Q1 2021 Lantronix Inc Earnings Call
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Good afternoon, everyone and thank you for joining the Lantronix first quarter fiscal 2021 conference call joining us on the call today are Paul Pickle.
Question on ex President and Chief Executive Officer, Jeremy Whitaker, Lantronixs, Chief Financial Officer, and Jonathan Shipman, Vice President of strategy, a live and 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.
<unk> five P.M. Pacific today through November 19th by dialing 8773, 0.475 to nine and the U.S. or for international callers for 12317, 0088, and entering passcode 10149.
RMB three nine 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 FTC today.
Great and is available on our website and in the Companys FCC filings such as its 10-K and 10-Q.
Tronics 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.
Got 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 I'll now turn the call over to Jeremy Whitaker.
<unk> and <unk> Chief Financial Officer.
Thank you Albert 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.
Over the business highlights for our first quarter of fiscal 2021 before I hand, it over to Paul for his commentary.
Please refer to today's news release.
And the financial information in the Investor Relations section of our website for additional details that will supplement my commentary.
For the first quarter of fiscal 2021, we reported $17.1 million in net revenue an increase of 35% when compared to $12.7 million for the first quarter of fiscal <unk>.
At least 20.
Sequentially revenue was down slightly compared with 17.4 million reported in the fourth quarter fiscal 2020.
As discussed on our last call during the current quarter, we successfully completed the exit of although margin product line, we acquired as part of the Mostra acquisition.
In the prior quarter.
Product line contributed approximately 540000 and that revenue.
Gross profit as a percentage of net revenue was up to 48.1% for the first quarter of fiscal 2021 as compared with 48.6% for the first quarter fiscal 2020.
27.7% for the fourth quarter of fiscal 2020.
As expected gross margin improved sequentially due to lower charges for inventory improvement in product mix and stronger than expected software licensing revenues.
Selling general and administrative expenses for the first quarter of.
Fiscal 2021 were 4.9 million compared with 4.5 million for the first quarter of fiscal 2024.
4.7 million for the fourth quarter of fiscal 2020.
The year on year increase Investor day, It was primarily due to additional headcount costs related to the intrinsic acquisition.
[laughter].
Research and development expenses for the first quarter of fiscal 2021 were 2.6 million compared with 2.6 million for the first quarter of fiscal 2020, and 2 million for the fourth quarter fiscal 2020.
As expected R&D expenses increased sequentially due the timing of product development projects.
Non-GAAP operating expenses as a percent of net revenue decreased from 49% in the first quarter of fiscal 2020% to 40% in the first quarter of fiscal 2021.
And were down from 50% of net revenue in the year ago fourth quarter, demonstrating our synergy capture and leverage.
Operating model.
GAAP net loss was 302000 or one cents per share during the first quarter of fiscal 2021 compared to a GAAP net loss of 2.5 million or 11 cents per share during the first quarter fiscal 2020.
As expected non-GAAP.
Earnings increased sequentially from four cents per share or $1.2 million for the fourth quarter fiscal 2020 to five cents per share or $1.7 million for the first quarter of fiscal 2021.
This was also a significant improvement from the year ago quarter, when we reported non-GAAP net income of 7000.
Or zero cents per share.
Now turning to the balance sheet.
We ended the September 2020 quarter with cash and cash equivalents of $7.7 million, which is consistent with the prior quarter worked.
Working capital improved to $19.3 million as of September Thirtyth 2020, as compared with 18 point.
$7 million as of June 32020.
Net inventories were $13.9 million as of September Thirtyth, 2020, compared with $13.8 million as of June 32020.
On our last earnings call, we transitioned to providing annual operating growth targets for revenue and non-GAAP.
Yes.
Consistent with the guidance, we provided on that call. We continue to target fiscal 2021 revenue growth of 20% to 25% and non-GAAP EPS growth of 120% to 160%.
I'll now turn the call over to Paul Thank you Jeremy.
In the quarter still marred by the COVID-19 pandemic, an ongoing supply disruptions, we focused on profitability and we're pleased to report 39% non revenue non-GAAP earnings growth on a sequential basis up substantially from breakeven in the year ago quarter.
Our revenue performance fell slightly below our expectations for two.
Two reasons in dollar terms the biggest challenge on revenues in the quarter was the ongoing supply chain disruption and longer lead times for electronic components.
While we entered the quarter expecting supply chain delays could temper results by about $500000 on the topline results reflect approximately $1 million, which pushed.
Into the December quarter.
While we had previously expected a resolution to our supply chain disruption could come as early as the September quarter. It is clear to us that it will not result in the December quarter.
However, we do expect to see some incremental improvement in the December quarter.
Secondly, just.
Like consecutive growth in demand for Asia Pacific end markets and continued growth in our North American markets. The EMEA region continued to struggle dragged down by the onset of the second spike of COVID-19 infections subsequent lockdowns and customer ordering patterns hesitations ultimately the EMEA territory declined over 17% so.
This is actually as we endure the European Lockdowns into typically softer December quarter, we don't expect much in terms of the near term improvement in the EMEA region, although our expectation for the Americas and Asia is for continued strength.
Turning our focus to products driven by continued strength in our Ethernet and Wi Fi modules our eye.
Ian product lines contributed just over $14.6 million in Q1 up slightly sequentially and 43% year over year.
Within this I OTN market, we saw another uptick of design services activity and we are filling the pipeline with projects expected to generate stronger revenue growth beginning in the second half of 2021.
And beyond.
While we have called out video conferencing as a major driver of the design services and edge computing products. We also know design activities in the automotive industrial energy and retail point of sale markets, which are expected to turn into substantial volume and revenue shipments as they roll into production over the course of.
The next 18 months.
Turning to remote environment management or RM.
Formerly known as ITM products revenues totaled $2.4 million down 10% sequentially, although up 4% from a year ago.
As we have noted historically rim can be a bit lumpy from quarter to quarter.
But we have seen a substantial increase in proof of concept activity in our design funnel is filling.
One highlight from the quarter was a purchase order from longtime customer capital one for new hardware as well as SaaS subscriptions to cover new and previously installed hardware. This is a strong validation of our vision for console flow software and its opportunity dependent.
Great not only new opportunities, but also the large number of existing deployments of our installed base of devices worldwide.
As we continue to convert hardware customers to software subscribers, we expect to continue year over year growth in this end market.
Turning to inorganic activity, we remain steadfastly focused.
On accretive inorganic growth.
This is part of our stated strategy here at Lantronix and we are looking at a number of opportunities often in parallel.
The industry for all its promise has fallen short of investor expectations over the last many years quite simply because it is too fragmented as such we see a number of excellent opportunity.
Tended to acquire call quality assets with quality management teams at reasonable valuations, while all the time growing our scale and our ability to give our customers the solutions. They need however, given the recent disclosure from to leap that we are in talks and with the Kunaev session coming up we think it is important to note here that as a policy, we do not comment on M&A.
And some there's much I am pleased with an assist first fiscal quarter.
We have a good handle on expenses and profitability.
We are increasing our customer engagement in our pipeline of opportunities is filling.
Design services activity points to a number of high volume opportunities in multiple.
Oh verticals, which should begin to ramp up in the second half of the fiscal year.
And they remain a large number of attractive acquisition opportunities to pursue which will boost revenue and earnings improve our market position and strengthen our customer relationships.
At this supply chain disruptions caused by COVID-19 dissipate and.
We'll economies inevitably recover lantronix will become an industry, leading IP solution supplier with the depth of products necessary to solve our customers' biggest problems and the scale to deliver industry, leading profit margins to our shareholders. We are confident in our prospects and continue to expect strong year over year revenue growth for fiscal two.
2021 up 20% to 25% from 2020, while non-GAAP profits more than doubled.
That completes our prepared remarks for today, So I will now turn it over to the operator to conduct our Q and a session Brandon.
Thank you.
We will now begin the question and answer session.
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Our.
Next question comes from Jason Schmidt with Lake Street. Please go ahead.
Hey, guys. Thanks for taking my question, Paul I know in the prepared remarks, you noted some supply chain disruptions continuing here in December.
EMEA being a bit soft, but just curious if you could just provide some color on.
From what you've seen from order patterns here in October and November have customers become a bit more cautious just given the headlines.
David whether it be elections any additional help there would be good.
Well I Wouldnt think that it was election related but.
Add on that.
Getting conjecture on that but I will say in EMEA definitely we saw Bloom Lake.
Late quarter ordering happening.
And that was a part of that we are.
Our delinquencies in shipments going up our inability to supply.
Customer demand.
It was.
Like we said, we expected to exit the quarter with about 500 K.
In shipment delays that things that we weren't able to fulfill in the quarter ended up being a million largely because of that.
EMEA territory, we had some just late orders people.
People just being very.
Very cautious and I think they started to sense.
That they were having some difficulties economically or continued difficulties werent quite rebounding like they were expecting and I think I, just kind of push things a little bit further off we did see some distributors in EMEA fully inventories down a little bit.
So we.
For the quarter with lower channel inventories and expected in EMEA and then once again those late orders came in were not able to turn those and timely fashion.
So a little bit of color on that and that and I will say media, we're not seeing.
So far this quarter, we would expect just kind of a continued sideways trend.
And.
What we saw exiting last quarter.
Okay. That's helpful and just a clarification on the comments you highlighted a number of different end markets.
Two industrial energy retail as far as design activity, but were those also the end markets that drove September as.
Well.
No. These are these are fairly new opportunities.
And the nice thing is on on the design services side. So.
I kind of reflect back to the January timeframe and I look at the pipeline and what we had at that at that point.
We really we tooled our served.
As offering kind of leverage both the intrinsic acquisition as well.
The whole team here at Lantronix.
We purpose.
And retooled re equipped the sales team to go out and really kind of drive our capability to a much broader market. So what we're seeing is a lot of activity.
Service come in since that timeline.
It's been not in our typical end markets, it's nice to see those.
I will say industrial energy is one of those that we've historically played in from a hardware standpoint, but not from a software standpoint. So it's nice to see that activity goes well then picking up some additional new.
The market opportunities in automotive.
As well as there is some drone activity that we've been pulled into as well that you expect to see so it's nice to see that our capability on the computer side to compute end markets has really kind of broad and going out to a much larger customer base.
Okay, and just last one from me and I'll jump back into queue. Jeremy gross margin had a pretty big sequential jump can you provide some color around that move as well as if this sort of 49% is the new level here in the near term.
Yeah.
As you may recall on last quarters.
Call, we took a pretty.
Significant charge for excess and obsolete inventory related to.
Some into life.
Products and components that we had.
In this current quarter, we didnt have so.
Similar level of charges. So that so that definitely helped with the sequential improvement in kind of bringing us back to I would say more of a normal.
Rate of Mark on the product margin mine.
In addition to that we did see some benefit.
On the mix side, we had a strong quarter with our Ethernet module products.
Which is higher on the scale of our margins and also higher than expected.
Revenue from software licensing, which is also a higher margin.
Product, so the combination of product mix and and.
Low, but much lower charges from from excess and obsolete inventories drove.
Drove the sequential improvement.
I think on a go forward basis, we may not have that same level of.
Of mix.
So I would expect that.
To continue to continue to see margins at this level or slightly slightly below depending on the mix. We see going forward. We also had 540 k. of.
Let's call it zero, 1% margin business in the number last core.
We made a decided to exit from and so we will not be.
Taking that business on a go forward basis, so that obviously gives us a little bit of lift. So we did about $2 million, 1% business last year that we exited so we get a little bit of lift from that yes, it's about a 100 basis points.
As well.
Okay. Appreciate the color. Thanks, a lot guys.
Our next question comes from Scott's yearly with Roth Capital. Please go ahead.
Hey, good afternoon. Thanks for taking my questions. He Directionally Paul can you give us an idea by product line what's your.
Sequentially as we go into the December quarter, the remote management sounds like it's a little bit lumpy, but I know there's been some new product introductions I mean, how is that shaping up.
Sequentially, how do we expect the different categories to kind of grow going into the December quarter, and then just to clarify on.
On the software front.
Is there a number that you put around that soft.
See licensing in the September quarter to give us sort of an idea about how that impacts gross margins, then I had a follow up or two.
Okay. So.
On on directionality get it we don't breakout revenue by product line, but in order to give you a little bit of color.
At this juncture we're seeing.
Our services business is typically.
I'll say around 50 points of gross margin and we've all been enough products to be at the point, where we're just about fully booked so we had a little bit capacity that ended up coming down to the R&D line working on standard R&D component or.
Standard products and then as they.
Currently booked with services they end up going up to the Cogs line. So that was a little bit of the movement that we kind of talk about from an R&D standpoint services is is we anticipate to be close to fully booked if not fully booked on a go forward basis over the next several quarters, so that will give us a little bit.
A lift on those.
You know our RPM products that remote environment management product is.
Typically all over the board if we have a light quarter, we typically have a strong quarter next quarter.
It really comes down to Capex trends with our income.
So we have to be a little bit careful in terms of trying to forecast those because it really going to come down to their budgets and when those get approved but.
We do have line of sight to a couple of build out that are happening.
We've seen a nice little surgeon datacenter.
Build outs and expansions and even some retooling so.
Yes, we would anticipate to get a little bit of lift there why fi products continued to be fairly strong mostly this is new product revenue that backfilling some obsolete component revenue.
So I Wouldnt anticipate.
Continued strength in those products and then.
And then really marching into.
The first part of 2021.
Say Q3, our fiscal Q3, we expect to get tart start to receive some of those Qualcomm processors that we've been waiting on long lead time orders and so you'll see a little bit of a shift there in terms of compute products.
Got you and they're very helpful.
On the on software, we Didnt put a number on it.
What we've kind of said historically is that that.
Software product typically runs if you take sauce.
The software licensing and this has.
Well typically around 750, K. a year, we definitely saw a boost.
I hesitate to kind of say that it's continued to be strong because we've gone back and looked at some of our older product lines that are finding ways to make sure that we do a good job on the four segment of the software licenses and continue to extract value for those so we might be of the.
Better manage that product.
Over the next several quarters.
To maximize it but.
But it's not it's not new per se.
And two follow ups, if I could in terms of internal development trying to move in the direction of recurring revenue and other services how has that progressed.
Missing in terms of other subscription offerings and when would we expect that to become a little bit more prominent in terms of the revenue stream and on the M&A front without commenting specifically on any deals I know theres been an active pipeline. There could you just give us an idea of what the tenor in the conversations are like more difficult to get deals done valuations kind.
How are you feeling about the overall environment right now thanks.
Okay.
I'll take the last one first I think on the M&A front, there's still plenty of.
Activity out there, there's still plenty of deals to be had.
Conversations are great I do think that.
Starting to wake up to the fact that.
Please turn to.
They've seen it done where you can do some M&A drive some value for shareholders and so we're starting to see a bit more activity from my standpoint, I start to see it fit more activity. There is still plenty of projects that are coming across our desk I think we're at the point where.
We're being.
More selective in terms of what we go after and.
Still plenty to be had but we'd like to make sure that we were a bit more selective in our offering so still plenty of activity lots of lots of things happening.
The like what we see out there.
On the SAS internal development, what what I've said in the past I think it's.
Still remain to be it still is true that I think it will be better prepared to talk about contribution.
Yes.
Revenue.
Around the end of the year, but we started talking about internal targets and getting to about 10%.
Of revenues coming from recurring.
Good.
In about five years timeframe, but.
We're getting.
Really some affirmation terms of the strategy.
From recent customers and actually I'll jump. This question over to John in terms of how we're progressing how he sees it and maybe some of the customer examples on validates.
John you want to take this one.
Sure. Thank you Paul Yes from a roadmap perspective, I think we are doing much better job in.
Colonel discipline around focus really understanding.
What our customer needs and what's going to drive customer success and really listening to.
Customers as we develop our roadmap we've seen an increase in.
PEO sees proof of concepts with customers.
In both new customers and existing customers and driving interest, where we didnt have it before and as well as those customers being excited enough to sit down with.
Parts and discuss.
Key features that they're looking for that we then have integrated into our roadmap for moving forward. So even even as we discuss it being early innings. The attraction is happening and then as far as where were going we.
We just had a press release come out yesterday and social media.
Post follow up to that around aren't connectivity services. So now lantronix products going forward, we will ship with easily activate a more global Siemens So all of our customers can quickly get their aiotv in rim devices get them online and get them activated and using cellular services right out of the box.
And so Thats. One example of where we're taking that that line to make it even easier for customers to get their solutions moving.
Great as.
Paul mentioned earlier, a big validation of this obviously, we can't talk about the customers in the pipeline, but capital one again as a great example of.
Validation of.
Building over the last year building a lot of value into our product customers and potential customers are seeing that value and being willing to sit down with us test.
Test with us and eventually.
Become a customer of both hardware and software.
Great. Thanks, so much.
Our next question comes from Rich Valera with Needham and company. Please go ahead.
Thank you thanks for taking my questions.
Maybe just to try to summarize what I've heard in the prior Kunaev prepared remarks with respect to the next quarter it sounds like you're expecting.
Revenue to maybe be flat to slightly up on gross margin, maybe flat to slightly down and then I'm not quite clear on topics that I'm. Just wondering if those are sort of directionally.
Consistent with what you're thinking in if you have any thoughts on how we should think about opex.
In the current quarter.
Yes, I think.
Thank you.
So opex is something that we'll probably downtick.
Slightly.
You know I don't think you're I don't think Youre characterizations, all that far off.
There is some I don't know that.
I wouldn't say flat this.
Lightly down I would say flat.
Just because we did definitely see the possibility of that coming in higher.
And you know, we're a little bit conservative when it comes to the.
Our current customers in EMEA, we might get a little bit of surprise in terms of some of that.
Yes, some of those processes from Qualcomm getting those into our hands a little bit early to our primary customer that's ramping up.
Quite nicely.
Is based in Europe, and so that would alleviate some of that but if I if I carve that out.
He is a whole with the bulk of the revenue is quite soft.
Okay.
That revenue came down I don't expect it to come it came down last quarter I don't expect it to continue to come down.
But.
We do expect it to be soft at least through December.
Does that help and I think from gross margin standpoint.
You're you're not.
Not that far off as we kind of like what are the gross margins are but we.
Temper the enthusiasm turns as stating that this is the new normal.
We do expect to be capturing synergies that we have been capturing.
Going forward and still continue to see though so we're going to get a natural.
We are the software component is continuing to add to the contribute to revenue. So it does come in at a much higher gross margin and really been and it comes down to hardware mix.
That's a little bit difficult to tell at the moment for the for the December quarter, but.
We could have if we get.
So some shipments coming in it's obviously, a little bit lower gross margin drag it down, but then it would drive the topline higher so theres things that kind of offset each other and then.
The only other color I'd give you a rich is that given the backlog continues to.
Build which is uncharacteristic for us we don't normally start a quarter with a lot of that growth.
But.
Over the last several quarters. This has happened it's all scheduled a lot of its scheduled in Q3, we also have.
A couple of customers that's.
We're kind of managing.
An exit from last year and they have some contractual obligations that happened in the Q3 timeframe as well so.
I kind of built into that pipeline and spells for a nice second half.
Got it thank you for that for that color.
And then just wanted to try to understand and maybe quantify that the assumption on headwind from supply chain heading in this current quarter sounds.
Last quarter, you expected about 500, K. and got about a million what's the assumption for this quarter in terms of how much supply chain headwind you might have.
I think im going to exit the quarter with the same amount, but a million dollars that I can't ship.
Historically, we have not.
Okay had this issue, where we havent been able to meet customer demand for our operations team has done a fantastic job on the planning and acquiring a component to making sure. The products are built and delivered in a timely manner.
And while I'll say supply chain issues really kind of when we talk about.
Supply chain issues, it's a number of different things delinquent.
Delinquency shipment delinquencies can come from customers ordering to a component lead times that are too long or manufacturing delays, we don't have quite the manufacturing delays that we had in the March quarter, we do occasionally see those associated with the couple of our suppliers.
And currently time definitely are those are stretching out and then customer ordering patterns, especially in EMEA are a bit sporadic. So it's a combination of those I would expect to exit the quarter with the million dollars.
Late again.
So I'm not expecting.
Expecting much improved.
Right.
Got it and as you look into next year and I know, it's it's a dynamic environment to be sure but.
Do we expect this is these kind of conditions are probably going to persist into the early quarters of next year.
Well.
I don't think it's really kind of depends what you're talking about if we're talking Qualcomm processors, I really expect to catch up at some point TSMC is doing a great job.
A lot of our other.
Demand is not on the cutting edge process today with our current design services, though is on that as.
All right or the nanometer process and so I would expect that supply will be tight maybe we get past the CE bubble.
With I phones, rolling out and things get a little bit better.
But.
I would always expect that that semiconductor component to be fairly long I would expect everything else.
So we kind of moderated a bit and then cut.
Capacity wise, we're leveraging our multiple contract manufacturing locations to qualify.
Skews in multiple locations so that we don't quite have.
The issues.
The incumbents is that we've had.
This past year. So we're trying to get ahead of that and then I think on the ordering patterns I do think that that does result.
A lot of skittishness, it all seems to really.
To cope with cases and more than that you are a believer or cynic in that regard.
You know I think we're making good progress in terms.
Vaccine. So hopefully that uses a lot of the trepidation that's out there.
Thats helpful. Just one final one you.
You guys talked about some nice video conferencing related wins last quarter, just wondering how the progress has been in ramping those thank you.
Yes, we picked up additional purchase orders.
In this past quarter, so it's going quite nicely, we picked up two additional three additional design services projects on video conferencing platform. So it's kind of nice once you're known for being able to deliver that kind of capability it tends to be yet more projects.
So that's why some of the expansion into other verticals is really kind of nice to see because I do think that it will lend itself to additional pickup in those particular vertical so that's going really nicely quite honestly.
You could you could sit there and say its something thats been really me.
Needed this past year, but in reality most of the video conferencing platforms that were on have been more office enterprise.
Type applications based sense switch their sales strategy to cater to more.
Executives at home and so people are buying those products for their homes.
But the.
Majority video conferencing today is done with the laptop tablets.
And despite that we're seeing nice volume and I think as we get into a more normalized environment doesn't matter. If you think that office retail is going to be cut in half the need for video conferencing platform in those.
Office locations, whether they're 30% of the space that they were 50% of the space, but they but they were.
They are still going to be a large uptick in demand that I believe is going to happen over the next several years.
Got it Thats helpful. Thanks for taking my questions.
This concludes our question answer session I would now like turn the conference back over to Paul Pickle for any closing remarks.
Well. Thank you for your time today I Hope you have fantastic evening.
The conference has now concluded.
Thank you for attending today's presentation you may now disconnect.
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No.