Lantronix, Inc. (NASDAQ:LTRX) Q4 2023 Earnings Call Transcript

Lantronix, Inc. (NASDAQ:LTRX) Q4 2023 Earnings Call Transcript September 7, 2023

Lantronix, Inc. beats earnings expectations. Reported EPS is $0.06, expectations were $0.05.

Operator: Hello, and welcome to the Lantronix 2023 Q4 Results Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Robert Adams. Please go ahead.

Robert Adams : Thank you. Good afternoon, everyone, and thank you for joining the Fourth Quarter Fiscal 2023 Conference Call. Joining us on the call today are Jeremy Whitaker, our interim CEO and Chief Financial Officer; and Jacques Issa, our Vice President of Marketing. 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 10-K and 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 use. With that, I will now turn the call over to Jeremy Whitaker, Lantronix’s Interim CEO and 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 fourth quarter and fiscal year 2023 before I provide our financial targets for fiscal 2024 and an update on our CEO search. For FQ4 2023, we reported revenue of $34.9 million, up 6% sequentially and down 3% from the year-ago period. The sequential growth of 6% was largely a function of a strong quarter for our Embedded Solutions products, led by an embedded compute sale of approximately $3.4 million to an in-flight infotainment customer. We also experienced continued contribution from our electric vehicle customer, Togg. System Solutions were relatively flat quarter-over-quarter and included $1.4 million in revenue from the delivery of QED pilot production units to Gridspertise.

We saw a weaker quarter in out-of-band products as our larger financial customers continue to exhibit cautious spending patterns. We expect out-of-band to improve against the backdrop of the upcoming Fed buying season. And sales here should increase in the September and December quarters, adding a boost to gross margins. And at Q4 2023, Software and Services revenues were down sequentially, a function of lower design services revenue. However, there was an ebb and flow to these design projects, and we expect improvement going forward. GAAP gross margin was 39.5% for FQ4 2023 compared to 44.4% in the prior quarter and 41.9% in the year-ago quarter. The decline in gross margin was primarily a function of product mix, with the biggest variances being higher embedded compute sales and lower out-of-band sales as a percentage of revenue during FQ4 2023.

For FQ1 2024, we expect our sales mix to normalize, with lower compute sales and gross margins closer to the mid-40s. GAAP SG&A expenses for FQ4 2023 were $8 million compared with $9.4 million in the year-ago quarter and $9.9 million in the prior quarter. The decline in GAAP SG&A was primarily due to lower share-based compensation expense and a focus on cost containment. R&D expenses for FQ4 2023 were $4.9 million, flat with the year-ago quarter and down from $5.1 million in the prior quarter. GAAP net loss was $1.7 million or $0.05 per share during FQ4 2023 compared to GAAP net income of $2.5 million or $0.07 per share in the year-ago quarter. Non-GAAP net income was $2.2 million or $0.06 per share during FQ4 2023 compared to non-GAAP net income of $2.8 million or $0.08 per share in the year-ago quarter.

Copyright: andreykuzmin / 123RF Stock Photo

Now turning to the balance sheet. We ended FQ4 2023 with cash and cash equivalents of $13.5 million, an increase of $650,000 from the prior quarter. Working capital was $50.2 million as of FQ4 2023 and remained steady with the prior quarter. Net inventories were $49.7 million as of FQ4 2023, a decrease of $2 million from the prior quarter. The balance of inventory includes nearly $10 million of long lead time components that were prepaid by a customer. We expect to consume these components during fiscal 2024 as we deliver on the customer agreement. Now turning to the first quarter and fiscal year 2024. We expect that revenue in the first quarter will be down sequentially as the revenue growth in FQ4 2023 was largely a function of a significant shipment to the customer deploying in-flight infotainment systems.

We don’t expect this customer to contribute at a similar level in the upcoming quarter. That said, we remain confident about the fiscal year ahead of us, and expect to deliver upon the fiscal 2024 guidance that we provided during our previous earnings call. We entered fiscal 2024 with record backlog, a cautious but relatively steady demand environment and new compute designs moving into production. Compute solutions, both embedded and at the system level, are expected to drive much of the growth in fiscal 2024 and beyond, led by smart grid deployments, intelligent vehicles and enterprise video. As we have previously discussed, Gridspertise is our lead smart grid customer with the QED, an all-in-one edge computing platform providing electric grid operators with real-time insights and automated control of distributed energy resources.

Since our last call, we’ve made substantial progress on getting the QED into production, which will allow us to realize the more than $40 million in revenue that we have in current backlog for Gridspertise during fiscal 2024. Specifically, we completed the shipment of substantially all of the QED units under the pilot production contract during FQ4 2023 and are ready to start mass production in the upcoming December ended quarter. All component shortages that would gate deliveries in fiscal 2024 have been resolved. On the demand side, Gridspertise recently increased their fiscal 2024 production order by over $0.75 million and are currently negotiating the first follow-on purchase order, which we would expect to drive continued growth from this customer in fiscal 2025.

Furthermore, we received the final deposit that was due under the initial production contract for a grand total of $20 million in deposits paid to us thus far. Based upon these factors, we are confident in the program and our ability to begin volume production of the QED in FQ2 2024, which would result in a meaningful revenue contribution during that quarter and leading to a full production ramp in the second half of fiscal 2024. More specifically, our current production forecast indicates that we would deliver approximately $5 million in FQ2 2024. We would double that amount in Q3 and deliver the balance in FQ4. Our lead EV customer, Togg, is also progressing well. During FQ4 2023, we received a significant order from Togg that was double their current run rate and greater than what we had previously anticipated for fiscal 2024.

In addition, we continue to engage a handful of other EV opportunities with design services that have the potential to transition to meaningful supply arrangements. We’re also seeing traction with other compute designs. For example, we have a high-volume enterprise video collaboration design expected to ramp in FQ3 2024. Furthermore, with the recent Qualcomm announcement of their QCS-8550 with increased computing for edge AI processing and WiFi 7 connectivity, we have had multiple engagements with customers interested in using that solution for various compute-intensive applications such as autonomous mobile robots, industrial drones and edge AI boxes. Now I’d like to provide the specifics for our fiscal 2024 guidance. With the backdrop of a record backlog, a cautious but relatively steady demand environment for our system solutions and new compute designs going into production, we anticipate delivering over 30% growth during fiscal 2024 and are reiterating our annual target of revenue in a range of $175 million to $185 million and non-GAAP EPS in the range of $0.50 to $0.60 per share.

Now I’ll provide a brief update on our CEO search. In June 2023, the Board engaged a third-party firm to conduct a candidate search. We’re well along in the process and have begun performing in-person interviews. While it is difficult to pinpoint the exact timing, I do expect that we’ll identify a qualified candidate before the calendar year-end. That completes our prepared remarks for today. So I’ll now turn it over to the operator to conduct our Q&A session.

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Q&A Session

Operator: [Operator Instructions] Today’s first question comes from Scott Searle with ROTH MKM.

Scott Searle : Nice to continue to see the reinforced outlook for fiscal ’24. Jeremy, maybe — I just want to quickly dive in and get some color around the gross margins. It sounds like that’s purely mix in the June quarter and you’re expecting a recovery back to where we’ve been in recent quarters, kind of given the recovery in out-of-band and some of the other products. Is that correct?

Jeremy Whitaker: Yes, that would be correct. We had a really strong compute quarter, and our out-of-band was actually down sequentially. The compute being on the lower end of our margin scale and the out-of-band on the higher into the scale. For FQ1, we’re expecting that to kind of flip where we’re going to see much more contribution from out-of-band and lower contribution from compute. And the result of that would likely be returning to gross margins closer to the mid-40s.

Scott Searle : Great. And then just looking at the top line, I thought I heard September sequentially down a little bit. Just want to clarify that. But then you start to see the ramp-up in the contribution from Gridspertise ramping up. I think you said $5 million in December, going to $10 million in the March quarter. I want to clarify that because it really implies, right, that you continue to see that big ramp-up over the course of the year and the contribution on that front. I’m wondering, 2 things on top of it. Gross margin profile, how is that going to impact you guys in the back half of the fiscal year? And then the follow-on contract, I’m wondering what other color you could provide around that in terms of the magnitude, size and timing related to that?

Jeremy Whitaker: Yes. I think you’re characterizing how we expect the year to play out. As it relates to — as it relates to margin, we are expecting to maintain margins in the mid- to low-40s, similar to what we saw in fiscal ’23. As grid rolls in, it’s pretty close to our corporate average. That said, it will bring down margins slightly. But we do have some tailwinds as it relates to — we’ve been experiencing lower supply chain costs and lower PPVs. And so I would expect as those lower costs roll in, we will see some benefit from that, which would offset some of the lower gross margin that we would get on a combined basis from Gridspertise.

Scott Searle : Great. And lastly, if I could. You talked about some of the other opportunities in different verticals, guys like Togg, et cetera. But I’m not sure if I heard a number in terms of the opportunity pipeline. I think last quarter, you talked about $150 million plus in opportunities. I’m wondering if there’s a number that you would put on it.

Jeremy Whitaker: Yes. That number has continued to grow. We’re still pursuing a large number of opportunities greater than what the company has seen in the past. A lot of that is in applications such as smart cities, smart grid, EV, automotive, as well as security and surveillance.

Operator: The next question comes from Mike Walkley with Canaccord Genuity.

Mike Walkley : Great. And yes, my congrats on reiterating the guidance closer to Gridspertise ramping. Just on Gridspertise, you talked about your early negotiation for the follow-on contract. If that goes well as we look out to fiscal ’25, could — could that be at least another $40 million? Or would you think it could grow off that as you have another — maybe a full year of production versus ramping throughout the year?

Jeremy Whitaker: Yes. I think on the high end, we would grow year-on-year with Gridspertise based upon the units that they have and the pricing that we’re currently talking about. And so yes, we do have a really good, I think, opportunity to continue the business with Gridspertise and to grow it year-on-year.