LTRX - Lantronix Inc. (LTRX) Q3 2023 Earnings Call Transcript
2023-05-10 22:01:05 ET
Lantronix, Inc. (LTRX)
Q3 2023 Results Conference Call
May 10, 2023 5:00 PM ET
Company Participants
Rob Adams - Head, Corporate Development & IR
Paul Pickle - President, CEO
Jeremy Whitaker - CFO
Conference Call Participants
Mike Walkley - Canaccord Genuity
Jaeson Schmidt - Lake Street
Ryan Koontz - Needham
Scott Searle - Roth Capital
Presentation
Operator
Good day, and welcome to the Lantronix Third Quarter Results Conference Call. [Operator Instructions] Please note, this event is being recorded.
I would now like to turn the conference over to Rob Adams. Please go ahead.
Rob Adams
Thank you. Good afternoon, everyone. 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. In addition, you can find the call and 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. Lantronix undertakes no obligation to revise or update publicly any forward-looking statements to reflect future events or circumstances.
Please refer to the news release and the financial information in the Investor Relations section of our website for additional details that will supplement management’s commentary.
Furthermore, during the call, the company will discuss some non-GAAP financial measures. 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 will now turn the call over to Jeremy Whitaker, Lantronix’ Chief Financial Officer.
Jeremy Whitaker
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% sequentially and up 2% from the year ago period. GAAP gross margin improved to 44.4% for the third quarter of fiscal 2023 compared to 43.8% in the prior quarter, and 42.1% 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 4.5 million for the third quarter of fiscal 2022 and 5.1 million for the second quarter of fiscal 2023.
The year-on-your increases in SG&A and R&D were largely driven by headcount we assumed in the September 2022 acquisition of Uplogix. GAAP net loss was 3.1 million or $0.08 per share during the third quarter of fiscal 2023 compared to a GAAP net loss of 3.2 million or $0.09 per share during the third quarter of fiscal 2022.
Non-GAAP 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 grid expertise and inventory assumed in the September acquisition of Uplogix.
Now turning to our outlook. For the fourth quarter of fiscal 2023, we are targeting revenue of 33 million to 36 million, a non-GAAP EPS and a range of $0.06 to $0.08 per share. For fiscal 2024, we are targeting revenue of 175 million to 185 million, and non-GAAP EPS in a range of $0.50 to $0.60 per share.
I'll now turn the call over to Paul.
Paul Pickle
Thank you, Jeremy. 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 FY ‘24 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.
Turing 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 WiFi solutions, as well as our embedded compute products. On the ethernet and WiFi 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 end customer demand for the Togg electric vehicle platform has exceeded expectations and 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 car 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 forecast. We are actively working with our public sector partners to address this in our 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 in 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 $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 the record backlog, strong bookings, improving supply chain, 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% growth during the next fiscal year. We are poised to begin shipping our Quantum Edge device while we pursue a pipeline of opportunities that could drive double digit growth at Lantronix 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, Lantronix 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. Chad?
Question-and-Answer Session
Operator
[Operator Instructions] And the first question will be from Mike Walkley from Canaccord Genuity.
Mike Walkley
Great. Thanks for taking my question. And great to see the guidance for next year. I guess, Paul, just if you could break down the fiscal ‘24 guidance for us a little more. You know, you don't want to call out a contract, but you, how should we think about the timing of the grids 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 and how much of that might be considered in fiscal ‘24 if that's not in the model and it could be upside if it hits earlier.
Paul Pickle
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 FY ‘24. But we do expect, you know, some contribution in FY ‘25 and it's not the, you know, there is certainly potential upside to that. 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 FY ‘25, but that's really more of a, you know, mass production number that is appreciable in FY ‘25. And -- 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 FY ‘24. So, right now we're giving a guidance to the midpoint number of 180. We feel like that is, you know, potentially a conservative number, but right now that's the current outlook.
Mike Walkley
And just to follow-up to 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 of that? Just slight growth or flat with some inventory clearing at your distributors? Just maybe what your assumptions to modest help from that side of the business and where you -- how long you think it's going to take your distributors to maybe to draw down inventory to levels they want to have it?
Paul Pickle
So, that last half of the question, it's pretty interesting. I think Disney, these 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 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 -- and flow to it. And so, we saw that correction in the -- 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 of that that turns business correction or moderation, and in terms of what we need out of it. Honestly, at this point we could probably tolerate a slight decline in that business and still readily as long as we get execution on new programs, we'll readily hit those numbers.
Mike Walkley
And last question for me, a pass line just you mentioned to 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 into shipments? Is that more of a one-to-two-year type thing or even longer?
Jeremy Whitaker
Well, we've started production with tog, so we are shipping to them, albeit in, modest volumes, but they just started to release those cars to some, 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 to the tune of 4x the number of vehicles in pre-orders. Then they expected to, and they certainly can't meet all of that demand in the short term. So we're expecting some uptime, upsize orders out of them going forward. But that is probably some meaningful revenue that will fold into this next year. In terms of those other engagements, they really are slated for FY ’25 production runs. We'll get some engagement, some level of contribution out of them in FY ‘24. There is one program that is slated to contribute in the last quarter of FY ‘24. 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 FY ‘25.
Operator
The next question is from Jaeson Schmidt from Lake Street.
Jaeson Schmidt
Paul, and you prepared your 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?
Paul Pickle
Yeah, we had about a million dollars that we couldn't meet. We did due to supply chain and a portion of that was due to a customer changing SKU on us at the last minute. And so it falls in this next quarter. But supply chain is largely 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 those -- that inventory flushes through over the next several quarters. But we do still occasionally have one or two components per bomb that is problematic. We did see some NXP push outs this past quarter, but largely it's okay, and it's manageable, but there are a handful that are still somewhat tough.
Jaeson Schmidt
Okay. That's helpful. And then you noted a record backlog. Curious if you could share that number?
Paul Pickle
I don't really want to give a total backlog. 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 will just say that it's -- we're in good shape starting backlog for the quarter, ticked up nicely. So at this point for Q4, we've got 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 booking strands. So I think we're in pretty good shape.
Jaeson Schmidt
Okay. And then just the last one from me, maybe this is for Jeremy. Gross margin picked up nicely sequentially. How should we think about that trending the rest of this calendar year?
Jeremy Whitaker
Yeah, I think for the rest of the year we had kind of expect a similar performance in margins, 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 PPV costs coming down. So from a cash standpoint, we are paying a little bit less for inventory, but 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, that are coming. But I would say for the next quarter or so, we'd expect it to be pretty consistent with where we've been.
Operator
The next question will be from Ryan Koontz from Needham.
Ryan Koontz
Appreciate all the great caller on the EV opportunities. I wonder if you could -- Paul reflect on some of the others you've been engaged with, whether it's government, smart city, et cetera, and which ones are performing kind of generally a plan. Where are there some weaknesses and where you see the most opportunity in fiscal ‘24 for upside? Thanks.
Paul Pickle
Yes. I think that the toughest thing about IoT that just about everybody would reflect on nowadays is the fragmentation of the market you end up with in a lot of different use cases. And that's one of the strengths and the capability that we built is we're able to address disparate number of opportunities. But there's a few that I would highlight. We got a program going on with our labs, 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 smart pull applications right now. There's not a lot of color that I could give on that, that program until New York, gets a little bit further along. And so it's, it's a bit of an IOT application. Think mesh 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 poles in New York City, so it would be significant volume over a number of years and then obviously it's got a lot of application in other municipalities.
One other one I might highlight, we've 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 SaaS 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 three type, tier two 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.
Ryan Koontz
That's great stuff. And the AT&T stuff you mentioned, was that wireless or wireline side?
Paul Pickle
It's wireless.
Ryan Koontz
Got it. And, how about a quick, any quick commentary on the competitive environment? Any changes there? Didi's been putting up some pretty good numbers of late and just in generally, what are you seeing in the space?
Paul Pickle
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 Digi story and that they're leveraging a much larger product to technology base in a particular space. We are making the same inroads, albeit in different verticals and different use cases. But I think it 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, that, you know, there's a lot of struggling right now. It kind of comes down to who has the part available and the timeline that a customer wants it. And if your lead time is a week longer 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.
Operator
And the next question is from Scott Searle from Roth Capital.
Scott Searle
Hey, Paul, just to follow-up on that pipeline, I think you said it was 140 million 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?
Paul Pickle
So win rates -- our win rate is actually really good, but I would caution you to say that, it's been fairly early innings when 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 it's a pretty predictable thing that it will close. The question is, is do they hit their forecast or not? You know, obviously NEAT was a new customer for ours for us in 2020 was a new application. They blew their number out of the park, but largely because COVID happened and everybody got to, uh, remote work environments.
But, and aside from that probably would've been a little bit slower increase, I think flock 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 that they'll push some volumes as well. But each guy, we assess and I think, as we look at FY ‘25, we're feeling pretty good about this list. Numbers might go up or down.
And Scott, I forgot, I forgot the last question, the last half of that question.
Scott Searle
Just on the software front, Paul, where are you seeing the attach rates in 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?
Paul Pickle
Yeah, the attach rates are going really well in -- especially, this is customer base that 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 single plane painted 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 and 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 we -- the higher order of security that we brought forward, so when you're talking about industrial applications, that those are the customer cares. If you look at the Togg program, we actually built into our platform and OTA function, and so these are the types of things that we have experienced with. And we can bring, if you're talking about a low end IoT application that's deployed in the masses, I'm not sure that we'd have the same level of traction there, but that's not the market that we're targeting.
Scott Searle
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.
Paul Pickle
Okay. On the console servers, financial markets, we saw some hesitancy. I think we actually mentioned it on earnings call two quarters ago. And this was before we saw a lot of the banking pressure. I think if you're talking smaller banking institutions, there's definitely going to be continued order ordering hesitancy. We typically deal with larger institutions, Bank of America, American Express, but even in those markets, they're -- 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 in some cases, a one quarter delay is all that we expect. On the -- let's call it strategic alternatives front. Right now, valuations are attractive. But we're still live in a risk off environment. So I think going out and getting financing for an asset right now is it'd be fairly expensive and we'd be looking at 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 let me make clear that we are extremely focused on executing what we're currently is our organic growth plan. But we are still -- we are still kicking the tires on 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 it's we'll see how it goes over the next couple of quarters.
Scott Searle
Hey, Paul. One last one. Just -- you talked 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.
Paul Pickle
Yes. If you ignore the grid expertise 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 a million dollars worth of revenue this past quarter that's going to flush through this next quarter. And I think if you look at the next three quarters, you're going to see that rep inventory number optimize pretty aggressively. And then as that flows through, we'll get some of the PPPs through. You should see some nice support on the gross margin line as well.
Operator
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.
Paul Pickle
Well, thank you for joining us and have a great day.
Operator
Thank you, sir. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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Lantronix, Inc. (LTRX) Q3 2023 Earnings Call Transcript