Q3 2020 Earnings Call
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Good afternoon, everyone and thank you for joining the electronics third quarter fiscal 2020 conference call joining us on the call today, our political plantronics, President and Chief Executive Officer, Jeremy would occur Lantronix, Chief Financial Officer, and Jonathan shipped men Lantronix, Vice President strategy Eli.
An archived webcast of today's call will be available on the company's website. In addition, a phone replay will be available starting at eight P.M. eastern five P.M. Pacific today, She may 21st.
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During this call management may make forward looking statement, 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 SBC today and is available on our website and as a company I can see filing.
Such as the 10-K and 10 kids Lantronix undertakes no obligation to revise or update publicly any forward looking statements to reflect future events or circumstances.
Furthermore, during the call the company will discuss some non-GAAP financial measures todays 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.
Now turn the call over to Jeremy would occur Lantronix, Chief Financial Officer [noise].
Thank you Amber and welcome to everyone joining us for this afternoons call.
Wonderful by the financial results as well and business highlights for third quarter fiscal 2020 before handing over to Paul for his commentary.
Please refer to today's news release on the financial information and the Investor Relations section of our website for additional details that will supplement my commentary.
For the third quarter fiscal 2020 net revenue was at the upper end of our revised guidance range of 15 to 17 million, which we provided on our Investor update call held on March 11 2020.
We reported 16.5 million adept revenue an increase of 34% when compared to 12 point Threemillion for the third quarter fiscal 2019.
Sequentially revenue was up 25% compared to the 13.2 million reported in the second quarter fiscal 2020.
The year on year growth was primarily driven by contribution from our acquisitions, although our growth was significantly tempered by disruptions caused by the cobot 19 pandemic.
Gross profit as a percentage of net revenue was 44.7% for the third quarter fiscal 2020 as compared with 57.4%.
For the third quarter fiscal 2019 at 51.2% for the second quarter fiscal 2020.
The decline in gross profit percentage was primarily due to a change of product mix as a result of our recent acquisitions.
In addition, our margins were negatively impacted by freight and tariff costs related to supply chain mitigation efforts, we took in light of the pandemic.
Selling general and administrative expenses for the third quarter fiscal 20, 25.6 million compared with 3.9 billion <unk> third quarter of fiscal 2019 at 4.9 million for the second quarter fiscal 2020.
The year on your increase in asked you name. It was primarily due to additional headcount costs related to the recent acquisitions and an increase in share based compensation.
Research and development expenses for the third quarter fiscal 2020 were 2.7 million compared with 2.4 million for the third quarter fiscal 2019, and 2.3 million and the second quarter fiscal 2020.
Non-GAAP operating expenses as a percent of net revenue decreased sequentially from 47% and the second quarter fiscal 20, 20% to 42% and the third quarter fiscal 2020, as we continued to capture synergies and take advantage of the operating leverage from our recent acquisitions.
Looking forward, we expect non-GAAP operating expenses to continue to decline as a percent of net revenue as we realize synergies from the recent acquisitions.
GAAP net loss was 5.2 million or 19 cents per share during the third quarter fiscal 2020 [laughter] included in the GAAP net loss for 4.3 million of acquisition and severance related costs.
During the third quarter fiscal 2019, we reported GAAP net income of 857000 or four cents per share there were no acquisition or severance related costs and the comparative period.
I'm pleased to report that despite the significant supply chain and business interruption that we faced last quarter. Our teams still delivered non-GAAP earnings per share within a two to six cents guidance range that we originally provided on our February 12, 2020 earnings call.
Non-GAAP net income was two cents per share our 611000 <unk> third quarter fiscal 2020. This compares to non-GAAP net income of one point threemillion or five cents per share for the third quarter fiscal 2019, and non-GAAP net income of 666000 or three cents per share for the sake.
Second quarter fiscal 2020.
Cash and cash equivalents were 7 million as of March 30, Onest 2020, compared to 15.3 million as of December 31st 2019.
In January 2020, we used approximately 8.3 million if that cash as partial consideration for the acquisition of intrinsic.
You may have seen our recent form eight Ks disclosing our rusty and subsequent repayment of the P.P.P. loud, although eligible for the financing we decided to repair the log in light of our most recent forecast for the fourth quarter and fiscal year 2021.
Which improved substantially from the time, we had initially decided to apply for the funding.
Working capital was 18.6 million as of March 31st 2020, as compared with 26.7 million as of June Thirtyth 2019.
Net inventories were 15.2 million as at March 30, Onest 2020, compared with 10.5 billion as of June Thirtyth 20 Nike.
Now turning to our recent acquisition have been transaction, which closed on January 16 2020.
As mentioned earlier on my remarks intrinsic contributed significantly to this quarter's revenue growth.
In addition, I'm pleased to announce that the acquisition it was accretive to our non-GAAP earnings in the quarter and we expected to be accretive to non-GAAP, EPS and our fourth fiscal quarter, as well, which will be the first full quarter a combined operations.
As a reminder, we set a target of 2 million an annual cost synergies within a year of closing the acquisition as we integrate supply chain eliminate.
Redundant public company costs and realize other operating efficiencies.
And we have already begun to capture some of these savings.
I'll now turn the call over to Paul.
Thank you Jeremy.
We were pleased to report revenues of 16.5 million in Q3 up 25% sequentially and 34% year over year, and what was a challenging supply constrained market environment.
As we stated our last guidance call end demand held up reasonably well, especially in North America as what we've seen some upside for our connectivity intelligent edge computing solutions as a result, and the increased focus on work from home initiatives at our customers.
As a reminder, we get initially guided for revenues of 18 million for the March quarter. In later lowered that expectation as a function of compounding supply chain shortages.
The supply chain disruptions that tempered Q3 results will persist through throughout Q4, we entered the quarter with a stronger backlog in order patterns quarter to date have also been strong.
Despite the supply chain disruption, we focused on controlling what we could last quarter operationally, we anticipated some of the government shutdown and reposition the timing of inventory receipts from our contract manufacturers to fulfill customer orders without significant delays.
Additionally, we anticipate it didn't transitions quickly to a work from home environment ahead of India, Germany in California shutdown orders. These actions minimize the revenue in product development impacts seen in the quarter. Lastly, we took steps to accelerate or integration plans and we slowed spending were prudently possible to preserve profitability.
As such.
A result of this discipline, we're happy to report profitability at the low end of our original guidance of two cents on a non-GAAP basis. These results are despite paying much higher freight costs and tariffs as we helpful to deliver.
On demand.
All in our I O T product lines contributed 13.9 million in Q3 up 25% sequentially and 56% year over year.
We saw good billings and bookings driven by an increased demand for our solutions and video conferencing equipment.
Our gateway in device server products also performed well in the quarter driven predominantly by medical applications. As a reminder, this is an important focus for us as there is a growing need in medical applications for internet connected devices.
Ethernet modules in our asset tracking and gateway Mount modem solutions softened in Europe, and Asia. After a strong showing them in the December quarter.
Our IC management product revenues totaled 2.4 million at 32% sequentially and down from 3.2 million a year ago. Other lantronix product lines were relatively flat for the quarter and with the exception of supply chain related delays demand, it's largely in line with our expectations.
Turning to software I'm pleased to report pipeline continues to grow in the third quarter. We've received three new purchase orders activating 24 additional software licenses. We now have 50 customers in the pipeline up from 27 in the prior quarter.
We also achieved the significant milestone of completing customer security audit against our SaaS platform unlocking further progress within our medical end market.
More importantly, we have also further refined our SaaS software product road map, we've completed the integration of multiple system backend into one increasing efficiency of resources.
We're now underway and our new software road map of refinements, new features and functionality and new services built on industry expectations and intimate customer feedback conditionally progress on a consolidated front end remained steady with features continuing to migrate under the console flow brand over the next few quarters.
Well, let's still remains early innings in terms of our re occurring recurring revenue stream, rather we continue to make progress to that.
[noise] internally the transformation at Lantronix continues well, we are focused on integrating our acquisitions and capturing revenue synergies. We continue to reorganize our sales efforts and better aligning support from key distribution and OEM customers. We've also just launched a new value added resellers or far channel sales.
Partner program to improve our performance with key strategic channel customers early results have been positive and we have been given several verbal and contractual confirmation confirmations of awards not seen in our pipeline just one quarter ago the opportunity in designing pop pipelines remain healthy as the appetite for I O T in a remote access Hulu.
And accelerate.
The emergence of the novel Corona virus in the resulting pandemic has companies institutions and individuals looking for new and innovative ways to deploy and managed projects, while removing the necessity for physical access.
We're seeing an increased demand for aiotv and remote access in the medical space for example, as hospitals and staff looked to increase their ability to access and control it complex ecosystem as machines and devices, while simplifying the day by day management Lantronixs in a unique position to help our with our portfolio if I O team.
Modems routers gateways device servers tracking and remote access products combined with our single pane of glass device management, So SaaS platform.
In terms of inorganic activity, we continue to pursue additive in accretive acquisitions to increase our sand and bolster our capability within the T. stack.
While remaining focused on the integration of already completed transactions, realizing synergies and delivering accretion.
Getting a little more specific regarding the global supply chain.
It of course still has a number of uncertainties.
Well, our China contract manufacturers are running at full capacity today, our Malaysia see yen is running a 20% capacity well below the expected rate. This quarter. In addition, Thailand has implemented a curfew, but we're cautiously optimistic that our Thailand base contract manufacturing capacity, we'll see minimal impact that.
Good.
Any government actions in response to infection rates or resurgent rate cannot be predicted.
The pandemic has led to some weakness in areas of our end markets, where clients are facing some trepidation about their customer base and are taking a wait and see approach all things considered are starting backlog and turns business quarter date leads us to believe we will see strong sequential and year over year growth and while we have seen no significant order.
Cancellations were delinquencies and collections, we believe it prudent to expect continued disruption in our supply chain will lead to some unpredictability in our financial results as such we will be suspending specific revenue non-GAAP EPS guidance for the June quarter, having said that we currently expect to grow both revenues and earnings.
Sequentially.
That completes our prepared remarks for today, so I'll now turn it over to the operator to conduct our Q and a session grant.
We will now begin our question answer session.
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Okay.
Our first question will come from rich Valera with Needham. Please go ahead.
Thank you good afternoon.
So Paul you mentioned you had your backlog is quite strong is heading into this current quarter and you were expecting strong sequential quarter over quarter growth.
I was hoping to kind of drill into what has bolstered the backlog I know you mentioned some kind of tele health.
And medical applications are there any other.
Applications that you think might have gotten to boost because it kind of the work from home and medicine telemedicine, that's been going on or any other color you can add on what helped what's sort of bolstered that backlog quarter over quarter.
Yes. So we do have so said several of our medical customers in particular have some device gateways, where it's a one for one relationship.
There was.
Certainly respirators, we saw an increase in demand related to that but it was more than just respirators.
But across the board.
When it comes to medical applications in general as some of our remote access devices have taken off rather well, even the caving in product that we've seen some legacy purchase orders that have come in the June quarter associated with that product.
Seven so device gateway device server.
Remote management type product to our access product.
In addition to that we've had some.
An increase in the flow of services based contracts.
We've been given verbals on it.
Subsequently closed on as well so.
This is filling in our services pipeline for.
Clients development software development and attached to that could be hardware upside as well as we kind of look forward over the next year. So it's been generally strong the areas that have been somewhat weaker has been anything associated with distributed datacenter and retail as you would expect a lot.
That has been kind of.
Then put on pause momentarily, but.
Some of the areas of strength, it's kind of.
They're outweighing some of those areas of weakness.
That's great color. Thanks for that so it sounds like you're seeing strength.
In both the I O T and and I can management areas from from some of these unique new dynamics I guess.
Yes, and then just on the intrinsic so congratulations on the close of that and it sounds like it contributed meaningfully and we had kind of thought that would be something probably in the range of five and a half to 6 million in the quarter. It can you confirm if that's kind of in the range of what it contributed in the quarter.
No it's a substantially.
Why would I shouldn't say substantially south of five but it was.
It was between four and five.
Got it.
So can you just talk about the dynamics of that business.
Obviously, Qualcomm historically, a very significant customer there and certainly I'm sure still is.
You talked about kind of how how's that businesses as well as how many non Qualcomm initiatives you have going out of intrinsic are going in the sort of growth prospects of that business.
The Qualcomm I would call them more of the technology partner rather than customer we don't we purchase product from Qualcomm and then we feed those into our hardware based solutions that we developed software on top of and then sell that too.
Our customer base.
Welcome relationship with relationships going great. We've had several meetings, where we're stepping up our engagement.
We've had some requests from them.
In terms of.
Better patient penetration geographically in other areas that we're certainly trying to.
Make sure that we.
We address those concerns and overall I think right as they're starting to launch the age 65 processors, it's really been.
This is kind of an exciting time, you we've got a natural.
Flow of customers that have used products from us before and they're looking to kind of step up and use that piece of hardware with more capabilities not to mention we're in terms of development I think that were at the very forefront of.
When it comes the hardware development kits availability. So we expect to capture a lot of that early interest so that's going fairly well.
In terms of other engagement.
I've said, it before and I will say it now certainly the Qualcomm relationship I don't want to disparaged that at all because it's it's really important to us.
But we do take it.
Good if the technology as agnostic approach, we obviously want to leverage our core competencies were ever we can I'm trying to develop a customer solution.
But what we what technologies, we embrace really kind of comes down to that problem statement that the customer has and what is the optimum solution and it could be a number of different things. So we are looking to make sure that we had abroad.
Phase of capabilities with which we address those problems.
That's helpful color, thanks for taking the questions gentlemen.
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Our next question will come from Jason Schmidt with Lake Street. Please go ahead.
Hey, guys. Thanks for taking my questions. Just curious you mentioned nothing any cancellations, but have you seen any delays or push outs to programs and deals already won and just curious if you think that was push outs.
Our into the second half for this calendar year more into calendar 21.
So we've not seen anything out of the ordinary.
We have the minor rescheduling that we've had with with some customers, but even that has been kind of below the norm in terms of activity. We don't really see it as you know people trying to pull things in but you know things are progressing fairly normally and they feel like a natural.
So.
More increase in some of the organic activity that we were having I don't know that I.
I Wouldnt a sense that there's a second half push out that might be coming at doesn't seem to be the case or some of the new.
Programs that were working on these are longer term projects that could spanned a couple of years and so.
A lot of engagements been fairly.
Fairly good.
Okay. That's helpful.
And then just curious if you could comment what you're seeing from a channel inventory standpoint.
So channel inventory did not go up appreciably in the quarter. We did have two additional partners that came on and in Asia and so these were natural expansions, where we didnt have a good coverage before as part of our sales effort.
So we saw a little bit of an increase associated with some initial stocking buys but it's a couple honored Kate.
And so not significant.
Okay, and then finally could you quantify how much revenue you think was impacted in the March quarter by supply constraints.
Yeah. It was it was over a million dollars I'll I'll say that.
If we look at the delinquency in shipments or factored committed shipment dates in the quarter. So I was over a million dollars I took that as the as a good thing if we look forward to the June quarter.
I don't know that we'll be able to clean all of that up we might end up.
Exiting the quarter with the still some some demand that we need to ship.
However, I do think that the June quarter will be will be the trough in terms of difficulty that we have I think.
As we kind of look at what's happened in China, the delay the shutdown and the subsequent reopening in how they are dressing. It today things that are a bit more normalized and people are a bit more use to.
Some of the orders of procedures are precautions that they're taking so once we get passed and get a you know some good.
Good activity Adam Malaysia.
And a continued activity at a Thailand, I think we'll be able to clean it up shortly so I do think June will be.
Close to the last of it but we may exit the quarter with some delinquencies too.
First factory to midship mandates.
Okay. Appreciate the color. Thanks, a lot guys.
This will conclude our question and answer session I'd like to turn the conference back to Paul Tacos CEO for any closing remarks.
Thank you very much for attending today appreciate your time and attention. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.