Lantronix, Inc. (NASDAQ:LTRX) Q2 2024 Earnings Call Transcript

Lantronix, Inc. (NASDAQ:LTRX) Q2 2024 Earnings Call Transcript February 8, 2024

Lantronix, Inc. reports earnings inline with expectations. Reported EPS is $0.08 EPS, expectations were $0.08. LTRX isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon and welcome to the Lantronix Second Quarter 2024 Results Conference Call. All participants will be in listen-only mode. [Operator instructions] Please note this event is being recorded. I’d now like to turn the conference over to Rob Adams. Please go ahead.

Rob Adams: Good afternoon, everyone, and thank you for joining the second quarter fiscal 2024 conference call. Joining us on the call today are Saleel Awsare, Chief Executive Officer, and Jeremy Whitaker, 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 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-Q.

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’ll now turn the call over to Saleel Awsare, Lantronix’s President and CEO.

Saleel Awsare: Thanks Rob, and thank you, everyone, for joining us on the call today. I’m happy to be speaking to you for the first time since I joined at the end of November. I’m pleased to report record results for the second quarter of FY 2024 with total revenues of $37 million in FY Q2, an increase of 18% compared to the same period of FY 2023, and an increase of 12% over the last quarter and we expect record revenue for fiscal 2024. I’m optimistic about the future of Lantronix, given our wide array of leadership in technology, strong product pipeline, and growing customer engagement. I thought it would be helpful to provide some of my background and why I joined Lantronix, as well as also discuss some of the initiatives that I’m driving in the short term.

For more than 25 years, I’ve navigated the high-tech landscape, driving successes across hardware, software and services. Most recently, I was the Senior Vice President and General Manager of the Enterprise and Mobile Business at Synaptics, the company’s largest division. Prior to that, I ran the IoT division. While at Synaptics, I made significant changes streamlining operations, prioritizing customer centricity, and implementing robust go-to-market methodologies that led to significant gross margin and profitability improvements. Across multiple companies, including Conexant, Winbond and Synaptics, I’ve established a track record of business performance improvement across a range of metrics. When the Lantronix opportunity was presented, it was quickly apparent to me that there is much potential to be unlocked.

The macro trends of IoT are accelerating and Lantronix, with its unique portfolio of secure, compute and connect solutions is perfectly positioned to capitalize on this momentum. From wireless routers, programmable telematics, out-of-band management, edge compute modules and a rapidly growing secure custom solution business, we have the breadth and depth to be the differentiated and trusted vested supplier of IoT solutions, providing unparalleled global reach and coverage. As the new President and CEO, I see myself as a steward of shareholder capital, and I take that responsibility seriously. You’ll find me direct, results-oriented and focused on building a profitable, growing business. In my first 60 days, I met with many customers, partners and employees, immersing myself in our strengths and opportunities.

However, my focus remains on enhancing performance. We’ve launched multiple initiatives, including the strategic portfolio review, delving deeply into various areas like engineering, operations, and marketing. In FY Q2, we made our first volume shipment to our smart grid customer, and we have the backlog in place to drive a strong ramp for the remainder of the year. In FY 2025, we expect to transition to a run rate business, receiving purchase orders against our existing design win, and in line with lead times. Having just met with a customer in Europe, I’m happy to say that the relationship has deepened, and I expect this to be a long-term engagement. Other noteworthy business highlights include the commencement of volume shipments of our Fox3 gateway device to a major telecom carrier.

This device enables tracking, data collection, communication and diagnostics in power-critical applications. Initial deployments will be generators supplying cell towers. This adoption is driven by mandates in power backup systems and state energy reporting standards and finally, our out-of-band products continue to perform well with our large enterprise customers resuming purchases. Before I hand over the call to Jeremy to review the Q2 financials in more detail, I’d like to conclude by saying I’m really excited about the opportunity ahead at Lantronix. Since I’ve been on board, I’ve been impressed with our team, the broad portfolio of technology and IP, and our great customers. We have a lot of work ahead of us as we continue down the transformation, but I’m confident we have the building blocks in place to drive Lantronix to become an even stronger company built on differentiated and sustainable franchises that generate profitable growth.

I’ll now turn over the call to Jeremy Whitaker, Lantronix’s Chief Financial Officer.

Jeremy Whitaker: Thank you, Saleel. Now I will provide the financial results and some business highlights for our second quarter of fiscal year 2024 before commenting on our financial targets for the remainder of the fiscal year. For FQ2 2024, we reported revenue of $37 million, an all-time record for Lantronix, driven by initial production shipments to a smart grid solutions provider. Revenue was up 12% and 18% from the sequential and year-ago periods, respectively. IoT system solutions increased by 21% and 54% from the sequential and year-ago periods, respectively. The increase was primarily driven by initial production shipments for our lead smart grid customer, as previously noted. In addition, the year-over-year increase was impacted by strong sales from out-of-band deployments.

For the remainder of the fiscal year, we expect continuing growth from our IoT system solutions, driven by the production ramp of our smart grid customer, continued strength in out-of-band, and telematics’ asset tracking solutions to a Tier 1 telecom carrier. Sequentially, embedded IoT solutions were up 3%, with meaningful contribution from our lead EV customer design-in. As expected, we experienced a year-on-year decline in embedded IoT solutions, as the year-ago period included a large enterprise video customer design win that ended in FQ4 2023. In FQ2 2024, software and service revenues were down sequentially, primarily a function of the completion of two large design services projects that have transitioned into production. GAAP gross margin was 40.6% for FQ2 2024, compared to 42.7% in the prior quarter and 43.8% in the year-ago quarter.

Non-GAAP gross margin was 41.6% for FQ2 2024, compared to 44% in the prior quarter and 44.6% in the year-ago quarter. The decline in gross margin was primarily a function of a change in product mix from the prior quarter and increased logistics costs. For FQ3 2024, we expect gross margins in a similar range. GAAP SG&A expenses for FQ2 2024 were $10.2 million, compared with $9.8 million in the year-ago quarter and $9.2 million in the prior quarter. The sequential increase in GAAP SG&A was primarily due to costs related to variable and share-based compensation, partially offset by cost-cutting activities. GAAP R&D expenses for FQ2 2024 were $4.7 million, compared with $5.1 million in the year-ago quarter and the prior quarter. The decline was primarily related to cost-cutting efforts.

Company-wide, we reduced headcount by approximately 7% during FQ2 2024. Over the last several quarters, we have reduced headcount by approximately 10%, as part of our ongoing efforts to capture cost synergies from our previous acquisitions, run the business more efficiently, and improve operating margins. GAAP net loss was $2.6 million, or $0.07 per share, during FQ2 2024, compared to GAAP net loss of $2.6 million, or $0.07 per share, in the year-ago quarter. Non-GAAP net income was $2.9 million, or $0.08 per share, during FQ2 2024, compared to non-GAAP net income of $1.4 million, or $0.04 per share, in the year-ago quarter. Now turning to the balance sheet, we ended FQ2 2024 with cash and cash equivalents of $22.1 million, an increase of $2.7 million from the prior quarter.

Working capital was $51.9 million, an increase of $1.8 million from the prior quarter. Net inventories were $42.8 million as of FQ2 2024, a decrease of $3.0 million from the prior quarter. Now turning to our outlook; for the third quarter of fiscal 2024, we expect revenue in a range of $38 million to $42 million, and non-GAAP EPS in a range of $0.09 to $0.13 per share. For fiscal 2024, we are updating our annual guidance to revenue in a range of $155 million to $165 million, and non-GAAP EPS in a range of $0.35 to $0.45 per share. The change in our annual guidance is primarily due to lower expected sales for our embedded IoT solutions as a result of two factors. A general slowdown in our broad-based channel business as customers work through their inventories, and an embedded compute design win in video applications that was slated for revenue in the second half of fiscal 2024 that pushed into fiscal 2025.

We remain optimistic on the business and are on track to deliver a record year on both the top and bottom lines with 18% to 26% organic revenue growth and over 50% growth in non-GAAP earnings. With that, we complete our prepared remarks for today. So I will now turn it over for the operator to conduct our Q&A session.

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Q&A Session

Operator: [Operator instructions] And our first question will come from Scott Searle of ROTH MKM. Please go ahead.

Scott Searle: Good afternoon. Thanks for taking the questions. Saleel, congratulations and welcome aboard. Maybe just to dive in quickly on the outlook, a little below expectations, it sounds like you’ve got a design win on the embedded push front. I wonder if you could provide a little more color and clarity in terms of how the Enel [ph] ramp is going, how you’re thinking about a Phase II opportunity with them, and what the channel level of inventory looks like at the current time. And is there any other risk to slippage of a larger customer like you’re talking about on the embedded front that’s slipped?

Saleel Awsare: Hey, Scott, thanks for the question. Let me start with the Enel ramp, and then I’ll pass it to Jeremy for some of the other questions that you asked. So, as I said, I was in Europe meeting our customer, who is a customer of Enel’s, if you put it precisely and that ramp is going well. Systems are now getting deployed in the field, and we have no showstoppers and as I said in my prepared remarks, we’ve got good backlog until the end of June for the fiscal year and as we transition this business into more of a run rate kind of business, we will be getting in purchase orders for the second half of the year. I expect to get purchase orders for the second half of the year, and we’ll ramp with them as we move forward. Now, there is a big build-up as they start the deployment, especially in our calendar Q3, I mean, our fiscal Q3 and Q4. It’ll slow down just a little bit as we go into the second half of the calendar. Jeremy?

Jeremy Whitaker: Yes, Scott, you had a question regarding distributor inventories?

Scott Searle: Yes, Jeremy, just on the embedded front, it sounds like you’re working down some elevated inventory levels. I’m wondering if you could give us an idea about channel inventory weeks or otherwise to kind of help us calibrate. And then on the design win that slipped out, the visibility and the comfort to that, that that is going to, in fact, ramp in September and December.

Jeremy Whitaker: Yes, so starting with channel inventories and what we’re hearing back from our sales team as it relates to end customers, a lot of that business is going to a broad-based, customer-base, a lot of it in industrial IoT connectivity and embedded solutions in that area and what we heard back from our sales team is that there are customers that are working down inventories, and that was — and also a general slowdown in the macro that is impacting customers. And for that reason, we brought down our forecast for our embedded solutions for the second half of the fiscal year. As it relates to the push-out of our one embedded compute customer in video applications, as far as we understand from talking with the sales team and their interaction with the customer, is that they are on track to go into production in fiscal ’25, or I would say have more of a ramp.

They’re already — are buying some product from us at this point, but the actual ramp of their production has slipped into ’25.

Saleel Awsare: Just let me add a little bit more color, Scott. This is a video conferencing system, and they need to go through some certification. You might be familiar with it, like things like Teams and stuff. Usually, this takes a bit longer than you anticipate, and that’s, I think, what they’re going through right now.

Scott Searle: Got you. Very helpful. And if I could, one follow-up, so I know it’s still early, so this is perhaps a bit unfair, but I’m wondering if you could give us some insight into how you think about the growth of the business as we get into fiscal ’25, not necessarily to give guidance, but are you comfortable that this is a double-digit or a mid-teens kind of growth business, given the product portfolio and the customer interactions that you’ve had? And as part of that, the gross margin profile that you’re thinking about now that you see in the blended business and product offerings, if you give us some insight on that front. And if I could throw in as well, edge compute is becoming a bigger and bigger discussion point within the industry. You guys have a lot of components on that front that have led to business over the past several years. I’m wondering how you see that evolving and your position in the marketplace there. Thanks.

Saleel Awsare: Yeah, so I think it’s a little too early for me to get into the specifics of fiscal ’25 from percentages and numbers, but we have all the right things in this company, as I said, as I move forward to compute and connect and our compute business is growing quite a bit. Almost it grew 60% from fiscal ’23 to fiscal ’24, just to be clear, as that we are projecting it to grow. So I expect that to be a growth driver as I look into the future. Now, going specifically to the edge compute, you’re right. We do have some great technology and products. Its early days, but I do see some momentum into it in fiscal ’25 for those specific areas. And we are doing, Scott, really a deep dive into the product portfolio starting in March called the Strategic Program Review.

This is something that I’ve done in the past, and I’m going to spend probably a better part of a week with our business teams and also the engineering teams trying to go through every product line, understand our strength, our weakness, and look at the ROI and the growth in that area. So I’ll be able to give a better view about this in the May call or so.