Q1 2022 Lantronix Inc Earnings Call
Good day and welcome to my first quarter 2022 results conference call.
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Please note. This event is being recorded I would now like to turn the conference over to Rob Adams. Please go ahead.
Thank you and good afternoon, and thank you to all those joining us for our first quarter fiscal 2022 conference call joining us on the call today are Paul Pickle, President and CEO, Jeremy Whitaker, Chief Financial Officer.
A live and archived webcast 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.
November 18th by dialing 870, 734475 to nine in the United States or for International callers four one to 3170088 and enter passcode 10161701.
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 yesterday and is available on our website and in the Companys SEC filings such as its 10-K and 10 Qs.
<unk> 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 today's earnings release, which is posted in the Investor Relations section of our website describes the differences between our non-GAAP and GAAP reporting and presents reconciliations for the non-GAAP financial measures that we use with that I will now turn the call over to Jeremy Whitaker.
Plantronics Chief Financial Officer.
Thank you, Rob and welcome to everyone joining us for this afternoon's call I'm going to provide the financial results as well as some of the business highlights for our first quarter of fiscal 2022 before I hand, it over to Paul for his commentary.
Please refer to the news release and the financial information in the Investor Relations section of our website for additional details that will supplement my commentary.
As a reminder, our first quarter of fiscal 2022 includes two months of operations related to the acquisition of transition networks and that to edge, which comprised the electronics and software business segment of communication systems, Inc, which closed on August 2nd 2021.
For the first quarter of fiscal 2022, we reported record revenue of $27 7 million, an increase of 62% when compared to $17 1 million for the first quarter of fiscal 2021.
The year on year growth was driven by contribution from the recent acquisition and double digit organic growth sequentially.
Sequentially net revenue was up 34% compared to $26 million reported in the fourth quarter of fiscal 2021.
GAAP gross margin was 45% for the first quarter of fiscal 2022, as compared with 48, 8% for the fourth quarter of fiscal 2021, and 48, 1% for the first quarter of fiscal 2021.
The sequential decline in GAAP gross margin was expected as we recognized a large amount of software license revenue in the prior quarter.
As discussed on previous calls, we continue to see higher than normal supply chain costs.
That said, we recently rolled out price increases, which we expect will offset a large portion of the product cost increases we are experiencing.
Selling general and administrative.
<unk> expenses for the first quarter of fiscal 2022 were $7 9 million compared with $4 9 million for the first quarter of fiscal 2021, and $6 1 million for the fourth quarter of fiscal 2021.
Research and development expenses for the first quarter of fiscal 2022 were $4 million compared with $2 6 million. The first quarter of fiscal 2021, and $3 6 million for the fourth quarter of fiscal 2021.
The increase in SG&A and R&D.
Was impacted by increased head count and operating costs related to the recent acquisition.
That said, we have moved quickly on implementing our synergy plan and as a result, non-GAAP operating expenses as a percent of revenue actually declined sequentially and from the year ago quarter.
GAAP net loss was $2 3 million or eight cents per share during the first quarter of fiscal 2022 compared to a GAAP net loss of 302000 or one cent per share during the first quarter of fiscal 2021.
The increase in GAAP net loss was primarily due to costs related to our most recent acquisition.
Non-GAAP net income was $2 5 million or <unk> <unk> per share during the first quarter of fiscal 2022 compared to non-GAAP net income of $1 7 million or <unk> <unk> per share during the first quarter of fiscal 2021.
Now turning to the balance sheet. We ended the September 2021 quarter with cash and cash equivalents of $10 3 million, an increase of half a million dollars from the prior quarter.
Working capital improved to $32 2 million as of September 32021, as compared with $20 3 million as of June 32021.
Net inventories were $26 6 million as of September 30th 2021, compared with $5 $115 1 million as of June 32021.
The increase was primarily primarily related to inventories assumed in our most recent acquisition.
Now turning to our annual outlook, which includes approximately 11 months of contribution from the most recent acquisition.
Once again, we exited the current quarter with increased demand driven by record backlog.
We believe that without supply chain constraints, we could deliver annual growth in non-GAAP EPS above the high end of our guided range. However, we feel it prudent to take a more conservative approach and as such we are raising the low end of our guidance range, while keeping the high end unchanged.
For fiscal 2022, we expect revenue growth of 54% to 75% and non-GAAP EPS growth of 95% to 135%.
I'll now turn the call over to Paul.
Thank you Jeremy.
First quarter was a busy one here at plantronics and we made progress on a number of fronts and transforming the company into a world leading Iot solutions supplier.
To name a few during Q1, we closed the acquisition of transition networks and I am pleased to report its integration is already well underway.
We battled ongoing supply constraints and delivered record results for our shareholders.
Furthermore, we entered Q2 with yet another record backlog in place and have commitments for supply necessary to raise our fiscal 2022 growth projections.
We saw a critical acclaim and continuing design in activities for our console flows SaaS platform and to top it all off we were awarded the largest design win ever in the company's long history, which I will detail shortly.
These accomplishments did not come easily the ongoing supply chain constraints delayed realizing approximately $6 million in revenue and cost had been rising due to the shortages. We first noticed these disruptions over a year ago and given the growing forecasts from our customers we moved quickly to secure supply.
<unk> are key components.
As such while we are not immune to the problem. We believe we have sufficient supply to continue to grow organically at double digits in fiscal 2022.
Also as Jeremy stated, we are starting to pass those higher costs on through price increases and through customer contractual obligations.
All in while we expect the continued constraints and resulting price pressures to remain into calendar year 2022, our early actions to secure critical components are unique technology position, our value to our customers and our success in executing on high dollar opportunities lead to increasing confidence.
And our ability to deliver organic growth to our shareholders in fiscal 2022 and beyond.
With that let's get into the product detail on some more specific discussion around our accomplishments in Q1.
We continue to see increasingly strong demand for our intelligent edge compute solutions we.
We have spoken on a few conference calls about expanding our capacity to meet this designed to demand and filling a funnel.
That will yield a number of high dollar volume production opportunities for us in the future.
Today I'm pleased to report on a few such opportunities in key verticals that we expect will make substantial contributions and physical fiscal years 2022 and 2023.
The first is an enterprise level video conferencing solution for our customer need which went into production last year and forecast and subsequent orders have tripled last quarter with request to pull scheduled shipments in as the world's workforce begins to go back to the office and in office conferencing solutions are being increasingly deployed.
Well this is the largest win for us in the video conferencing Arena. We are an expert in this field and had several opportunities in the pipeline that will leverage the same skill set this application alone will drive significant growth for our edge compute solutions and we are growing in other key verticals as well.
Turning to security and surveillance, we have just received additional purchase orders on a significant increase in forecasted quantities for Atlanta Onyx developed AI driven some solution.
Driving a camera monitoring product for a leading security Kevin.
This application will lead to longer term content and revenue synergy opportunities as many of these smart city applications involve power over Ethernet solutions, which are supported by our recent acquisition.
Electric vehicles, the new vertical for us, where we are making great strides you may recall, we have spoken in the past about our involvement with arrival, who produces electric cargo vans as well as talk.
Turkey stage vehicle company.
Our design work with these customers has led Qualcomm to designate us as a tier one authorized design center of ADC and invitation only program put in place to develop and accelerate easy automotive innovation.
This ADC status designation places us in a position to better benefit from Qualcomm opportunity funnel.
Moving on uptake of our remote management solutions in the Telecom data center and financial end markets remained strong due to a robust macroeconomic trend along with new design wins.
COVID-19 has made a lasting impact on this market and our customers continue to build their out of band and remote management capabilities after posting 20% organic growth in our fiscal 2021 of the enduring boost to this end market drove Q1 results, 57% sequentially and 98% year over year.
We caution that this has historically been a lumpy business quarter to quarter, but we expect that the remote management upward trend will continue.
In the industrial smart grid energy market I am excited to announce we've just been awarded our largest design win in the history of the company to supply the world's largest energy supplier with an AI driven intelligent power substation monitoring compute hardware. This relationship has already provided us with meaningful design services revenue over the last several quarters.
And I'm pleased that <unk> is executing on a four dollar content per design strategy with several hardware components and software in the total design.
We expect to begin shipping in the second half of calendar year 2022, with an approximate 10 million to $20 million of revenue impact in our fiscal year 2023.
And some Q1 was not without challenges, but we continue along our growth path and delivered strong sequential and year over year results for our shareholders and as I expect you can hear in my commentary. The company is starting to gain some momentum in key verticals with key customers, while we expect a constrained environment for the remainder of fiscal 2022.
We are at the same time increasingly confident in our ability to drive industry, leading growth and profitability as we deliver for our shareholders.
That completes the prepared remarks for today, so I'll now turn it over to Betsy to conduct our Q&A session.
Thank you.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
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At this time, we will pause momentarily to assemble our roster.
Yeah.
The first question comes from Scott thoroughly with Roth Capital. Please go ahead.
Afternoon, Thanks for taking my questions and nice job on the quarter guys. Thank.
Thank you Scott Paul maybe just to jump in on the supply chain issue. It seems like you guys have done exceptionally well on that front, but I'm wondering if there were any sales that were left on the table as an inability to ship and I'm wondering if there were any components in particular that you guys are struggling with.
That's a good question. We did have we did see an increase in that delinquencies to CRD.
And it's basically customers requesting it in the quarter. So about an additional million dollars 6 million in total revenue that customers would like us to deliver that we just can't quite dilip.
<unk> deliver in the timeframe that they want due to lead times and so if we look at a particular components.
It's a little bit across the board.
Some of the less impactful but.
<unk> defined nonetheless.
We do see some oscillator shortages and.
In general most of the semiconductor chip sets that would be Wi Fi network controllers Wi Fi controllers, certainly Qualcomm processors are at some significant lead times.
And then if I go to a little bit longer we are seeing flash in fairly short supply and then some of the specialty memory devices that we need top memory devices.
That are in short supply and largely because they're somewhat exotic packages and they go along with that.
Qualcomm processors, I will say that Qualcomm is.
They are not the long pole in the tent, they're doing a good job keeping up with customer demands for us and it's mostly because of the tight partnership.
Very helpful. Thank you.
Maybe to follow up it seems like Theres a lot of design activity in the pipeline and you've been moving more and more in the direction of software as well as recurring services and you've had some I guess lumpy sales that have come through in the not too distant past I'm wondering in terms of some of the future opportunities going forward. How big is the software attach rate are you still tracking to that five.
Went to 10% goal of software and recurring services as we look out three years or so.
Well I appreciate the fact that you lowered the bar on on us a little bit, but it's 10% of revenues in three to five years is what is what we're looking for I will say, we are on track to that we'd like.
Were tracking internally on SaaS recurring platform and micro services to be at about a $1 $5 million our exit rate this year.
That is in addition to the on Prem licensing.
Business that we have so I'd say, we're making good progress.
We're adding features and services to the to the platform and we're seeing much better uptake than we certainly have.
Last year, so making great progress on that front.
And if I could follow up on the energy supply deal that you talked about is their largest whenever.
I think you said $10 million to $20 million in the fiscal 'twenty three time frame does that look like it's going to be some are recurring win where you're going to see those kind of levels of revenue going forward. Once you start to get that into production.
We certainly hope so.
You know I'd like to think that that's on the conservative side of what we're able to capture but in this particular, one we're shipping we've designed in several.
Several hardware components, we're doing the the AI application software for the platform as well and then handling the build for the completed hardware. So.
You know that.
That opportunity is quite large and I don't you can't quite think in terms of their total substation attach rate you know they have over a million substations out there and we're just.
Really participating in the first 35000 units today, but.
What that solution looks like in the future, we expect to still capture a considerable dollar amount, we just happened to be handling the whole thing.
At the get go so I would expect in the future is to pick up we will pick up a bigger programs like this and we have been talking in terms of when we do these design services there.
There are seven digit contracts theres eight digit hardware opportunities on the back side of that if we do a good job through the prototyping.
Phase and this is evidenced that the first one that we've captured we do have two other programs in the wings that would be similar.
And lastly, if I could and then I'll get back in the queue, but.
You've raised the lower end of the guidance for this year, it basically implies a $110 million to a $125 million and depending on what's your pencil in for transition networks organic growth is low teens to maybe as much as 30%. So there is some pretty big numbers I'm I'm wondering if you could kind of talk around the variance there what kind of moves you to the higher end of the range versus lower.
End of the range it sounds like component availability and you could could be above that.
And then what's the longer term organic growth rate I know, you said double digits, but its pretty big number that you've got out there for this year and it seems like you've got some other wins in the pipeline that are going to feel 'twenty three and beyond so any thoughts you could kind of elaborate on that front would be helpful. Thanks.
In a particularly strong trend.
The base business that we've historically had is.
Is really it's doing double digits and then we have these organic growth plans that are that are kicking in as well I'd say this year its definitely.
Get demand, it's definitely north of 20%, we might actually be able to deliver on.
That 20% and our customers would love for us to do a bit better than that but it is it is component supply constraints. So when we place an order.
We got this award for energy Smart grid utilities and this is for December quarter build of next year.
We're starting to have to place orders for components, which our customers are on the hook for them, we're having to place those today can't really realize that revenue until that timeframe. So we could be growing much much faster but.
Overall, it's still you know what.
Probably north of 20%.
Great. Thanks, so much nice quarter guys.
Thank you.
The next question comes from Jason Jason Schmidt Schmidt excuse me from Lake Street Capital. Please go ahead.
Hey, guys. Thanks for taking my questions just wanted to start with the backlog or would you mind sharing what that backlog number is entering the December quarter.
Yeah, I think we're Jeremy you can correct me, if I'm wrong, but I think we're just about $43 million total.
With approximately $3 three coming from the new acquisition, so to put it in perspective.
We've got $39 million on land <unk> proper and this if you look at historical run rates were about $1 million going into the quarter.
Okay. That's helpful and have you seen any cancellations in the pipeline or are you at all worried about any potential D commits.
Not at the moment and our.
Usually the next question is do we see any double ordering.
Find out that when we take in these orders and we start procuring product our customers on the hook for that product.
And so you can effectively see them as in CNR.
Not seen.
The double ordering and and just do a contrast to last quarter. If we looked at starting backlog our total backlog last quarter, where we are.
Well, we started it with them it was about $28 million. So it has grown substantially this quarter, but most of that is new programs that have kicked in ramps.
A year ago would have been eight and then if you kind of went back a year and a half.
That $1 million that I talked about so it's new programs, all organic and and our customers are on the hook for the for the material that we acquire and and so we feel pretty good about the order status there.
Okay. No. That's good to hear and then just the last one for me and I'll jump back into queue, Jeremy on gross margin with all the moving parts and different dynamics, how should we think about that here in the December quarter, and I guess bigger picture for fiscal 'twenty two.
Yes, we're still targeting margins in the mid mid <unk> mid to upper Forty's is I think where.
We think we can get to over time is a lot of the synergies.
Synergies come into play from the recent acquisition, but I think we're pretty comfortable at the mid 40 range.
Okay. Thanks, a lot guys.
Thank you.
Okay.
The next question comes from Christian Schwab with Craig Hallum. Please go ahead.
Hey, congratulations.
On a great quarter and outlook.
Hum.
And some of the Big design wins, you know we did highlight one of them that you know, we said, even though it can be $10 million to $20 million.
Starting at the very end of 'twenty, two and going into 'twenty, three but we highlighted a couple of other.
No meaningful ones are you in a position at all to <unk>.
Give us a range of potential outcomes.
Those design wins in hand gathered not quite yet.
That's the first one that I highlighted in audio or video conferencing, if I look at the totality of compute hardware going into video conferencing systems. This year it'll be on the order of $10 million. This has grown from and I'm going off of memory I don't have this in front of me, but about 2 million.
And last year, so a substantial increase.
In terms of that particular program on the security camera side that's one.
On the order of five to six this year.
And then this was was fairly small call over $1 million last year and both of those are already in production. So we talked about one that's 10 to 20.
That we are having to plan for today.
Once we sign that supply contract it'll likely be something that we'll announce as well.
But we do have programs in production today that we are seeing some meaningful 10 plus million dollar revenue run rates on them.
Great and then and then on the smart grid energy, one the $10 million to $20 million why do you said Theres a couple of other programs. I was confused is is there a couple of other programs in the space with other customers or is there a couple of other programs with that same customer.
That that could.
You know Gulf from.
You know a non design win stage two to a design win to revenue.
So so.
So not necessarily in smart grid, we do have some follow on programs with this particular customer, but I'm not I'm not trying to double count those I was really referring to other compute hardware opportunities in other verticals.
Okay and other other verticals, okay. So we've got three.
Well, you know customer situations that we've highlighted here.
And we're working on two other programs of Oh, it's similar to the same size revenue opportunities or could they be even greater.
Could be similar I'll say similar size at this point, so I don't put the cart ahead of the worse.
Great Great. One one that we didn't highlight we talked about remote environment management and datacenter financial institutions being quite strong we do have some of our classic blue chip customers that are rolling out to the tune of $1 $2 million.
The infrastructure upgrade opportunities that will consume.
One plus million dollars' worth of plantronics product. So there is a lot of stress.
Strength in the funnel for us the design in funnel across the board across all product lines.
And then on the ASP increases that you've done is this a.
Is this across the board.
You know to two you know it sounds like we're renegotiating contracts, and then where and we're renegotiating or just going to tell the distribution channel prices are going up.
Are you getting any push back or you know, it's as everybody firmly understand the world that we're in today.
And when did you let them know prices were going to increase and when are they increasing.
The notices are the letters went out in November.
For standard products.
And to be clear, it's not a set percentage across the board, we don't intend to give up market share, but at the same time, we intend to maintain our gross margin targets and one other point of clarification, we're not renegotiating contracts most of the contracts that we have on some of these large opportunity.
He is given the environment, we built in safeguards to be able to pass along those.
Component costs at margins so it.
It will be something thats already negotiated and something that will end up passing along and I think the you know the point that we wanted to stress is that the.
Pricing pressure, we're seeing from components, you're not going to drive our gross margins down we'll be able to maintain those and still continue to grow at the rate that we currently are.
Fabulous isn't then it you know I know word a component constrained environment.
Like all things will eventually and.
It seems like given you know.
You know I think you guys had previously talked about and are in an environment that wasn't component constrained.
That you would target kind of a 15% organic growth rate and we've already kind of talked about where you know that we're.
I'm still in a good component constrained environment, but we're going to grow north of that.
You know as you as you think about the company I know it might be a little bit early but you know is this a sustainable.
No.
It looks to be 15%, plus but you know or is it just too early to kind of.
Categorize what that number could be over a longer timeframe. Other than you know the next 12 to 24 months.
Provided that there's not as you know our stock and demand. If you just kind of project normal run rates, even if it moderates we have significant backlog that's built up to customer requests that will fuel growth going forward for quite some time so.
I feel.
I expect to have growth over significant growth over the next.
One and a half to two years, that's a little bit further out than we would normally want to project, but given where this environment's going it seems like.
We're in a good place to continue to have that and that macroeconomic trend, though on the base business I do expect it to moderate a little bit so.
Are we going to continue to be able to keep up 20 plus percent we'd have to continue to fill the design funnel them knock those down that's certainly possible, but I do expect some of the base business to pull back just a little bit and Thats still would put us in a in a healthy 15 plus percent environment. So most of the new growth right now is happening.
And new designs and so I looked at is it that is organic pickup in and some market share gains.
Great and one last question, if I may if I could sneak it in.
We have $43 million in backlog you know, we just did $27 million, which as you know our record quarter. So you know.
Not quite two quarters of complete revenue in backlog, but it seems to be like.
You mentioned the number but in a in a as you know.
Pre COVID-19 environment.
If you were doing the same revenue that you are doing today or projecting to do today for example, roughly $110 million to $125 million.
In revenue and we were just starting in the December quarter and going into you know the next calendar year, how much backlog.
Sydney not today.
And it would be typically one month of backlog and we're talking total backlog nuts, starting backlog, but it typically be one month total backlog, we were a very heavy turns business and the makeup of the business has changed so that that is no longer the case and then also obviously lead times ahead.
Had have added two visibility, but the vast majority of it has come from a shift in the type of business that we target and that's the type of business that are that we book.
Great I don't have any.
Other questions. Thank you guys.
Thank you.
The next question comes from Ryan Koontz with Needham <unk> Company. Please go ahead.
Our next question.
A little more color on the integration.
If you could it sounds like Youre pretty much there on head count and.
<unk>, but where are you whats still lies ahead of you in terms of <unk> and <unk>.
Manufacturing and then.
So what still remains there and then secondly.
As you look at some of the revenue synergies that you brought up when you originally did the deal do you have an updated outlook there.
Those are opportunities for cross selling and alike.
Yeah, Great question, Ryan Thank you for that.
I'd say, we're we talked $7 million over 18 months and we're definitely ahead of that projection.
I'd say, we've taken two thirds of the actions necessary, but right now probably capture are on track to capture half of the synergies to date in terms of next steps that we have.
We have to get out of that a transition services agreement with CSI that involves bringing up our own instance of an ERP importing that data over that slated to happen.
This this quarter. So and then just the migration of building and we've got that identified and are moving forward on that so.
In terms of longer term capture.
Got some go live events in July that will get us all on one ERP and will start to pick up some more of the Cogs synergies at that point I think we'll be in pretty good shape, but right now everything is going really well and then I have to say very thrilled with the new sales team.
We're finding quite a bit more opportunities with that team and for plantronics proper product and the cross selling opportunity is a bit higher than what we expected. We've also been able to drive their aggressiveness a little bit more in terms of capture and so they're doing a little bit better than we would've originally.
<unk> in the model, so pretty happy with the with where this is going so far.
That's fantastic to hear thanks.
Quick follow up as you look at your from verticals, which verticals would you say you had the best kind of near term opportunities to sell in your SaaS solutions.
Yeah.
So that's a that's a great question. So right now the vast majority of the traction has been and datacenter financial.
Telecom opportunities and that's because we have a lot of deployed boxes are that in the past did not have.
Device management capabilities. So now that we've added that upgraded the firmware, it's greenfield opportunity to go back into the existing installed base and try to migrate those platforms over but then if we kind of look at.
Security camera most of those remote security camera applications like in smart cities, they all have LTE or <unk> backhaul.
We see a lot of opportunity for zero touch provisioning and data connectivity services in that space and so that's where we're expecting that one and a half million exit <unk> rate from this fiscal year to be kind of a big chunk of that particular type of.
Products and services for that vertical.
Got it so a substantial portion of its selling into your install base as well not just not just green buildings near.
Near term definitely selling into the installed base, that's kind of the low hanging fruit, but then a lot of pick up some of the distributed Iot applications.
Okay perfect.
Other question I had thanks a lot.
Thank you.
This concludes our question and answer session I would like to turn the conference back over to Paul Pickle for any closing remarks.
Thank you Betsy. Thank you all for joining us today and have a fantastic evening.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.