Lantronix, Inc.

Hello and welcome to the Lantronics 2023 Q4 results conference call. All participants will be in 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 your telephone keypad. To withdraw from the question queue, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Robert Adams. Please go ahead.

Thank you. Good afternoon, everyone, and thank you for joining the fourth quarter fiscal 2023 conference call. Joining us on the call today are Jeremy Whitaker, our interim CEO and chief financial officer, and Jacques Issa, our vice president of marketing. A live and archived webcast of today's call will be available on the company's website, In addition, you can find the call-in details for the phone replay in today's earnings release. 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 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 use. With that, I will now turn the call over to Jeremy Whitaker, Lantronics Interim CEO and 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 2023 before I provide our financial targets for fiscal 2024 and an update on our CEO search. For FQ4 2023, we reported revenue of $34.9 million, up 6% sequentially and down 3% from the year-ago period. The sequential growth of 6% was largely a function of a strong quarter for our embedded solutions products. led by an embedded compute sale of approximately $3.4 million to an in-flight infotainment customer. We also experienced continued contribution from our electric vehicle customer, TOG. Systems solutions were relatively flat quarter over quarter and included $1.4 million in revenue from the delivery of QED pilot production units to Gritsvertise. We saw weaker quarter and out-of-band products, as our larger financial customers continue to exhibit cautious spending patterns. We expect out-of-band to improve against the backdrop of the upcoming Fed buying season, and sales here should increase in the September and December quarters, adding a boost to gross margins. In FQ4 2023, software and services revenues were down sequentially, a function of lower design services revenue. However, there is an ebb and flow to these design projects, and we expect improvement going forward. Gap gross margin was 39.5% for FQ4 2023, compared to 44.4% in the prior quarter and 41.9% in the year-ago quarter. The decline in gross margin was primarily a function of product mix, with the biggest variances being higher embedded compute sales and lower out-of-band sales, as a percentage of revenue during FQ4 2023. For FQ1 2024, we expect our sales mix to normalize with lower compute sales and gross margins closer to the mid-40s. GAAP SG&A expenses for FQ4 2023 were $8 million compared with $9.4 million in the year-ago quarter and $9.9 million in the prior quarter. The decline in GAAP SG&A was primarily due to lower share-based compensation expense and a focus on cost containment. GAAP R&D expenses for FQ4 2023 were $4.9 million, flat with the year-ago quarter and down from $5.1 million in the prior quarter. GAAP net loss was $1.7 million, or $0.05 per share, during FQ4 2023, compared to GAAP net income of $2.5 million, or $0.07 per share, in the year-ago quarter. Non-GAAP net income was $2.2 million, or $0.06 per share, during FQ4-2023, compared to non-GAAP net income of $2.8 million, or $0.08 per share, in the year-ago quarter. Now turning to the balance sheet. We ended FQ4-2023 with cash and cash equivalents of $13.5 million. an increase of $650,000 from the prior quarter. Working capital was $50.2 million as of FQ4 2023 and remained steady with the prior quarter. Net inventories were $49.7 million as of FQ4 2023, a decrease of $2 million from the prior quarter. The balance of inventory includes nearly $10 million of long lead time components that were prepaid by a customer. We expect to consume these components during fiscal 2024 as we deliver on the customer agreement. Now turning to the first quarter and fiscal year 2024. We expect that revenue in the first quarter will be down sequentially as the revenue growth in FQ4 2023 was largely a function of a significant shipment to the customer deploying in-flight infotainment systems. We don't expect this customer to contribute at a similar level in the upcoming quarter. That said, we remain confident about the fiscal year ahead of us and expect to deliver upon the fiscal 2024 guidance that we provided during our previous earnings call. We entered fiscal 2024 with record backlog, a cautious but relatively steady demand environment, and new compute designs moving into production. Compute solutions, both embedded and at the system level, are expected to drive much of the growth in fiscal 2024 and beyond, led by smart grid deployments, intelligent vehicles, and enterprise video. As we have previously discussed, Gridspertise is our lead smart grid customer with the QED, an all-in-one edge computing platform providing electric grid operators with real-time insights and automated control of distributed energy resources. Since our last call, we've made substantial progress on getting the QED into production, which will allow us to realize the more than $40 million in revenue that we have in current backlog for grids for TEAS during fiscal 2024. Specifically, we completed the shipment of substantially all of the QED units under the pilot production contract during FQ4 2023 and are ready to start mass production in the upcoming December-ended quarter. All component shortages that would gate deliveries in fiscal 2024 have been resolved. On the demand side, Gridspertise recently increased their fiscal 2024 production order by over three-quarters of a million dollars and are currently negotiating the first follow-on purchase order, which we would expect to drive continued growth from this customer in fiscal 2025. Furthermore, we received the final deposit that was due under the initial production contract for a grand total of $20 million in deposits paid to us thus far. Based upon these factors, we are confident in the program and our ability to begin volume production of the QED in SQ2 2024, which would result in a meaningful revenue contribution during that quarter and leading to a full production ramp in the second half of fiscal 2024. More specifically, Our current production forecast indicates that we would deliver approximately 5 million in FQ2 2024. We would double that amount in Q3 and deliver the balance in FQ4. Our lead EV customer TOG is also progressing well. During FQ4 2023, we received a significant order from TOG that was double their current run rate and greater than what we had previously anticipated for fiscal 2024. In addition, we continue to engage a handful of other EV opportunities with design services that have the potential to transition to meaningful supply arrangements. We're also seeing traction with other compute designs. For example, we have a high volume enterprise video collaboration design expected to ramp in FQ3 2024. Furthermore, with the recent Qualcomm announcement of their QCS8550, with increased computing for edge AI processing and Wi-Fi 7 connectivity. We have had multiple engagements with customers interested in using that solution for various compute-intensive applications, such as autonomous mobile robots, industrial drones, and edge AI boxes. Now, I would like to provide the specifics for our fiscal 2024 guidance. With the backdrop of a record backlog, a cautious but relatively steady demand environment for our system solutions, and new compute designs going into production, we anticipate delivering over 30% growth during fiscal 2024 and are reiterating our annual target of revenue in a range of $175 to $185 million, and non-GAAP EPS in a range of $0.50 to $0.60 per share. Now, I'll provide a brief update on our CEO search. In June 2023, the Board engaged a third-party firm to conduct a candidate search. We're well along in the process and have begun performing in-person interviews. While it is difficult to pinpoint the exact timing, I do expect that we will identify a qualified candidate before the calendar year-end. That completes our prepared remarks for today, so I'll now turn it over to the operator to conduct our Q&A session.