Q2 2021 Lantronix Inc Earnings Call
Good day, and welcome to the land and Sonics and 'twenty and 'twenty. One Q2 results conference call. All participants will be in listen only mode should you need of systems, placing all the conference specialist by pressing the star key followed by the Euro.
After todays presentation, there will be and opportunity to ask questions.
Ask a question you May press Star then one on your Touchtone phone.
So well try your question please.
Press Star then two.
Please note this event is being recorded.
And now I'd like to turn the conference over to Amrita.
Please go ahead.
Good afternoon, everyone and thank you for joining the land and tonic and second quarter fiscal 2021 conference call joining us on the call today are policy for Plantronics, President and Chief Executive Officer, Jeremy Whitaker, and Kelly, Chief Financial Officer, and Jonathan Shipman, Vice President of strategy.
The 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 and five P. M Pacific today through February 18th by dialing eight and Kevin and seven three and 44529 and the U S corporate finance.
Callers or one to three 170 and zero 88, and entering pass code one of your of 151719.
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.
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 some of the Companys SEC filings such as its 10-K and 10 Qs and.
<unk> undertakes no obligation to revise or update publicly any forward looking statements to reflect future events or circumstances. Furthermore, during the call of the company will discuss the non-GAAP financial measures today's earnings release, which is posted in the Investor Relations section of our website describes the differences.
And as between our non-GAAP and GAAP reporting and presents reconciliations for the non-GAAP financial measures that we use and with that I'll now turn the call over to Jeremy Whitaker, and Phoenix Chief Financial Officer.
Thank you Amber 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 second quarter of fiscal 'twenty and 'twenty, one before I hand, it over to Paul for his commentary.
Please refer to today's news release, and the financial information and the Investor Relations section of our website for additional details that will supplement and my commentary.
For the second quarter of fiscal 2021, we reported $16 6 million and net revenue and increase of 25% when compared to $13 2 million for the second quarter of fiscal 'twenty and 'twenty sequentially.
Sequentially net revenue was down 3% compared to the $17 1 million reported and the first quarter of fiscal 2021.
We exited the second quarter of fiscal 2021 with record backlog as a result of supply chain constraints, driven by component shortages, which affected our ability to ship against the current customer demand and beat our quarterly revenue target.
Gross profit as a percentage of net revenue was 42 two per cent for the second quarter of fiscal 'twenty and 'twenty, one as compared with 51 two per cent for the second quarter of fiscal 2020 and $48 one per cent for the first quarter of fiscal 2021.
Approximately 500 basis points of the year on year decline in gross margin percentage can be attributed to increased manufacturing costs. As a result of component shortages and elevated logistics costs as a component shortages and logistics costs subside, we expect a large portion of these costs.
And to return to normal levels.
Selling general and administrative expenses for the second quarter of fiscal 2021 remained consistent at $4 9 million.
Research and development expenses for the second quarter of fiscal 2021 were $2 4 million compared with $2 3 million for the second quarter of fiscal 'twenty, and 'twenty and $2 6 million for the first quarter of fiscal 2021.
Non-GAAP operating expenses as a percent of net revenue decreased from 47% and the second quarter of fiscal 2020% to 39% and the second quarter of fiscal 2021 day.
Inventory, hitting our synergy capture and leverage and the operating model.
GAAP net loss was $1 5 million or <unk> per share during the second quarter of fiscal 2021 compared to a GAAP net loss of $1 4 million or <unk> <unk> per share during the second quarter of fiscal 2020.
Non-GAAP net income was 861000 or of <unk> per share during the second quarter of fiscal 'twenty 'twenty one.
<unk> two of non-GAAP net income of 666000 or <unk> <unk> per share during the second quarter of fiscal 2020.
Now turning to the balance sheet.
We ended the December 2020 quarter with cash and cash equivalents of $7 6 million, which is consistent with the prior quarter.
Working capital improved to $19 4 million as of December 31, 2020, as compared with $18 7 million as of June 30 of 2020.
Net inventories were $14 3 million as of December 31, 2020, compared with $13 8 million as of June 30 of 2020.
Now turning to our annual outlook.
We are now targeting fiscal 2021 and revenue growth of 15% to 25% and non-GAAP EPS growth of 75 to 125 per cent.
I'll now turn the call over to Paul.
Thank you Jeremy.
As you May recall from our Q1 earnings call. We entered Q2 with the hope the COVID-19, driven supply chain issues would be on the debt on the decline. However, unprecedented component demand has seen our lead times continue to stretch and component costs rise.
In addition, the second wave of the virus has ensured that logistics issues persist and expenses due to an ongoing dearth of commercial flights worldwide remained at three times the normal levels and all of it remains a challenging environment from an operation standpoint.
The call it in and our June 2020 earnings call. We noted that lead times stretch for the processing components used in many of our products. We also reported that lead times worsened and the September quarter with our late shipments to customer request day coming in and just over $1 million and revenue.
We expect it to keep that number of flatten in the December quarter, but the component shortage has worsened with some suppliers of announcing 50 week lead times.
Al and the continuing supply chain disruptions impacted gross margins by approximately 500 basis points as Jeremy referenced in his opening remarks and pushed over $2 million of revenue out of the quarter.
However, we have been taking the steps necessary to mitigate these challenges by placing component orders as soon as the lead times are announced and we currently expect we will be able to achieve growth and the second half, albeit somewhat tempered.
Partly due to the these constraints we entered our third fiscal quarter was the customer requested hardware backlog of 35% higher than the prior quarter our demand during the quarter was strong as evidenced by the heart hardware book to Bill solidly above one driven by our intelligent edge computing and remote environment management solutions as the supply chain.
And as ultimately ease we expect to turn these bookings strength into organic growth with that let's delve into some more specifics on the quarter.
Turning to our product categories.
Iot products delivered $13 4 million and Q2 is down 8% sequentially, although up 20% year over year, while Wi Fi and Ethernet modulate it somewhat after strong results and Q1 solid growth from our device servers led Iot revenues in Q2 on the design front, we are building on our reputation for high performance.
Telegent edge solutions, and we are seeing an influx of design opportunities. Our team has stretched the capacity and we are expanding to capitalize on that momentum.
We have shared with you previously some examples of audio and video conferencing designs, we're executing the industrial and automotive design activities as well for example during Q2, we signed two significant design contracts I'd like to share with you here.
First off we inked the contract within all of the world's largest manufacturer and distributor of electricity and gas to design. Their next generation Iot smart grid analytics and control solution with embedded AI.
And then the automotive market, we signed the design contract with tell us and design and manufacturer of next generation of electric vehicles to design, the infotainment and automotive control consoles.
All and we are extremely pleased with the growing pipeline of high volume opportunities, we have for our intelligent edge computing solutions as we look to Q3 and Q4, we expect to we continue to expect to ramp of production of our video conference and compute solutions and we expect this drive second half growth for plantronics with.
And the caveat the delay of some key semiconductor suppliers likely back end load these revenues and our fiscal year.
Turning to remote environment management, or RM revenues totaled $3 $1 million up 29% sequentially and up 69% from a year ago.
As we translate recent proof of concept activity into design wins and revenue, we expect the growth of remote work and the access initiatives.
Buoyed by the near share of our console flow of SaaS solution will drive strong growth over the longer term.
With that I'd like to focus on our acquisition strategy and recent activity. While we are not immune to the effects of the supply chain disruption. Thanks to our acquisition strategy and Tronox is in a much better position than it was just one year and two acquisitions ago.
Q2 revenues were 25% higher than the year ago quarter, while non-GAAP Opex came down by 17 percentage points. Thanks to.
And our increasing scale and the efficiencies created by the integration of these assets.
These are excellent numbers, regardless of what is going on and our supply chain and of course, we are not done acquiring and we remain focused on acquisition targets, which brings scale strategic value and earnings accretion to our model.
And we must also acquired the talent and the technologies to deliver the solutions, our customers need and to realize the massive the fragmented opportunity that is Iot.
We have a strong pipeline of acquisition targets and we expect to report on our next acquisition and the near term.
And some despite the disruption there is still much to celebrate and our second fiscal quarter.
Total revenues grew 25% year over year, while non-GAAP Opex came down by 17 percentage points. Thanks to our acquisition strategy. Despite the headwinds of COVID-19 on the supply chain.
We're entering the quarter with record backlog and we continue to expect the second half ramp of multiple intelligent edge designs. Our design services group has booked the capacity and we are hiring so as to expand the revenue potential and.
And we have a strong pipeline of acquisition targets on which to execute in the coming quarters as the supply chain disruptions caused by COVID-19, dissipate and world economies inevitably recover plantronics will become an industry, leading Iot solutions provider with the depth of products necessary to solve our customer's biggest problems and scale to deliver industry.
Leading profit margins to our shareholders.
That completes our prepared remarks for today, So I will now turn it over to the operator to conduct our Q&A session Grant.
We will now begin the question and answer session.
Ask your question and the cross sell.
And then one on your Touchtone phone.
We are using a speakerphone please pick up your handset before pressing the keys.
We withdraw your question. Please press star and then too.
At this time, we will pause momentarily to assemble our roster.
Yes.
Our first question so they will come from Scott.
Zero with Roth capital. Please go ahead.
Hey, good afternoon, and thanks for taking my questions guys. I Hope you your families and your teams are healthy and safe.
Yeah, just two of it here.
Well just to dig right in and on the component availability issue I think I think you said 2 million clipped upside and the quarter was 1 million plus last quarter.
Is that still largely restricted to.
Processor of baseband component availability are you seeing and other areas and then as it relates to the guidance you still of 25 per cent out there as the potential growth target for the fiscal year sort of implies a pretty big snapback in the second half of this year. So.
What are you seeing and in terms of that.
Passenger you and component availability loosening up to enable you to get there and and I guess, what would have to get there in terms of driving it sounds like the video conferencing opportunities ramp and you've got some other design wins as well that you just announced but what has to really kick in the start to move up to those type of 25% growth for the year, because actually implies 2 million.
And a quarter of above I think where consensus is.
Yeah and understood. So on the on the first part of your question. So in the early days. It was just processors. So we talked about Qualcomm processors, we talked about the 865 largely it was related to capacity constraints on the low lithography lines of TSMC.
This past quarter, we've seen it expand you know when we ship and Eval board or Assam, It's not just the processor it's memory.
It's P mix and we're starting to see those.
Strength, all across multiple processing nodes, and even we had oscillator and crystal shortages this past quarter. So.
And definitely has gotten worse Qualcomm was that.
Our previous calls we talked about going to 25 weeks and the 30 weeks were 34 plus with them.
And then Broadcom, just announced 50 weeks and so it's just gotten worse and it seems to be.
A bit across the board I don't know that we've seen that spread quite into passage of yet, but theres some talk about debt.
In terms of.
How we get that second half growth. So the fact that we were we were on this early on and we had the benefit of some forecasts coming out of our customers.
In June we were actually that June quarter of.
The 2020, we were playing placing purchase orders and putting things in place to make sure that we got into the queue and we're able to deliver.
So we do have some long pole and the 10 components, especially as it relates to memory.
And so that's tempering it a little bit we can get the process of but we can't get necessarily some of the other components that we need to deliver on the on the total solutions.
But we have enough product and we have to still be able to deliver.
A decent number and the second half and so that range really is the indicative of.
If were.
I think we safely C of minimum growth trajectory for the second half as guided.
And then it's I think we can see some upside if we get some things and other product areas that come in and won't necessarily depend on shipping.
Shifting out of compute modules for instance, but it will be dependent on delivering some on some of the other products, where we don't have the extreme shortage.
But it sounds like you're comfortable with sequential increases into the March and the June quarter, and then as component availability loosens up.
There could be a little bit more of a springboard of demand demand is not the issue. It's a supply issue at this point and Todd <unk>.
It's definitely a supply issue but.
I don't know I know, we have deliveries coming in the back half of the back end of the.
Our second half so our Q4 time frame, we've got firm commitments and that timeframe. So.
We caution you to think in terms of just the step function.
Q3, and Q4, but definitely as we look towards that second half.
Hopefully we can we can take a little bit out of that $2 million of delinquencies or as of late the CRD as we like to call it and.
And then deliver on the increased growth and the backlog that we have and the books for the Q4 timeframe.
Got you and and lastly, if I could since since you've got Jonathan on the phone maybe an update in terms of platform development.
They are progressing on that front in terms of recurring revenue opportunities and and Paul to follow up on your commentary around M&A. If you could talk a little bit about the pipeline the the level of activity and kind of valuation expectations. You guys have been very very adept at doing good deals.
Or the valuation parameters changing now making things more difficult are you pretty comfortable that youre going to be able to get some things so and it sounds like you've got something.
And the hopper, thanks, and ill get back in the queue.
John I'll, let you take the SaaS question.
Sure. Thank you.
Yes.
As part of the early innings or as I think that the snowball rolling and gathering snow.
And we added an additional six names of customers and expanded our proof of concept pipeline from $20 to 28 opportunities worldwide. So we continue to expand there and we also are looking at.
Continue adding resources to our development team on the tax side to not only add additional value and functionality today, but to also work with customers to meet specific customer expectation around a customer operational efficiency and hearing back and example of this is zero touch.
Provisioning and while we have the system today and.
And it's okay, it's not great and listening to our customer and it's important that we added value for all customers whether they are critical for our customers over 100 devices and beyond and so we're working on multiple roadmap and every new product we have coming out of is gonna be tied into our recurring revenue and SaaS.
Model to make sure, we're adding full solution and value to our customers and really understanding what theyre trying to solve and then we're tackling that from SaaS software perspective value added services perspective, like our cellular connectivity, we just launched and we really become a one stop shop for management services Engineering service.
And hardware and we're continuing to see increased interest from opportunity sizes.
Over 500000, and total opportunity size when we look at the complete package of the customer.
Yeah, and I'll just tag onto that it's a very different landscape.
That we have today with the current SAS product it's still.
Requires a couple of feature sets that we will be delivering on the next six months.
Right now customers are liking, what they see and we're getting them to sign up so on the on the M&A front and in terms of valuations the.
The environment has definitely changed.
A little bit there's a bit of a frothy money raising environment I think the to put it lightly and.
And so companies that were possibly looking at acquisition have.
Have a judgment call to make whether or not they'd be better off raising funds and going it alone or.
Being part of the larger entity and I will say the debt while that is another option for them on the table I don't know the debt changes so much the landscape it is making.
And maybe some of the valuation expectations push up a little bit and we have a tendency to look for the value for our shareholders. So I don't expect us to.
To feel like we have the complete and acquisition, we're going to make sure that we find something that fits.
And with who we are and delivers that accretion to the bottom line and it's really.
Strategically important for the future, while we continue to work on our organic plans inside.
In terms of the immediacy.
And we're always actively working of a pipeline with multiple engagements.
I think at this point.
And we're we're certainly at a point, where we can take on and acquisition and integrated our last operational.
Synergies were captured here and this this last quarter related to intrinsic and so the.
<unk> is really ready to take on the challenge of.
And doing and integration and executing on it quite quickly. So we're certainly ready to get one done and.
And we're working the pipeline and ensure that we do.
Great. Thanks, I'll get back in the queue.
Yes.
Our next question will come from harsh Kumar with Piper Sandler. Please go ahead.
Yeah, Hey, guys. Thanks for letting me ask the question Paul.
Paul.
Heard you on the call.
The second half guidance.
Quick question on that is your second half guidance and anyway dependent upon a pending deal or is this something that you guys.
We feel like based on the backlog.
Current showing a little bit of away and then I'll kind of follow up on the other new site.
Sure.
Yeah definitely not dependent on a deal we wouldn't we wouldn't forecast the revenue.
Anticipating getting something done unless we have something definitive.
Understood and then.
My follow up and <unk>.
The.
Pipeline sounds like Youre always pretty active share.
In terms of the confidence you would you take on a new comprehensive and Iot and AR with the pipeline and that you have or is it something that would be additive to.
Okay.
There's just expand the.
And.
That's a great question, we would definitely take on of new competency.
We still kind of fall back to.
The five layer stack that we call of Iot.
And we're looking for.
Always to expand our expertise and those middle three layers, where we believe that we have to have critical mass in order to really win.
So anything along the comprehend connect and compute line, we'll definitely be looking at and we do have some sensor products and.
And the collect layer function.
But we don't believe that thats necessarily someplace that we have to we have to build the competency. If we found something that was attracted from the financial standpoint, we'd certainly take a look at it but.
Great question.
Definitely you think that we have enough critical mass to service our customers today, where we don't have we can outsource.
Usually but we definitely are not afraid to pick up something new.
Understood.
It's a luck of the supply of stuffs and thank you.
Thank you very much.
Yes.
Our next question will come from Jason Smith with Lake Street. Please go ahead.
Hey, guys. Thanks for taking my questions. Paul just curious if you could comment on any particular end market strength or weaknesses, you're seeing within the Iot segment.
Yeah.
So I don't know that we've seen.
The ton of weakness it alright, so the one of <unk>.
Area that we do play into is the is retail small business office taxes. Those obviously had been weak area. If we look at.
EMEA I think it's the second wave I don't know that its so much and end market vertical so much as the geographic problem, but definitely the telematics devices routers gateways.
Those had a little bit of a setback and EMEA with the second wave just the the whole scare of of the U K really kind of shut everything down.
And so I think I.
I'd hesitate to call it and the end market with the exception of a small business office and retail small business off of stack. Those definitely are suffering continued the tougher I would expect would continue to suffer going forward, but other than that.
Nothing stands out.
Fine.
Okay. That's helpful. And then you mentioned the exiting December with strong backlog acknowledging sort of the supply constraints you've laid out just curious if you could comment on how order patterns have been so far of this march quarter.
Yeah, So order patterning ordering patterns are.
Still I think.
What we have going on with their customers, there's still a little bit late in the quarter. So.
Customers are seeing the long lead times, but at the same time, they're not placing orders.
And this is a general comment because in some areas, we definitely have secured backlog, but as the general.
The comment for our turns business, we are seeing late ordering being of a significant component, we're not able to turn the product and if I could give you an anecdote the eggs.
We ended the quarter with the.
Just over $2 million of late shipments to customer request dates and those typically get.
Fulfilled almost all of fulfilled and the following month.
All of a month and a half and then we ended up having late ordering just can't respond fast enough at.
At the end of the quarter with the turns business to turn it. So good news is is where we're able to fulfill it we're not losing those sockets. No revenue is lost it's just delayed and it gets pushed to the right by a couple of months if that continues to build and obviously it produces a headwind overall.
And then there was a catch up period that happens where the.
The snapback as debt.
As logistics and manufacturing and become a little bit easier.
Okay that makes sense and then just the last one for me Jeremy how should we think about gross margin is sort of this mid 40 per cent range for the remainder of this fiscal year of good ballpark.
Yes, I think that's of.
A decent target the one caveat would be this quarter and it started a little bit and the quarter before is that.
We are spending more as it relates to the component shortages, where were happen to go out and do spot buys and secure materials.
And sometimes at higher prices, which is creating higher manufacturing cost and some variances and so.
And we can when I look at margins.
The quarter, we just completed versus a year ago, we had probably 500 basis point difference in margin and just related to increased freight and increased manufacturing costs related to expedites and component shortages.
Until that I think longer term and I would expect as things normalize that we would be able to recover.
Of that and get back to.
The mid mid the mid Forty's, even a little bit higher than that but in the short term, there's going to be a little bit of pressure on that I think.
It's hard to predict I think two quarters from now we thought we'd be through some of the stuff and it's actually seems to have gotten worse and now with component shortages actually getting worse. So.
<unk>.
It's hard to predict but longer term I definitely think we will we will get back to those mid to mid to upper Forty's as we get more.
Two of normal state.
Okay I appreciate the color. Thanks, a lot guys.
Thank you.
Our next question will come from Rich Valera with Needham. Please go ahead.
Thank you.
And it relates to the record backlog is that more of a function of your inability to ship or have you actually seen bookings picking up from the September quarter to the December quarter and is there kind of building bookings momentum or are you just kind of seeing relatively steady demand and your just your inability to ship as creating a rising backlog.
It's a little bit of both so obviously when you can't deliver the custom.
Customer request state that the builds into starting backlog and the fact that it went from $1 million to just over $2 million.
It is definitely partially responsible for the increased backlog having.
Having said that we are having strong bookings don't see double bookings and there but.
Part of it is related to.
If you look at the compute side of the business it definitely has.
And it sets up for a nice backlog so we've gotten some nice bookings that have happened.
For that particular product as you look at the turns business.
And it turns business is really responsible for the.
The late the CRD and.
Has caused that push up so it's a little bit of both.
Got it and then is the remote management business being affected by the component shortages.
Not as not to date, if you if you look at it we don't some of our boxes the pretty high high resale.
And so not a ton of units and we've definitely been able to manage the inventory.
With that product so it has not affected us.
More remote environment management.
And how is the pipeline there how should we be thinking about that business I know, it's always a little bit chunky.
Are you thinking about that business for the balance of the year.
It's definitely chunky, but we're expecting to see some growth and it.
And what we've been building into all of the hardware is console flow capability and with the new console flow products that.
The code drops that are coming out of it.
Has the tendency to take even the boxes that have been deployed and kind of breathe new features into the lab.
Now.
And it gives us a nice subscription opportunity revenue opportunity.
And then we have some new products that are.
Have some features in them that customers have been asking for free.
For a while and so it'll be a little bit of both but we see of kneisel of pipeline going for us.
Got it perfect. Thanks for taking my questions.
And our last question and this will conclude our question and answer session.
I would like to turn the conference back over to Paul Pickle and for any closing remarks.
Thank you grant.
Appreciate you guys joining us today have a great day.
Conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
Yeah.
Okay.