Lantronix, Inc. (NASDAQ:LTRX) Q3 2023 Earnings Call Transcript

Lantronix, Inc. (NASDAQ:LTRX) Q3 2023 Earnings Call Transcript May 10, 2023

Lantronix, Inc. misses on earnings expectations. Reported EPS is $0.06 EPS, expectations were $0.07.

Operator: Good day, and welcome to the Lantronix Third Quarter Results Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Rob Adams. Please go ahead.

Rob Adams: Thank you. Good afternoon, everyone. Thank you for joining for the third quarter fiscal 2023 conference call. Joining us 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 and details for the phone replay in today’s earnings release. 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 today and is available on our website and in the company’s SEC filings such as its 10-K and its 10-Qs. Lantronix 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 management’s commentary. 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. With that, I will now turn the call over to Jeremy Whitaker, Lantronix’ Chief Financial Officer.

Jeremy Whitaker: 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 before I hand it over to Paul for his commentary. For the third quarter of fiscal 2023, we reported revenue of 33 million, up 5% sequentially and up 2% from the year ago period. GAAP gross 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. Selling, general, administrative expenses for the third quarter of fiscal 2023 were 9.9 million compared with 8.3 million for the third quarter of fiscal 2022 and 9.8 million for the second quarter of fiscal 2023.

Photo by Gabriel Benois on Unsplash

Research and development expenses for the third quarter of fiscal 2023 were 5.1 million, 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-your increases in SG&A and R&D were largely driven by headcount we assumed in the September 2022 acquisition of Uplogix. GAAP net loss was 3.1 million or $0.08 per share during the third quarter of fiscal 2023 compared to a GAAP net loss of 3.2 million or $0.09 per share during the third quarter of fiscal 2022. Non-GAAP net income was 2.1 million or $0.06 per share during the third quarter of fiscal 2023 compared to non-GAAP net income of 2.8 million or $0.08 per share during the third quarter of fiscal 2022. Now turning to the balance sheet.

We ended the March 2023 quarter with cash and cash equivalents of 12.8 million as compared to 6.8 million in the prior quarter. Working capital was 49.9 million as of March 31, 2023, as compared with 50.6 million as of December 31, 2022. Net inventories were 51.7 million as of March 31, 2023, compared with 49.2 million as of December 31, 2022. The increase in inventories over the last several quarters was primarily due to the purchase of long lead time components to support the ramp of our supply arrangement with grid expertise and inventory assumed in the September acquisition of Uplogix. Now turning to our outlook. For the fourth quarter of fiscal 2023, we are targeting revenue of 33 million to 36 million, a non-GAAP EPS and a range of $0.06 to $0.08 per share.

For fiscal 2024, we are targeting revenue of 175 million to 185 million, and non-GAAP EPS in a range of $0.50 to $0.60 per share. I’ll now turn the call over to Paul.

Paul Pickle: 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. 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. But importantly, the table is set for impressive growth in fiscal year 2024.

We have achieved much and we are poised to make significant progress towards our intermediate term goal of $250 million in annual revenue. I can talk a little bit more about our expectations for FY ‘24 and beyond later in my prepared remarks, but first let’s report on Q3 2023 results and our expectations for the remainder of the fiscal year. Turing to our March results. In our fiscal third quarter, embedded IoT solutions totaled 16.1 million, up 17% sequentially and 5% year-over-year, representing 49% of revenues. Sequential revenue growth was largely driven by our embedded ethernet and WiFi solutions, as well as our embedded compute products. On the ethernet and WiFi front, improving supply chain dynamics allowed us to [ship it] to pent up demand.

On the compute side, EV and automotive shipments are ramping on schedule and the opportunity funnel is growing. Early end customer demand for the Togg electric vehicle platform has exceeded expectations and new engagements with Fisker, Ghost, Renault, Volvo and Daimler contribute to a growing pipeline, which we expect will translate to revenue in late fiscal year 2024 and 2025. Elsewhere, within embedded, we saw some softening in our more classic network interface car 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 confident that this is a temporary setback.

Nevertheless, looking ahead, we see continued strength from embedded wired and wireless products driven by continuing supply chain improvements in steady demand, coupled with compute sum growth from EV and automotive. Turning to system 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. 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. 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. For fiscal fourth quarter 2023, while we have noted some slowness in our turns driven business and our distributors continuing focus on leaning out their inventories, we enter Q4 with the record backlog, strong bookings, improving supply chain, logistics dynamics, and an expectation of sequential growth. Turning to fiscal year 2024, we have a strong outlook and our visibility into demand has never been better. 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 at Lantronix over the next several years.

Today’s customer engagement continues to improve, bringing quality, high value opportunities into the pipeline. Looking at our top prospects, Lantronix 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 as 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. 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. 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?

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Q&A Session

Operator: [Operator Instructions] And the first question will be from Mike Walkley from Canaccord Genuity.

Operator: The next question is from Jaeson Schmidt from Lake Street.

Operator: The next question will be from Ryan Koontz from Needham.

Operator: And the next question is from Scott Searle from Roth Capital.

Operator: 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.

Paul Pickle: Well, thank you for joining us and have a great day.

Operator: Thank you, sir. The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.