earnings call two quarters ago. And, you know, this was before we saw a lot of the banking pressure. I think if you're talking to smaller banking institutions, there's definitely going to be continued ordering hesitancy. We typically deal with larger institutions, Bank of America, American Express. But even in those markets, they're, you know, we're kind of waiting on the CapEx cycle to loosen up a little bit. have good visibility. They sit there and say that, no, it's needed, the deployment's needed, and it's just a matter of timing. So we don't anticipate a long delay. I'd say, you know, in some cases a one-quarter delay is all that we'd expect. On the, you know, let's call it strategic alternatives front, right now valuations are attractive. um you know but we're still we still live in a risk-off environment so um you know i think going out and getting financing for an asset right now is uh you know it'd be fairly expensive and we'd be looking at uh rates that probably cost the capital that resembles that of equity so the good news is we have a couple of different currencies to play with i think we would uh Let me make clear that we are extremely focused on executing what currently is our organic growth plan, but we are still kicking the tires on a number of different assets to see if it makes sense. I think for the most part, the market still sees that, hey, we're bigger together. I think smaller assets are going to be constrained on capital, and so it makes it a little bit easier to pick things up. But, you know, we'll see how it goes over the next couple of quarters.
spk05: Hey, Paul, one last one. Just, you know, you talk about the cost of capital. You generated some cash this quarter, but inventories are still pretty elevated. Part of that is related to the grid expertise. Could you just walk us through how you see that transitioning over the next couple of quarters? Should we start to see that work down with normalization of the supply chain to give you a little bit more flexibility? Thanks.
spk03: Yeah, if you ignore the gridspertise opportunity and the inventory associated with it, we had inventory levels tick up ever so slightly in the quarter. And so right now, I think it's just indicative of support for some of the growing revenue opportunities and bookings that we saw. I did mention that we had difficulty shipping to about $1 million worth of revenue this past quarter. That's going to flush through this next quarter. And I think if you look at the next quarter, three quarters, you're going to see that inventory number optimize, you know, pretty aggressively. And then as that flows through, we'll get some of the PPVs through, you should see some nice support on the gross margin line as well.
spk05: Great, thanks.
spk01: And ladies and gentlemen, this concludes our question and answer session. I would like to turn the conference back over to Paul Pickle for any closing remarks.
spk03: Well, thank you for joining us and have a great day.
spk01: Thank you, sir. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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