Lantronix Inc. Q3 2023 Earnings Call
Speaker 1: I that I to.
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Speaker 2: Please note, this event is being recorded. I would now like to turn the conference over to Rob Adams. Please go ahead.
Speaker 3: Thank you. Good afternoon everyone and thank you for joining for the third quarter fiscal 2023 conference call.
Speaker 3: Joining us today are Paul Pickle, our president and chief executive officer and Jeremy Whitaker, our chief financial officer. A live and archived webcast that 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 today's earnings release.
Speaker 3: 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.
Speaker 3: 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 in the company's SEC filings such as its 10-K and its 10-Qs. Lantronics undertakes no obligation to revise or update publicly any forward-looking statements to reflect future events or circumstances.
Speaker 3: comments. Thank you.
Speaker 3: 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 will use.
Speaker 3: With that, I'll now turn the call over Jeremy Whitaker, and electronics chief financial officer. Jeremy.
Speaker 4: 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 third quarter of fiscal 2023.
Speaker 4: For the third quarter of fiscal 2023, we reported revenue of 33 million, up 5% sequentially and up 2% from the year ago period.
Speaker 4: Gap growth margin improved to 44.4% for the third quarter of fiscal 2023, compared to 43.8% in the prior quarter and 42.1% in the year-ago quarter.
Speaker 4: Selling General Administrative Expenses for the 3rd quarter of fiscal 2023, or 9.9 million, compared with 8.3 million for the 3rd quarter of fiscal 2022, and 9.8 million for the 2nd quarter of fiscal 2023. Research and development expenses for the 3rd quarter of fiscal 2023, or 5.1 million.
Speaker 4: compared 4.5 million for the third quarter of fiscal 2022 and 5.1 million for the second quarter of fiscal 2023. The year-on-year increases in SG&A and R&D were largely driven by headcount we assumed in the September 2022 acquisition of Uplogix. Gap net loss was 3.1 million, our 8 cents per share.
Speaker 4: $2.8 million or eight cents per share during the third quarter of fiscal 2022.
Speaker 4: Now turning to the balance sheet.
Speaker 4: We ended the March 2023 corridor with cash and cash equivalents of $12.8 million as compared to $6.8 million in the prior quarter.
Speaker 4: Working capital was 49.9 million as of March 31st, 2023, as compared with 50.6 million as of December 31st, 2022.
Speaker 4: Net inventories were $51.7 million as of March 31, 2023, compared with $49.2 million as of December 31, 2022.
Speaker 4: The increase in inventories over the last several quarters was primarily due to the purchase of long lead-ton components to support the ramp of our supply arrangement with grid's
Speaker 4: An inventory assumed in the September acquisition of a blog.
Speaker 4: Now turning to our Outlook.
Speaker 4: For the fourth quarter of fiscal 2023, we are targeting revenue of $33 to $36 million.
Speaker 5: call over to Paul.
Speaker 4: Thank you Jeremy. We are pleased to deliver sequential growth in March and as you can see in our guidance we look toward delivering continued sequential growth in our fourth quarter. As you might imagine we like our investors are intensely focused on the state of the economy and our business.
Speaker 4: In fiscal year 2023, our results have been good but below our expectations. Results have been hampered by the normalization of demand for our classic products, delays in the QED program which pushed out those revenues into the following fiscal year, and our distributors who for the last three quarters have been ordering less from us than they are selling through to their customers in order to lean their inventories.
Speaker 4: But importantly, the table is set for impressive growth in fiscal year 2024.
Speaker 4: We have achieved much and we are poised to make significant progress towards our intermediate term goal of 250 million dollars in annual revenue. I can talk a little bit more about our expectations for FY24 and beyond later in my prepared remarks, but first let's report on Q3.
Speaker 4: 2023 results and our expectations for the remainder of the fiscal year. Turning to our March results in our fiscal third quarter, embedded IoT solutions total 16.1 million up 17% squintially in 5% year-over-year representing 49% of revenues.
Speaker 4: Sequential revenue growth was largely driven by our embedded Ethernet and Wi-Fi solutions, as well as our embedded compute products. On the Ethernet and Wi-Fi front, improving supply chain dynamics allowed us to ship to pent-up demand. On the compute side, EV and automotive shipments are ramping on schedule, and the opportunity funnel is growing. For more information, visit www.fema.gov
Speaker 4: Early in customer demand for the Togged Electric Vehicle Platform has exceeded expectations of new engagements with Fisker, Ghost, Renoll, Volvo, and Dymler contribute to a growing pipeline which we expect will translate through revenue in late fiscal year 2024 and 2025.
Speaker 4: Elsewhere within embedded, we saw some softening in our more classic network interface card products. The customer base for these products is largely federal in nature, and as can be the case with our federal customers from time to time, we are experiencing some delays relative to our forecast. We are actively working with our public sector partners to address this in our conference.
Speaker 4: Solutions revenues here totaled 14 million or approximately 43% of revenues down 6% sequentially and 6% year-over-year. Within System Solutions sales of our remote environment management products were up thanks to increased buying from our communication customers.
Speaker 4: However, we acknowledge a continued temporary weakness in the financial sector, leading to delayed orders for these products. We expected to bounce back in the coming quarters, switch revenues tempered as well after recent seasonal strength.
Speaker 4: Looking at software and services, revenues in Q3 were approximately $2.9 million, flat sequentially, and up 36% year-over-year. We continue to make progress in selling high margin, recurring revenue, with some additional contribution coming from our recent acquisition. ARR from software and services at the end of March remained above $5 million.
Speaker 4: For fiscal fourth quarter 2023, while we have noted some solowness in our terms, driven business, and our distributors continuing focus on leaning out their inventories, we inter-Q4 with a record backlog, strong bookings, improving supply chain logistics dynamics, and an expectation of sequential growth.
Speaker 4: We anticipate delivering over 30% growth during the next fiscal year. We are poised to begin shipping our quantum edge device while we pursue a pipeline of opportunities that could drive double-digit growth electronics over the next several years. Today's customer engagement continues to improve, bringing quality, high value opportunities into the pipeline.
Speaker 4: Looking at our top prospects, Lane Trionics is pursuing more than 40 opportunities that total over $150 million in peak annual revenue in applications such as smart cities, smart grid, EV and automotive as well security and surveillance and telematics. This is an incredible departure from the business we inherited four years ago and we are just about to hit our stride.
Speaker 4: We need only modest performance from our classic products to meet our growth target due to market share gains and new customer revenue despite a softening macroeconomic environment.
Speaker 4: We expect to deliver on that pipeline of opportunities I referenced and set the table for more of the same in fiscal year 2025. We look forward to reporting on our results in the near future. And with that, we'll start our Q&A session. Chad? Thank you. We will now begin the question and answer session.
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Speaker 2: At this time we will pause momentarily to assemble our roster.
Speaker 2: And the first question will be from Mike Walkley from Canaccord Unuity. Please go ahead.
Speaker 6: Thanks for taking my question and great to see the guidance for next year. I guess Paul, you could break down the fiscal 24 guidance for us a little more. You don't want to call out a contract but how should we think about the timing of the expertise contract entering fiscal 24.
Speaker 6: maybe linearity as it ramps. And I think, and I didn't catch the number of you said, 40 projects of 140 million if you could correct me on that. And how much of that might be considered in fiscal 24 if that's not in the model and could be upside-fated earlier?
Speaker 4: Okay sure so if we look at that contract you know the statement that we made in the past is that it will ship appreciably in FY24 but we we do expect you know some contribution in FY25 and it's not the you know there is certainly potential upside to that you know we're looking at
Speaker 7: the total production schedule. If we kind of look at a September quarter start to that production, we would expect that to ramp as you would typically ramp production into December with a strengthening number and then you know continue over the next several quarters. And so the 40 million dollars is just
Speaker 7: get some contribution in FY 25 but that's really more of a you know mass production number that that is appreciable in FY 25 and but we do have some programs that we've been working on over the past year and a half and let's say even two years
Speaker 7: that do, if these programs go well, they do provide some additional upside potential in FY24. So.
Speaker 7: Right now we're giving a guidance to the midpoint number of 180. We feel like that is potentially a conservative number, but right now that's the current outlook. Great, thanks. And just a follow-up to Paul. You indicated...
Speaker 6: your regular turns business you just needed a modest contribution to hit that number. Can you kind of put that into context? Is that just slight growth or flat with some inventory clearing at your distributors? Just maybe what your assumptions to modest help from that side of the business and how long you think it's going to take your distributors to maybe to draw down inventory to levels.
Speaker 7: Compare against last fiscal year that turns business we kind of talked about it was doing double digit growth and it really should historically you're talking uh... mid single digits is probably the right number uh... there's a little bit of an ebb and flow to it and um... and so you know we saw that correction in the sept you know
Speaker 7: towards the end of the year, it has moderated and it has slowed the past couple of quarters. I'll say the last three quarters, but as of today, we've seen that turns business, booking trend, increase a little bit. So we're cautiously optimistic that we see a bottom of that turns business correction or moderating.
Speaker 6: Just you mentioned Tog, something that's going even above your expectations and some of those other auto manufacturers. Can you remind us how long it might take to transition trials with those and to design one's end to shipments? Is that more of a one to two year type thing or even longer?
Speaker 7: Well, we started production with Tog, so we are shipping to them. I'll be it in modest volumes, but they just started to release those cars to the public or civilians. And so it will take them a little while to ramp up. Things are still moving along quite nicely, but I'm referencing.
Speaker 7: really their deposit program, they sold, you know, to the tune of 4X the number of vehicles in pre-orders than they expected to, and they certainly can't meet all of that demand in the short term. So we're expecting some upsize orders out of them going forward, but that is probably some meaningful revenue that will...
Speaker 7: fold into this next year. In terms of those other engagements, you know, they really are slated for FY 25 production runs. We'll get some engagement, some level of contribution out of them in FY 24. There is one program that is slated to contribute in the last quarter of FY 24. But most of those engagements, our engagements probably do...
Speaker 2: Please go ahead.
Speaker 8: Hey guys, thanks for your time my questions. Paul, in your prepared remarks you mentioned some improving supply chain dynamics in some product lines, but just curious if due to supply chain headwinds there was any revenue that couldn't be fulfilled in March. Yeah, we had about a million dollars that we couldn't meet.
Speaker 7: Cost has come down, component costs continue to come down. You're going to see a little bit of support in the gross margin line as a result as that inventory flushes through over the next several quarters. But we do still occasionally have one or two components per bomb that is problematic. We did see some NXP.
Speaker 7: I don't really want to give a total backlog. Essentially, we've got the contract is now fully in the backlog number. It's a rather large number, as you can imagine, but we'll just say that we're in good shape. Starting backlog for the quarter, ticked up nicely.
Speaker 7: At this point for Q4, we've got, we're in a better position than we have been in previous quarters in terms of numbers needed to make the quarter. So things are just overall pretty healthy, good bookings trends in quarter requested bookings trends. So I think we're in pretty good shape. Okay, and then just the last one from me maybe.
Speaker 4: by mix.
Speaker 4: On a positive note, we are seeing logistics costs tempering quite a bit from what we saw earlier in the fiscal year. So I think there is some potential upside from there if that continues and also into the next fiscal year. And then we are starting to see, you know,
Speaker 4: PPV costs coming down. So from a cash standpoint, we are paying a little bit less for inventory, but we're still continuing to amortize off some of those previous costs that we incurred. I wouldn't expect to see benefit to the P&L from that until we get into the next fiscal year. So we do have some improvements.
Speaker 4: I think, you know, that are coming. But I would say for the next, you know, quarter or so, we'd expect it to be pretty consistent with where we've been. Okay, that's helpful. Thanks a lot, guys. Thank you.
Speaker 8: The next question will be from Ryan Kuntz from Needham. Please go ahead. Thanks for the question and appreciate all the great color on the EV opportunities. I wonder if you could, Paul, reflect on some of the others you've been engaged with, whether it's government, smart city, etc., and which ones are performing generally a plan, where are some weaknesses, and where you see the most opportunities.
Speaker 7: to address disparate number of opportunities. But there's a few that I would highlight. We got a program going on with OWL Labs, bit more enterprise, faster time to revenue on this particular one, but audio-video conferencing platform that should drive some pretty decent volumes. And so that'll be a nice add for us.
Speaker 7: We continue to work with the New York deity on a couple of proof of concepts for, let's call it Smart Pool applications. Right now there's not a lot of color that I could give on that program until New York gets a little bit further along.
Speaker 7: And so it's a bit of an IoT application, think mesh network, surveillance, a number of different things that go into that program with a single painted glass management backbone attached to it. So we're pretty excited about that one. There's 750,000 polls in New York City, so it would be significant volume over a number of years.
Speaker 7: Attach an IoT device to generators, several different types of generators. Assess the status, the operational status, and the health predictive maintenance with a SaaS platform as well. Those are all attached to base stations in an AT&T network. Pretty excited about that one.
Speaker 7: That one would be fairly near-term revenue as well, but it's a little bit early on in the process. So, it's a little bit of customization on the hardware side from our standpoint, and then a ramp-up in order to meet their needs, but we're working very quickly to make that happen.
Speaker 7: And the only other ones I would probably highlight at this point is we've got some engagements with P3. It's an Android automotive OS company that looks to provide a digital cockpit experience. And as we look at their customers.
Speaker 7: largely tier 3 type, tier 2 numbers. We do the hardware for a lot of customers in that market, like with an ART on a Bugatti platform, but they would like to standardize a telematics experience for in-cockpit, and this gives us an opportunity to do one development and roll it out across several platforms.
Speaker 8: How about a quick commentary in the competitive environment? Any changes there? You know, Digi's been pretty good numbers of late and just in general, what do you see in the space?
Speaker 7: Yeah, I think, you know, in terms of competitors, there's definitely in certain areas, you know, we know that hardware is not a particular business model that we're especially fond of. We don't want to have to compete in commodity spaces. We want to utilize those commodities.
hardware platforms or pieces in order to kind of pull through a larger play. It's I'd say it's similar to a DigiStory in that they're leveraging a much larger product, a technology base in a particular space. We are making the same inroads, albeit in different verticals and different use cases. But I think it anybody that kind of thinks in terms of just providing hardware instead of looking at a software hardware solution or platform solution bringing in additional pieces and
against some of the softening and market demand.
Got it. Super helpful, Paul. Thank you. Thank you, and the next question is from Scott Cirl from Roth Capital. Please go ahead.
Good afternoon. Thanks for taking my questions. Hey, Paul, just follow up on that pipeline. I think you said it was 140 or 150 million. I'm wondering if you could calibrate us in terms of what your win rates have been and the close rates have been on that front. And as well on the software front, I was wondering if you could give us some idea in terms of where are you seeing the highest detacherates right now.
a lot of opportunities that come our way mostly because when we start talking about them as opportunities and in the pipeline they're already qualified they're already funded and so in a lot of respects we end up signing statement of work or customization efforts on these programs and once they do that it's it's really kind of a it's a pretty predictable thing that it will close
I think Flock also, great customer, great program, great ramp, also very opportunistic with a lot of the strife that's going on. People started to focus on security. So some of it has been fortuitous, but very early innings. But now that we're talking about some of these engagements.
Our win rates generally are really good. I mentioned Fisker, Fisker's a name that's come around a few times. They're pretty well funded. We'd like to say that third time's the charm, but we're pretty confident that they'll push some volumes as well. But each guy we assess, and I think as we look at FY25, we're feeling pretty good about this list.
Numbers might go up or down. And, Scott, I forgot the last question, the last half of that question. Oh, just on the software front, Paul, were you seeing the attach rates and the opportunity both today in terms of where you're getting the attach rates and where you see that looking forward in fiscal 24-25? Yeah, the attach rates are going really well in RIM, especially this...
you higher order functions allow you to really drill down on what's happening inside a data center. So specialized tools that deliver what customers need, we see a lot of success there. On the AT&T front, for instance, that software attachment is going to be largely dependent on the method of security that we implement. But on a server said, OK. He's telling me, he's within the worst service route OK he is the highest is not okay uncomfortable.
platform and OTA function and so
IoT applications that's deployed in the masses, you know, I'm not sure that we'd have the same level of traction there, but that's not the market that we're targeting.
Lastly, if I could, you mentioned on the console server front financial markets has been a vertical that you guys have had success in. I'm wondering if you could provide a little bit more color on when you think there might be a recovery timeline associated with that. And lastly, inorganic opportunities. I'm kind of wondering what you're seeing out there, if there's rationalization.
in terms of valuations that companies are looking for in this type of market. Thanks. Okay, on the console servers, financial markets, we saw some hesitancy. I think we actually mentioned it on an earnings call two quarters ago. And this was before we saw a lot of the banking pressure. I think if you're talking a smaller...
banking institutions, there's definitely going to be continued ordering hesitancy. We typically deal with larger institutions, Bank of America, American Express, but even in those markets, we're kind of waiting on the capex cycle to loosen up a little bit.
have good visibility. They sit there and say that no, it's needed, the deployment's needed, and it's just a matter of timing. We don't anticipate a long delay. I'd say, you know, in some cases a one-quarter delay is all that we'd expect. On the, you know,
let's call it strategic alternatives front. Right now valuations are attractive, but we still live in a risk off environment. So I think going out and getting financing for an asset right now is, it'd be fairly expensive and we'd be looking at.
rates that probably cost the capital that resembles that of equity. So the good news is we have a couple of different currencies to play with. I think we would, let me make clear that we are extremely focused on executing what we're currently
is our organic growth plan, but we are still kicking the tires on a number of different assets to see if it makes sense. I think for the most part the market still sees that, hey, we're bigger together. I think smaller assets are going to be constrained on capital, and so it makes it a little bit easier to pick things up.
But, you know, we'll see how it goes over the next couple of quarters. Hey, Paul, one last one. You talked about the cost of capital. You generated some cash this quarter, but inventories are still pretty elevated. Part of that is related to the goods forties. Could you just walk us through how you see that transitioning over the next couple of quarters?
Should we start to see that work down with normalization of the supply chain to give you a little bit more flexibility? Thanks. Yeah, if you ignore the grid expertise opportunity and the inventory associated with it, we had inventory levels tick up ever so slightly in the quarter. And so right now I think that's just indicative of support for some of the growing revenue opportunities and bookings that we saw.
through, you should see some nice support on the gross margin line as well. Great, thanks. And ladies and gentlemen, 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 for joining us and have a great day. Thank you, sir. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.