Q2 2023 Lantronix Inc Earnings Call
Okay.
Good day, ladies and gentlemen, and welcome to the Atlanta Ciani, Inc. 2023, Q2 results conference call.
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I'd now like to turn the conference Oh, What's you Rob Adams Investor Relations. Please go ahead Sir.
Thank you good afternoon, everyone. Thank you for joining the second quarter of fiscal 2023 conference call.
Many of US on the call today are Paul Pickle, President and Chief Executive Officer, and Jeremy Whitaker, <unk>, 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 in todays earnings release during this call.
<unk> may make forward looking statements, which involve risks 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 today and is available on our website and it is also in the Companys SEC filings such as its <unk>.
<unk> 10-K, and its 10-Qs.
Plantronics undertakes no obligation to revise or update publicly any forward looking statements to reflect future events or circumstances.
Please review that.
Please refer to the news release and the financial information in the Investor Relations section of our website for additional details that will supplement management's commentary.
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.
<unk> 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 second quarter of fiscal 2023 before I hand, it over to Paul for his commentary.
For the second quarter of fiscal 2023, we reported revenue of $31 5 million compared to $33 7 million for the second quarter of fiscal 2022 sequentially revenue was down 1%.
GAAP gross margin was 44% for the second quarter of fiscal 2023, which is consistent with the prior quarter and about a 900 basis point improvement from the year ago quarter.
Selling general and administrative expenses for the second quarter of fiscal 2023 were $9 8 million compared with $8 9 million for the second quarter of fiscal 2022, and $9 2 million for the first quarter of fiscal 2023.
Research and development expenses for the second quarter of fiscal 2023 were $5 1 million compared with $4 3 million for the second quarter of fiscal 2022.
And $4 5 million for the first quarter of fiscal 2023.
The year on year increases in SG&A, and R&D were largely driven by head count we assumed in the September 2022 acquisition of up logics.
GAAP net loss was $2 6 million or seven cents per share during the second quarter of fiscal 2023 compared to a GAAP net loss of $2 4 million or eight cents per share during the second quarter of fiscal 2022.
non-GAAP net income was $1 4 million or four cents per share during the second quarter of fiscal 2023 compared to non-GAAP net income of $3 3 million or <unk> 10 cents per share during the second quarter of fiscal 2022.
Now turning to the balance sheet. We ended the December 2022 quarter with cash and cash equivalents of $6 8 million as compared to $13 1 million in the prior quarter.
With our recently announced contract we expect to receive aggregate prepayments of $20 million during the next six months.
Working capital was $50 6 million as of December 31, 2022, as compared with $54 5 million as of June 32022.
Net inventories were $49 2 million as of December 31, 2022, compared with $37 7 million as of June 32022.
Kris was primarily due to the purchase of components to support the recently announced contract which is expected to ramp during fiscal 2024.
Now turning to our annual outlook.
For fiscal 2023, we are targeting revenue of $135 million to $145 million.
And non-GAAP EPS in a range of 27 to 33 per share.
I'll now turn the call over to Paul Thank you Jeremy we.
We continue to make progress in transforming <unk> in Q2, and after finalizing the largest contract in the history of the company, which we announced two weeks ago. The pieces are falling into place for.
For those who didn't see the announced subsequent to the close of the December quarter Plantronics finalize the largest contract in its history, a $40 million smart grid compute platform utilized by one of the worlds leading energy distributors.
We expect to ship against the contract substantially over the course of fiscal 2020 for this.
This contract validates our capabilities and is but one that provides substantial visibility into our fiscal 2024 growth prospects.
Against the backdrop of continued supply chain easing executing on delivery of the product will accept accelerate us towards our intermediate goal of $250 million in annual revenue.
With an opportunity pipeline in excess of 200 million, we are at capacity with our current resources and our longer term outlook is looking bright.
Looking for more more immediately at Q3 and Q4, while our land Tronox Classic business has normalized after a strong run post COVID-19 were bolstered by a backlog that remains just off all time highs are slowly improving supply chain and a decidedly lean inventory channel implying it returned to.
Growth.
With that let's turn our focus now to December results and our fiscal second quarter embedded Iot solutions totaled $13 7 million down, 9% sequentially and 12% year over year, representing 43% of total revenues. The decline in revenues was largely driven by our embedded Ethernet and Wi Fi solutions where demand.
It was healthy but supply disruptions continued to gate, our ability to ship to customer demand.
On the positive side compute revenues grew nicely quarter over quarter security and surveillance compute revenues were steady enterprise revenues were up and Automotives began to contribute.
In terms of outlook, we currently see embedded systems strengthening throughout the remainder of the year driven largely by our compute products with some contribution expected from Ethernet and Wi Fi supply chain limitations eats shipments to electric vehicle customer Tog continue according to plan and the factory in Turkey was reportedly.
<unk> by the recent earthquake in the country.
Turning to system solutions revenues here totaled $14 9 million or approximately 47% of revenues up 2% sequentially, though down 9% year over year within system solutions, which has remained a strong contributor and we continue to see a good funnel of activity that bodes well for the remainder of the year.
Environment management or rim products also grew in the December quarter. Thanks in part to the acquisition of <unk> in mid September .
While we continue to see a good funnel of activity for <unk>, we have seen weakness in the financial sector, resulting in push outs of proof of concepts also within Iot systems routers gateways and trackers were up nicely in the December quarter, as we were able to catch up on some opportunities as supply came in.
For the remainder of fiscal 2023, we expect to see continued growth led by switches a rebound in remote management solutions and continued strength in routers gateways and trackers looking at software and services revenues in Q2 were approximately $2 9 million up 41% sequentially and 71% year over year.
We continue to make progress on selling high margin recurring revenue with some additional contribution coming from our recent acquisition.
Our our from software and services at the end of the December quarter totaled five point, just over $5 $2 million.
In summary, we look forward to a resumption of growth for the remainder of the fiscal year, thanks to solid bookings or backlog that remains near record highs a strong opportunity funnel and a slowly improving supply chain. While there is still much to focus on for the remainder of the fiscal year, we can't help but anticipate our fiscal 2024 as we shift to the larger.
Customer contract in history, we have excellent visibility into solid revenue growth and fast growing funnel of opportunities to keep the ball rolling.
That completes the prepared remarks for today, so I'll turn it over to the operator 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 you touched on phone if youre using a speakerphone. Please pick up your handset before pressing the keys.
Dan Your question has been mattress and you would like to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Yeah.
Yeah.
Our first question comes from Scott Searle with Roth M. P. M. Please go ahead.
Good afternoon, and thanks for taking my questions I'll, Paul really appreciate hearing a lot of the color on the breakdown to the different business units.
Maybe to dive in on the grids for TS contract that was announced I was wondering if you could provide a little bit more color on in terms of how we should expect that to ramp up is that could extend into fiscal 'twenty five and kind of I think this was supposed to be the first phase of that relationship you know what do you see coming out on the horizon, there as well.
And then I've got a couple of follow ups.
Yes, I think you know.
We have a schedule in the in the contract that we have and we have a target by the customer.
This should come out of the gate and our Q1 fiscal Q1 quite strong in and ramping quite nicely into the December quarter.
In terms of follow on engagement. We are at this point talking about additional skus are in and certainly this is just the first step in the fulfillment of what we've been developing over the past.
Past couple of years with them and they've they've done a phenomenal job, bringing this product to market. The market is quite excited.
That's part of the reason for the delay in fact, you know they are as they launch a product they've been getting a lot of feedback from.
The dsos out there the customers that would use this and it's prompted some SKU changes feature changes that we've now shifted direction and started focusing on so we've got a firm product launch at this point certainly anticipate that this is just.
The first bit of success that we'll have here and and this will certainly take us beyond 2024.
Perfect and Paul just to emphasize I think what you just said is that you've you've got firm ship dates here right. So you've got very very good visibility to a fiscal 'twenty four at this point and I think in your opening monologue you said that this was one.
Contracts that provide some visibility I was wondering if you could give us some details or maybe a little bit more color in terms of what else is giving you comfort as we're looking into fiscal 'twenty four.
Yeah, we have we really have quite a large pipeline of opportunities you know some of these opportunities we work on for a year and a half two years before the fulfilled at this point, we'd been working on quite a few them not to get into specifics until we're ready to announce them, but theres quite a few new opportunities in automotive.
Especially EV platforms, we've been doing we're taking the success that we experienced that torgan and parlay that into other vehicle platforms.
Out of band we've been working on <unk> with some new product definition, we've got some new skus coming out with our recent acquisition on our new technology platform with a new software tool that were deploying so that's quite promising not quite the needle mover that you know that in the grid.
<unk> would be but certainly up there and then smart city engagement still probably early innings, but.
There's been a couple of discussions on some Iot applications in smart cities that are right up our allianz, it's a little bit of a takeoff of what we did for the smart grid applications compute platform along with some distributed Iot devices to help in the management and large municipalities so that.
One it's like an eight digit opportunity over the life of the program.
Still early innings, we've got a lot of work to do there, but it's a it's nice to be engaged in opportunities that are this large if I were to reflect on three years ago. We didn't have anything like this in our pipeline.
Perfect and if I could just shift over to supply chain, and then I'll get back in the queue, but.
Your inventories are up it sounds like part of that.
It is related to preparation for grids for Ts, but I'm wondering if you could talk about some of the other aspects in terms of how the supply chain is going it sounds like youre continuing to see issues on the Wi Fi front and.
And what you're seeing in terms of your customers. It sounds like the channel for your customers that you're selling is pretty lean at this point in time should we expect sort of a recovery as we're going into March and June here. So I wonder if you could give us the kind of holistic view of what you're seeing in terms of you know coming in the door and what your customers have on their premise and how we should expect things to ramp over the next couple of quarters.
Yeah. That's a great question I don't think it's a dissimilar to what you might see a if you were to paying a couple of CMS or other suppliers everybody's turns I have kind of worsened and it's really an artifact of orders being placed the demand being there and the supply chain starting to ease we can collect probably 90.
5% of the bomb or even as high as 99% of the Bom, but there's one or two problem components that prevent you from.
Going to manufacturing building and then getting that inventory brought down so if I were to take out and now that's kind of a special case, we're going to receive some prepayments.
For for those components, we acquired a bit of inventory with the up logics. So we saw a little bit of a jump in the inventory numbers associated with acquired inventory if I dismiss all of that and just look at the rest. If we really do have one or two problem problematic components that are preventing us from really turning.
That inventory into sales and cash so cypress was a was a bit of a difficult one from a chipset standpoint that slowed down our Wi Fi shipments. We saw some improvements that came in and had some a slightly better shipments of chipsets in December that allowed us to turn that.
Revenue in this quarter, it's getting better, but you know having said that we still have some.
Some problematic components here and there are some of the critical ones are still 36, all the way up to 52 weeks, but for.
For the most part supply chain is getting a lot better in terms of channel inventory.
We saw this quarter.
I think it's a little bit of hesitancy in terms of what people think the market might be doing.
But as we look at the P. O S out of the channel versus what we sold into the channel.
There was quite a bit of disparity a lot more product exited the channel and so you know.
Came down about two weeks of channel inventory, it's really good healthy number so at some point, they're going to have to re up.
Perfect and I apologize I got one more follow up on the $20 million prepayment.
Nice to see that that's going to kind of make the balance sheet look a lot better but I expect that your inventory levels are going to start to work down as well. So we should start to see a little bit of a reversal of working capital here over the next couple of quarters to help out on the cash portion of the balance sheet.
Three quarters or so you want to give any color on that Jeremy yeah, as Paul mentioned, it'll there'll be a customer deposit liability and then we'll leave that liability off as we ship against the the orders.
From grids parties, and then you know.
Also the terms of the agreement and when we ship will kind of also dictate when they will build a bit of inventory and then that will obviously come off the books when we ultimately ship it to them.
Great. Thanks, I'll get back in the queue.
Thank you.
The next question comes from Mike Walkley with Canaccord Genuity. Please go ahead.
Alright.
Thanks for taking my questions and congratulations on getting the a good pick T cell deal signed.
Just following up on Scott's questions can you update us you've shared in the past just given some of those troubled components customer requested product that you couldn't deliver in the quarter due to that.
A couple of those components you couldn't quite get.
Yeah, and so Wifi was a was a big portion of it we started to have.
We have some problematic components in terms of the AC just waiting for those process on a foundry.
Why five is the biggest one of of.
Our biggest product line that we have a backlog associated with <unk>.
<unk> blocks <unk> G N S. S. Some cellular modems cellular chipsets also Wi Fi cards that we incorporate sub assemblies that we incorporate into our systems business is doing a little bit better.
So if I were to look at the.
The suppliers of those problematic components. It does it's still mixed signal RF.
Analog mixed signal I should say T. I, it's still we're still having some issues associated with those Adi and like it's the same same culprits if you will.
Okay, Great and then just on the grid.
Each contract is it sounds like you're you expect to ship most of that $40 million in fiscal 'twenty four but when you're when you're working with them do you think you'll have follow on orders to keep growing or keep it at least flat levels and into future years.
So this is so the answer to that is just a straightforward yes.
And just to give you an idea of the scope of the program.
So grid for Ts.
This like this.
And then there's other markets rather than just captive usage. So they would like to get a get to a run rate of roughly 100000 a year.
It's safe to say that we wouldn't participate in all of that business and eventually over time, it will take a little bit different shape for us there's.
There's a recurring component of the component of it for us and we're really in the very early innings of this product launch. So we're pretty excited to see what happens after this and.
Yes, we just contracted we definitely anticipate that we will we will be fulfilling the bulk of this in FY 'twenty four.
You know and there could be some upside to that but certainly we would anticipate some FY 'twenty five contribution as well.
Great. That's helpful. Last question from me I'll jump in the queue. Just can you update us just on tog and how that opportunity is going and some of these other car opportunities you've talked about an EV or are they similar size or even bigger than the talk opportunity.
Yeah, so talks going really well we shipped in December .
And we're shipping this quarter as well things are moving along as planned they had their factory opening October 29th that program with went off without a hitch, we're still in development mode.
On that platform. We are still implementing software features we have not finalized the firmware image yet, but we are you know.
We are holding.
Yeah, it's not daily meetings meetings at least twice a week are tracking the progress in integrating our hardware and software into the total vehicle platform.
It's going rather well, but we're at a breakneck pace, our nose down head down I should say at the moment in terms of follow on opportunities. What's been interesting is I think with the EV Revolution, you're starting to see a lot more players out there and a platform that's starting to standardized so the hardware.
We developed for talk for instance is land Tronox IP, we do get to go out there and we sell that the April certifications that we got on the hardware.
We will attempt to to sell across the broad market seller license across a broader market and it has really opened up other automotive opportunities. So I could name a few.
Half a dozen are at the moment, but it's still a little bit early for us in terms of those engagements and so we're gonna let us continue to work on those let them incubate and we'll announce those at a at a later date, but this should be a nice a nice space for us.
I think it's it's a it's a market that we can exploit without without having to become a full blown automotive supplier with all the infrastructure that's necessary there for a number of reasons on our partner front. So.
Expect us to give more details as the as the automotive platforms continue to mature.
Right. Thanks for taking my questions.
Yeah.
Yes.
As a reminder, if you have a question. Please press Star then one can be joined can get the queue. The next question comes from Ryan Koontz with Needham.
Needham <unk> company. Please go ahead.
Good afternoon, and thanks for the question opportunity.
So with this upsizing on.
The <unk> deal how should we think about gross margin puts and takes for for 'twenty four.
With the upsides are a little margin pressure there that we should factor in.
Not at this moment when.
When we kind of look at the business on an aggregate basis, we still feel comfortable with the mid forty's margin through this year.
And then I would anticipate as we would continue to grow our E. R. R. At this point you know just over $5 million of them and just as a reminder, when we talk about recurring revenue we are talking about 85% plus gross margin revenue.
As we grow that number continue to grow it we would expect it to offset any scale that might come with a particular opportunity.
But this this opportunity in particular with grids for Ts.
We don't expect it to be margin dilutive to the to the corporate number and we expect to be able to offset that with other high margin areas and hopefully make some improvements in gross margins as we look at FY 'twenty four.
Got it that's super helpful.
Hi, Paul and on the go to market side. It sounds like you know the companys reoriented a bit around chasing some of these longer bigger deals and longer sales cycles I'm sure.
Can you reflect on any changes you've made either geographically or the types of channels you used to go after these larger deals and how it how it affects how you think about your go to market strategy.
Yes, it's been a wholesale overhaul you know if I can.
Compare against three years ago, we roughly had pretty.
Pretty much 100% of revenue that ran through channel and today, it's probably on the order of 64% runs through the channel we're starting to launch on a direct basis larger opportunities wed like to strike a healthy balance, but we reoriented the entire sales team into a channel.
<unk> sales team.
As well as our business development team that exclusively targets, what we would affectionately referred to as big game hunting.
And it's working out we're actually looking at ways that we can engage with customers on.
Customized development opportunities become a technology partner extension to their business and if we look at it you know I think the value proposition is the complexity and.
And the skill set necessary to have in house to unlock the potential of today's semiconductor Ics is just pretty vast and most customers don't have the full the full talent in order to be able to do that so they have to parse that out that's been an opportunity for us and we need to make sure that we're leveraging our value.
<unk> for return, we still have to make some gains I think on a go to market standpoint in terms of being able to bring more standardized IP.
R&D reuse it would allow us to build a bit more of a scalable business model instead of something that's so customized but that is the nature of Iot today every engagement require some customization and we just we're looking to try to take.
That forms we've already developed leverage at least 85% reuse and do a little bit of customization on top that's the sweet spot that we've been able to exploit its a good good question. Thank you.
Oh, you're welcome quick follow ups to this also in the.
Our relationship with Qualcomm there how is that evolving any any changes in that regard.
Well it continues to get better.
We are we really see this as a key partner.
<unk> Com is a key partner just like some of our other chipsets Qualcomm in particular has had seen value in what we do we are able to enable applications, where they don't really quite have the ability to go address a diversified market and like I said Iot is pretty young I think they recognize the Iot as their future.
But at the same time, it's pretty fragmented so.
They require partnerships like what we have and you know that one just I believe that it's going to continue to be important to us I think we're going to be a bit more ingrained and alongside what they're what they're market targets are well start to share strategic plans and start to go off and.
Get those capsules opportunities together, so expect us to be able to continue to build on that might have some news on that are on exactly what that engagement looks like over the next couple of quarters.
Great. Thanks, a lot.
The next question comes from Christian Schwab with Craig Hallum Capital. Please go ahead.
Hey, great. Thanks for taking my question Paul.
We think about the business.
No X you know large contracts.
What do you think the you know the core business you know growth rates should be over the next two to three years.
It's a great question, so and I'll I'll draw a little bit of contrast, AR as we kind of talked about before FY 'twenty two it grew far more than what it really should have and we expected it to moderate.
Shortly after the fiscal year was done and it has so normally that business.
We get a mid maybe high single digits growth out of it the markets that are kind of targets those industrial well established.
Industrial markets are probably you know mid single digit growth CAGR.
And so that's really what the business should do we do have some older product lines that.
Are you know marching down and it's a useful product lifecycle, but we we've got a few of them and sustained mode. We've got a few of them, where we're not investing any more and redirecting funds into higher growth opportunities like the compute business like rim and like software.
To be Frank.
Okay.
That's great.
That's my only question. Thank you.
Thank you.
Yes.
This concludes our question and answer session.
I will now turn the conference back over to Mr. Paul Pickle for any closing remarks.
Alright, well. Thank you for joining us today I hope you have a great evening and a great week. Thank you.
Yeah.
The conference has now concluded thank you for attending today's presentation.
Okay.