Q4 2022 Lantronix Inc Earnings Call

Good day and welcome to the Lantronic fourth quarter 2022 results conference call. All participants will be in a listen only mode. Should you need assistance, please signal conference specialists by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch tone phone.

And to withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Mr. Rob Adams, Corporate Development and Investor Relations. Please go ahead, sir.

Thank you and good afternoon everyone. Thanks for joining the fourth quarter fiscal 2022 conference call and joining us on the call today are Paul Pickle, our President and Chief Executive Officer and Jeremy Whitaker, our Chief Financial Officer. A live and archived webcast of today's call will be available on the company's website. In addition, you can find the call in details for the phone replay of today's release.

During this call, management may make forward-looking statements which involve risks and uncertainties.

It could cause our results to differ materially from management's current expectations. We encourage you to review the cautionary statements and risk-backed containment of the earnings release, which was furnished to the SEC today and is available on our website and in the company's SEC filings such as 10-K and 10-Q. Landtronics undertakes no obligation to revise or update publicly any forward-looking statements to reflect future events or circumstances.

Please refer to the news release and the financial information in the investor relations section of our website for additional details that will supplement and commentaries. Furthermore, during the call the company will discuss some non-GAAP financial measures. Today's release, which is posted in the investor relations section of our website, describes the differences between our non-GAAP and GAAP reporting and presents reconciliation for the non-GAAP financial measures that we will use. With that, I will now turn the call over to Jeremy Whitaker, our Chief Financial Officer. Jeremy?

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 fourth quarter of fiscal 2022 before I hand it over to Paul for his commentary.

For the fourth quarter of fiscal 2022, we reported record revenue of $35.9 million, an increase of 74% when compared to $20.6 million for the fourth quarter of fiscal 2021, and up 11% sequentially as compared to $32.3 million reported in the third quarter of fiscal 2022.

The year-on-year increase is driven by organic growth of 29%, in addition to the contribution from our acquisition of the TN companies.

Gross margin was 41.9% for the fourth quarter of fiscal 2022 as compared with 42.1% in the prior quarter.

Selling general administrative expenses for the fourth quarter of fiscal 2022 were $9.4 million, compared with $6.1 million for the fourth quarter of fiscal 2021 and $8.3 million for the third quarter of fiscal 2022.

Research and development expenses for the fourth quarter of fiscal 2022 were 4.9 million, compared with 3.6 million for the fourth quarter of fiscal 2021 and 4.5 million for the third quarter of fiscal 2022.

The year-on-year increases in SG&A and R&D were largely driven by the acquisition of the TN companies at the beginning of our fiscal year.

Gap net income was $2.5 million, or $0.07 per share, during the fourth quarter of fiscal 2022, compared to a gap net loss of $1.1 million, or $0.04 per share, during the fourth quarter of fiscal 2021.

The increase in gap net income was primarily due to non-cash income related to our most recent acquisition. The increase in gap net income was primarily due to non-cash income related to our most

non-GAAP net income was $2.9 million, or 8 cents per share, during the fourth quarter of fiscal 2022, compared to non-GAAP net income of $1.7 million, or 6 cents per share, during the fourth quarter of fiscal 2021.

Now turning to the full year results.

Net revenue for fiscal 2022 was $129.7 million compared to $71.5 million in fiscal 2021, representing an all-time record and an increase of 81%, driven by organic growth of 31% and contribution from the acquisition of the TN companies.

Gross profit as a percentage of net revenue for fiscal 2022 was 42.9% as compared with 46.2% for fiscal 2021.

The decline in gross margin percentage was primarily due to product mix and increased supply chain costs during fiscal 2022.

Gap operating expenses for fiscal 2022 are $60.6 million compared with $36.4 million for fiscal 2021.

non-GAAP operating expenses for fiscal 2022 were $44.8 million compared to $28.2 million for fiscal 2021.

As a percentage of revenue, non-GAAP operating expenses for fiscal 2022 decline as a percentage of revenue to 35% as compared to 39% of revenue in fiscal 2021.

For fiscal 2022, we reported the gap net loss of $5.4 million, or $0.16 per share, compared to gap net loss of $4 million, or $0.14 per share, for fiscal 2021.

The increase in gap net loss was primarily due to non-cash acquisition related costs.

Non-gap net income increased by 97 percent to $11.4 million, or $0.33 per share for fiscal 2022 as compared to $5.8 million, or $0.19 per share in fiscal 2021.

Now turning to the balance sheet.

We ended the June 2022 quarter with cash and cash equivalents of 17.2 million as compared to 9.7 million in the prior fiscal year. Working capital increased to 54.5 million as of June 30, 2022 as compared with 51.8 million as of March 31, 2022.

Net inventories were 37.7 million as of June 30, 2022, compared with 33.2 million as of March 31, 2022.

Now turning to our annual outlook.

For fiscal year 2023, we are targeting revenue of $149 to $162 million, representing growth in the range of approximately 15 to 25 percent.

and non-gap EPS in a range of 39 to 44 cents per share, representing growth in the range of approximately 18 to 33%.

We expect the revenue and earnings growth to be more heavily weighted in the second half of the fiscal year, as our two largest design wins are expected to ramp into full production during the second half.

I'll now turn the call over to Paul.

Thank you Jeremy. I am pleased to report results today because I am not only reporting on our fiscal fourth quarter and 2022 year end results, but I am also laying out for you our investors what is expected to be an exciting fiscal 2023 for all of us.

Starting with Q4, as Jeremy revealed to you, revenues for the quarter totaled 35.9 million, up 74% year-over-year and 11% sequentially. For the year, we grew revenues an impressive 81% and 31% organically.

While we intend to continue to build on capabilities and competencies through M&A, it is our ability to grow organically that will be the true test of our operating philosophy as well as our ability to integrate and manage those acquisitions.

Q4 results were solid, with our outperformance coming against the backdrop of ongoing supply chain disruptions and increased costs, which continue to temper profit growth.

During Q4, we were able to secure additional semiconductor supplies that we had originally expected in the September quarter, which helped us to exceed our initial revenue expectations. Despite these additional shipments, we still saw late shipments to customer request date increase to approximately $10 million, up from just over $7 million last quarter.

We are starting to see supply improving for some of our components, but on the whole it remains a mixed bag as we continue to see long lead times for a number of important products.

Looking at requested shipments for our fiscal first quarter ending in September , we expect a slower start to our fiscal year versus Q4. However, our operations team will continue to aggressively source supply in hopes of meeting customer requested delivery dates.

In aggregate, we expect the supply chain to continue to improve over the remainder of the calendar year.

As we turn to our product discussion, we are reporting on the business with three new product classifications which better describe and give insight into our business. Those are embedded solutions, system solutions, and software and services. Embedded solutions will continue to include devices such as SIPS, SOMs, and subassemblies, which are ultimately embedded within a customer's product. System solutions are our standalone box products, though they may be a complementary part.

of a larger IoT solution of sorts. And finally, our software and services will include software licensing, SAS, and other services with recurring revenue as well as design services.

Looking at our fourth quarter, embedded IoT solutions totaled 18.4 million, up 20% sequentially and 68% year-over-year, and represented 51% of total revenues. For the full year, embedded IoT solutions totaled 61.8 million, up 60% year-over-year and 48% of revenues. Results were driven by record compute revenues comprised of our enterprise video conferencing products as well as our security and surveillance solutions.

As we look to fiscal 2023, it is going to be another exciting year for Lantronics, and we are pleased to announce that we have received our initial production purchase order from the electric vehicle manufacturer, Tog. For Tog, we developed a complete automotive infotainment computer that can interchange different SIPs or systems and packages and processor capabilities, thus allowing Tog to customize its solution depending on the vehicle.

It will handle all of the camera processing, driver guidance, and various consumer applications expected in today's modern cockpit.

We expect to begin volume shipments of this device appreciably in the second half of our fiscal year.

Turning to system solutions, revenues in Q4 totaled 14.6 million or 41% of revenues, down 2% sequentially, but up 154% year over year, with most of that growth coming from acquisition.

For the full year 2022, System Solutions totaled 59 million or 46% of revenues, up 144% from fiscal 2021.

We also expect a strong showing from systems in 2023 as we have now signed our pilot production agreement

for the Quantum Edge device compute platform with smart grid energy customer Enel. Pilot production of approximately 1000 units should commence in our second fiscal quarter.

After receiving an additional award this quarter, we currently have production awards for a total of 39,000 production units. As previously guided, we conservatively expect this project to contribute 10 to 20 million dollars of revenue in fiscal 2023.

Looking at software and services, revenues in Q4 totaled $2.9 million, up 36% sequentially and accounting for 8% of total revenues. For the full year, software and services totaled $8.9 million, or 7% of total revenues, up 2% year over year.

We exited the fiscal year with a high margin subscription ARR of approximately $900,000. While shy of our goal of 1 million to 1.5 million exit rate this fiscal year, we continue to make progress on this front with continued uptake by our customers given our slated release of compelling new software products and services.

As we look toward 2023, we continue to tackle a robust design funnel focusing on those designs that give us the best long-term volume potential.

As we reflect on the last three years, we have accomplished much. We have significantly expanded our opportunity with a company better equipped with the capabilities and competencies to address today's emerging IoT market.

We have optimized our go-to-market strategy and

and delivered on stated synergy targets by efficiently integrating our acquisitions. Against the challenges and constraints of the current environment, we delivered better than 30% organic growth in fiscal year 2022, and revenues have almost tripled from three years ago. But we have more to do as the positive secular market trends are just beginning to manifest. As we look toward fiscal 2023, we intend to continue delivering for the benefit of our shareholders.

In summary, we are pleased with our fourth quarter and year-end results posted today, and we look forward to a breakout year in 2023 as recent design wins ramp into production. While supply chain and related logistics issues will continue, we feel we have enough demand and visibility to drive results in line with our fiscal year 2023 guidance.

That completes the prepared remarks today. So we'll now turn it over to the operator for Q&A.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touch tone phone. If you're using a speaker phone, please pick up your handset before pressing the keys. And to withdraw your question, please press star then two. And at this time, we'll pause momentarily to assemble our roster.

And the first question will come from Mike Walkley with Canaccord Genuity. Please go ahead....

Thanks for taking the questions and congrats on the strong fiscal 2020-2022.

I guess Paul just...

Just in terms of your guidance, can you just help us maybe think about the seasonality through the year? It sounds like it's a much stronger second half of the year. Congrats on the TOG and the NLD deals. But should it be a steady sequential increase from maybe a down sequential September quarter or how you're thinking about how that linearity plays out in the year given supply issues also? Right, right, through that.

Yeah, I'd say it's, you know, the Q1 is less seasonality and it's more a product of, you know, some of the supply chain limitations that we're running into. You know, you don't really get the answers out of the component suppliers and sometimes you're able to, you know, they have upside demand that they deliver to you late in the quarter you're able to convert that. I think, you know, that what's kind of happening in Q1, we had slated product that was

place at no risk to us. And so we're able to really kind of schedule and deliver to those forecasts. So that's why we've got pretty good visibility in the December quarter and beyond.

And that's some of the limitations we're running into for the September quarter.

Thanks, and then just on Tog, now that you've got that order, can you remind us kind of the long-term opportunity with him and the timing when that hits the model?

This is just for 20 seconds.

Yeah, they're doing a plant opening in October . The assembly lines are being qualified today, are going through, they're actually in place and producing bodies and are going through qualification. I was there this past quarter, visited the plant, so their production is pretty much in line to start kind of that January 23 timeframe. So the plant's opening in October , you can expect some components to be delivered in the December timeframe, but.

is basically I think at max 167,000 units.

Great, thanks. Last question from me and I'll jump into the queue. Just Jeremy, with the product new divisions and the product mix changing in fiscal 23, any thing to think about on gross margins to be somewhat stable or maybe a little down given some of these new projects ramping?

Yeah, so I would, you know, as it relates to some of our largest design wins, such as Enel with the QED and then also with Tog, those tend to be on the lower end of our scale, so there will be some downward pressure as it relates to that. That said, we do, you know, get better, you know, with the higher revenue, we'll get some better absorption.

And with the expected uptick in some of our higher margin areas like services, that will also give us a little bit of relief. I think also in the second half of the year, we may begin to start seeing some relief as it relates to some of the different supply chain costs beginning to normalize. So, like I said, from I think from a state straight product mix some downward pressure, but.

that some of that will get offset by some of these other areas as we progress through the year.

Yeah, Mike, I'll give you two other pieces of color as well. You know, we just at the end of July , I believe it is, we're off that transition services agreement with CSI. So kind of final integration warehouse move completed. That was basically 1.2 million a year that doesn't repeat in fiscal 2023. And this particular quarter was, you know, the purchasing of components was a little bit more, you know,Adam Trootler variable cost that this had been issued with a technical manager astronomy and there there were some problems out there. They told someone planned grown up to serve in New York about 30,000 people a day, Give me some more space, Just put more of these in here, plan and get these things product for sale.

more normalized. It'll take a while for PPVs to kind of work through the P&L but freight was just we saw a significant increase in freight upwards about 50% and you know you couldn't forecast that kind of increase. I don't see those types of increases you know repeating and so we should be on the downward trend in terms of some of those additional supply chain costs.

Great. That's very helpful. Thank you.

The next question will come from Scott Cyril with Roth Capital. Please go ahead.

Hey, good afternoon. Thanks for taking my questions. Nice to see the strong organic growth guys. Maybe just to jump right in, in terms of the June results, OPEX was elevated. I'm wondering if that's more of a normalized number, if there's any one-time impact in there. And then Paul, to follow up on some of your comments related to gross margins, rate was elevated as well, component supply chain remains difficult.

But it sounds like things are improving going forward. I'm wondering what the magnitude of the impact was in the June quarter, and how we should think about that going into September and beyond, and that trajectory over the course of fiscal 23.

Yeah, it's hard for us to kind of project, you know, what freight is going to be going forward. It was a significant uptick, you know, kind of halfway through the quarter. And I think as we get back to a more normalized environment, we could start to utilize some lower cost shipping lanes as well. So I don't think that they necessarily continue to, you know, continue to tick up but should normalize, and I think we'll be able to whittle those down. I will state as I have stated before, you know, we're going to have to work together

R&D projects that had to go to certification, those certifications were at least a part of the uptick in OPEX. I wouldn't look at the OPEX number as a normalized number, something that's going to continue to repeat. We did have some one-times in there as well, some variable comp.

Any other color you want to highlight Jeremy?

No, I was going to point out the variable comp, which was higher than what we saw in Q3, and I would expect that to normalize in Q1 and have a lesser impact.

Hey Jeremy, can you quantify the gross margin impact in the June quarter? And also Paul, just to clarify, I think in your comments as well, you talked about 10 million up from 7 million. So there's basically kind of 3 million was left on the table in effect this quarter for various component availability issues.

Yeah, I'll cover the late customer request date. We were making pretty good progress. We actually expected to whittle down that 7 million. We did get some significant uptick in demand in the quarter. If I look at ordering patterns, they were actually pretty good. We're seeing some of the ordering patterns starting to request product in the out quarters as well. The customers are getting a little bit more visibility and are able to plan a little bit better.

And if I could just lastly follow up on some Mike's questions around the guidance. Nice to see that 15 to 20% outlook for the year. You did mention that it starts a little bit slower in September . I'm wondering kind of what that means sequentially in terms of the trajectory of revenues. And then given the timelines for some of the larger opportunities with DOG and with Enel, it sounds like they start to ramp up in the back half of the fiscal year. So a couple of questions in there with, you know, given that you're seeing 30% organic growth.

15 to 20% seems like it's a relatively modest number. I guess I'm wondering what are you factoring in in terms of an L contribution and a Todd contribution in the year? And then kind of given what sounds like a back-end loaded year, is it correct to be assuming that you're exiting fiscal 23 probably somewhere in the 45 million plus range per quarter somewhere in that ballpark?

Yeah, that's a safe assumption. I mean, if we're going to do $150 million at the midpoint next year, you know, we have to have some quarters that are starting with a four. And we do expect that to happen. In terms of contribution, I'm a little conservative on the contribution of Vennell, just, you know, especially with new programs that are ramping up. We expect it to start to affect our December quarter. You know, that still remains true. We're saying 10 to 20. It's probably more on the order of $20 million.

additional color as we're able to move further along in the fiscal year. Thanks so much. Congrats on the quarter.

Yeah, and for further clarification, that midpoint is about 155.

Thank you.

The next question will come from Christian Swab with Craig Howlam Capital Group. Please go ahead. There, my practice

Hey, thanks for taking my question.

So I guess it's like you know, what is your your, you know, we could do the math, but why are gross margins going to be?

Um, you know, is it?

It's kind of confusing because we talk about we're not adding a lot of

potential revenue from the big programs at lower gross margins but you're implied

gross margins for your revenue guidance.

you know, is just kind of below, you know, what we've kind of been operating at, you know, lately and certainly last year. So, can you help give us clarity there, please?

Yeah, I think if you, you know, obviously if you do the math, it's right in line with what we have been driving. I think if we look at what our stated operating model is, it's 10% EBITDA margins. We're just slightly below that, 9%, doing okay in today's environment. We'd like to be, you know, driving 10% quite solidly. So right now the EPS guidance is right in line with that revenue guidance. So it's not really.

what we feel is prudent to forecast.

Okay, that's fair. What do you believe, what do you guys are assuming your organic growth rate is?

on a go-forward basis or over the course of the next year.

you know, a couple of the names Big Program wins.

So what we're forecasting is 20%.

That's what I think we can dial in. I think we've got line of sight to do better than that as the year goes along. But there are some of these windows, given what these production ramps are expected to do, it could move in and out of that last June quarter, some of the bigger quantities that ramp up. And so we're just trying to forecast what we currently see today.

That's what I think we can dial in. I think we've got line of sight to do better than that as the year goes along. But there are some of these windows, given what these production ramps are expected to do, it could move in and out of that last June quarter, some of the bigger quantities that ramp up. And so we're just trying to forecast what we currently see today. Does that make sense?

Yeah, I guess I'm just trying to gauge just how conservative we're trying to be. I mean, if we're on the high end of revenue expectations for next fiscal year, you know, for a NEO, I mean, that's pretty much, you know.

puts you near the top end of your growth expectations.

that you're outlining today. So you know it kind of suggests a lot of conservatism you know and many other programs as well as a couple of other big programs that we've talked about. Am I thinking about that right?

You are. I think that kind of makes sense the way you're framing it. You know, bear in mind this program starts to ramp really at the end of the December quarter and more appreciably in our third fiscal quarter, so that March quarter. There is one other supplier that Enel has some dependency on that has been the long pole in the tent. We've been ready to go since the September timeframe.

September quarter time frame so this particular quarter that we're in as Enel has requested but the other vendor has not necessarily delivered what they've needed to deliver because of some of their supply chain dependencies, so You know given the fact that we have some dependency on that other vendor. It's not you know It's I think it's prudent to anticipate Be a little bit more conservative anticipating some of those same type of supply chain disruptions happening

And so when we look at it, we see it starting to happen in December quarter with a ramp-up that You know could be quite steep, but at the same time you have to ramp up production on a 4U compute box, so it should move pretty steadily up from that time frame through the end of the calendar year.

Okay, that's great. One last question, if I can squeeze it in here. Is there any update for us on the M&A landscape and recent valuation changes, at least in the public markets here in tech this year? Can you give us any update on any potential puddle? Are you seeing more stuff to look at or has nothing really changed?

We have had some additional meetings. I'd say that the opportunities are a bit more actionable of late, and the conversations are a bit more numerous than they have been. Valuation certainly helps. We went through that kind of VC cycle last year where things were quite good, and I think people wanted to go make a run of it for themselves, raise money. A lot of those players, things didn't pan out quite like they thought they did.

a bit more reasonable. Starting to see some depressed assets, which is kind of a good sign as well, it could present a good buying opportunity.

Great, no other questions. Thanks guys.

The next question will come from Jason Smith with Lake Street. Please go ahead. Matt, there's a question.

Hey guys, thanks for taking my questions. Just two quick ones. First, could you just comment on what you're seeing in the distribution channel from an inventory standpoint?

Sure, that one's kind of easy. We saw distribution throughout the channel decrease. So they sold out more than they purchased. A bit disappointing, you know, in terms of having to go bang on distributors and say, hey, you're already at minimum stock levels and if we're just going to ship directly to your customer, we'll just cut you out of the loop and recoup that margin. But we did see those inventories come down. I think that's a good sign. There's nothing building up in the channel, but I think it does kind of indicate

hence the outperformance. But I'm just trying to get a sense on, was this characterized, would you characterize this as sort of pull-forward in demand, and some of the softness here starting fiscal 20-3 is just sort of that error pocket, or is the softness starting this year really just a function of the supply chain still?

Yeah, I don't see it as pull forward. These have been, you know, so we exited this quarter with 10 million dollars of revenue that customers requested in the June quarter. They wanted it, we couldn't deliver it, so that went up by 3 million over the previous quarter. So I kind of look at that number, the reason why we've been tracking that number is because it's a good indicator of demand. So demand still appears to be strong, at least for us.

I will say that we've been talking about our base business, the kind of long sales cycle industrial business that's several years old. It was growing at a double digit rate. It really shouldn't be growing at a rate quite that strong. So we've been talking about expectations of that moderating around this June timeframe. I think we're starting to see that and it's...

at mid to high single digits growth as opposed to double digit growth, which is more appropriate for that business. So a little bit of catch up has been done, but as indicated by the late to CRD shipments, despite being able to beat our revenue expectations in the June quarter, we still didn't meet everything that customers requested. So if I could get enough supply, I'd be able to ship against that late to CRD number of 10 million, I'd be able to, certainly outperform in the September quarter.

not quantitative, maybe some qualitative directional expectations there. Also help us understand how to bridge your legacy segments around REM and IoT into the new definitions and what sort of verticals drive which sorts of categories. Thank you. Thank you.

Yeah, I think we'll be providing some reconciliation. Jeremy, you can correct me if I'm wrong, where we kind of will provide the previous segments and then the new segments side by side. So you get a sense of what both of those are doing. I think as we look at solutions, a NEL will be a big part of that. So in terms of absolute dollars, total system solutions have higher ASPs attached to them. And so they can...

you know that that particular segment can substantially outperform all the others and then but we do like the sticky embedded business as well you design into a customer's platform and they just continue to buy those sub assemblies and deliver those we've had strong growth in that segment as well.

Qualitatively, I would say we'll probably get decent growth out of both with maybe systems edging out embedded towards the second half of the year as that ML platform starts to shift, because there are a lot of dollars attached to that. And then in terms of software and services, we wanted to provide visibility to how we are doing on the software side, and talk about it in a meaningful way. So, thank you.

as we still look at high margin ARR, still very early innings, but we wanted to report on that goal that we had for this fiscal year. In addition to that, I wouldn't expect the design services business to grow at an appreciable rate. That's not a good indication of what the business is actually doing because most of that revenue is leveraging and we're seeing residual hardware revenue that would be counted.

can see the new and the old classifications as we transition.

Perfect, thanks. And Paul, is there an updated target for a mix of software services or software as a standalone we should think about at all?

Not at this time, but we are going through and looking at some of the programs that we have and are totaling that. I will update a target over this next year, or probably at this next quarter we'll give an update in terms of what our target exit rate is for the year. Thank you. The next question will come from Scott Cyril with Roth Capital. Please go ahead.

Hey Paul, just a quick follow-up from an industry standpoint. Given the Semtech, Sierra Wireless, or the pending combination, are you seeing any implications for your business in terms of more opportunities opening up, particularly on the module front or otherwise? Thanks.

Yeah, it's an interesting one. I think if you look at that semiconductor consolidation cycle, some would argue that it's run its course and then you would possibly want to start to move up the food chain. I think as we get some successes in specific areas related to specific technologies, compute being one of those, I think it would become an attractive.

to either invest in or acquire. So I think it's expected to happen in more verticalized segments, I think, is a reasonable expectation. But it is interesting, some of the technology partnership discussions that we're having these days, and it's all around semiconductor guys. So one of the things about, it's intuitive if you think about it, today's semiconductors are getting more and more complicated, and somebody has to unlock that potential. More often than not, customers are getting more and more

those technology partnerships become more important to us in the future.

Great, thank you.

This concludes our question and answer session. I would like to turn the conference back over to Mr. Paul Pickle for any closing remarks. Please go ahead..

Thank you for joining us today and have a great week.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

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