Lantronix [LTRX] Conference call transcript for 2021 q3
2021-11-11 21:40:10
Fiscal: 2022 q1
Company Representatives: Paul Pickle - President, Chief Executive Officer Jeremy Whitaker - Chief Financial Officer Rob Adams - Investor Relations
Operator: Good day, and welcome to the Lantronix First Quarter 2022 Conference Call. All participants will be in a listen-only mode. . 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, and good afternoon and thank you to all of those joining us for our first quarter fiscal 2022 conference call. Joining us on the call today are Paul Pickle, President and CEO; Jeremy Whitaker, Chief Financial Officer. A live and archived webcast of today’s call will be available on the company’s website. In addition, a phone replay will be available starting at 8:00 p.m. Eastern, 5:00 p.m. Pacific today through November 18 by dialing 877-344-7529 in the United States or for International callers 412-317-0088 and enter passcode 10161701. 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 yesterday and is available on our website and in the company’s SEC filings such as its 10-K and 10-Qs. Lantronix undertakes no obligation to revise or update publicly any forward-looking statements to reflect future events or circumstances. 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 recording 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’ 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 first quarter of fiscal 2022, before I hand it over to Paul for his commentary. Please refer to the news release and the financial information in the investor relations section of our website for additional details that will supplement my commentary. As a reminder, our first quarter of fiscal 2022 includes two months of operations related to the acquisition of Transition Networks and Net2Edge, which comprised the electronics and software business segment of Communications Systems, Inc. which closed on August 2, 2021. For the first quarter of fiscal 2022 we reported record revenue of $27.7 million, an increase of 62% when compared to $17.1 million for the first quarter of fiscal 2021. The year-on-year growth was driven by contribution from the recent acquisition and double digit organic growth. Sequentially net revenue was up 34% compared to $20.6 million reported in the fourth quarter of fiscal 2021. GAAP gross margin was 45% for the first quarter of fiscal 2022 as compared with 48.8% for the fourth quarter of fiscal 2021 and 48.1% for the first quarter of fiscal 2021. The sequential decline in GAAP gross margin was expected as we recognized a large amount of software license revenue in the prior quarter. As discussed on previous calls, we continue to see higher than normal supply chain costs. That said, we recently rolled out price increases, which we expect will offset a large portion of the product cost increases we are experiencing. Selling, general and administrative expenses for the first quarter of fiscal 2022 was $7.9 million compared with $4.9 million for the first quarter of fiscal 2021 and $6.1 million for the fourth quarter of fiscal 2021. Research and development expenses for the first quarter of fiscal 2022 were $4 million compared with $2.6 million the first quarter of fiscal 2021 and $3.6 million for the fourth quarter of fiscal 2021. The increase in SG&A and R&D was impacted by increased headcount and operating costs related to the recent acquisition. That said, we have moved quickly on implementing our synergy plan and as a result non-GAAP operating expenses as a percent of revenue actually declined sequentially and from the year-ago quarter. GAAP net loss was $2.3 million or $0.08 per share during the first quarter of fiscal 2022, compared to a GAAP net loss of $302,000 or $0.01 per share during the first quarter of fiscal 2021. The increase in GAAP net loss was primarily due to costs related to our most recent acquisitions. Non-GAAP net income of $2.5 million or $0.08 per share during the first quarter of fiscal 2022 compared to non-GAAP net income of $1.7 million or $0.05 per share during the first quarter of fiscal 2021. Now turning to the balance sheet. We ended the September 2021 quarter with cash and cash equivalents of $10.3 million, an increase of $0.5 million from the prior quarter. Working capital improved to $32.2 million as of September 30, 2021 as compared with $20.3 million as of June 30, 2021. Net inventories were $26.6 million as of September 30, 2021 compared with $15.1 million as of June 30, 2021. The increase was primarily related to inventories assumed in our most recent acquisition. Now turning to our annual outlook, which includes approximately 11 months of contribution from the most recent acquisitions. Once again we exited the current quarter with increased demand driven by record backlog. We believe that without supply chain constraints we could deliver annual growth and non-GAAP EPS above the high end of our guided range. However, we feel it prudent to take a more conservative approach and as such, we are raising the low end of our guidance range while keeping the high end unchanged. For fiscal 2022 we expect revenue growth of 54% to 75% and non-GAAP EPS growth of 95% to 135%. I'll now turn the call over to Paul.
Paul Pickle : Than you, Jeremy. The first quarter was a busy one here at Lantronix, and we made progress on a number of fronts in transforming the company into a world leading IoT solutions supplier. To name a few, during Q1 we closed the acquisition of Transition Networks and I am pleased to report its integration is already well underway. We battled ongoing supply constraints and delivered record results for our shareholders. Furthermore, we entered Q2 with yet another record backlog in place and have commitments for supply necessary to raise our fiscal 2022 growth projections. We saw a critical acclaim and continuing design and activity for our ConsoleFlow SaaS platform, and to top it all off, we were awarded the largest design win ever in the company's long history, which I will detail shortly. These accomplishments did not come easily. The ongoing supply chain constraints delayed realizing approximately $6 million in revenue and costs have been rising due to the shortages. We first noticed these disruptions over a year ago and given the growing forecasts from our customers, we moved quickly to secure supply of key components. As such, while we are not immune to the problem, we believe we have sufficient supply to continue to grow organically at double digits in fiscal 2022. Also as Jeremy stated, we are starting to pass those higher costs on through price increases and through customer contractual obligations. All in, while we expect the continued constraints and resulting price pressures to remain into calendar year 2022, our early actions to secure critical components, our unique technology position, our value to our customers and our success in executing on high dollar opportunities lead to increasing confidence in our ability to deliver organic growth to our shareholders in fiscal 2022 and beyond. With that, let's get into the product details and some more specific discussion around our accomplishments in Q1. We continue to see increasingly strong demand for our Intelligent Edge Compute Solutions. We have spoken on a few conference calls about expanding our capacity to meet this design demand and filling a funnel that will yield a number of high dollar volume production opportunities for us in the future. Today, I’m pleased to report on a few such opportunities, in key verticals that we expect will make substantial contributions in fiscal years 2022 and 2023. The first is an enterprise level video conferencing solution for our customer needs, which went into production last year. The forecast and subsequent orders have tripled last quarter, which request the full schedule shipments and as the world's workforce begins to go back to the office and in-office conferencing solutions are being increasingly deployed. While this is the largest win for us in the video conferencing arena, we are an expert in this field and have several opportunities in the pipeline that will leverage the same skill set. This application alone will drive significant growth for our Edge Compute Solutions and we are growing in other key verticals as well. Turning to security and surveillance. We have just received additional purchase orders on a significant increase in forecasted quantities for our Lantronix develop AI driven sound solution, driving a camera monitoring product for a leading security company. This application will lead to longer term content and revenue synergy opportunities as many of these smart city applications involve power over Ethernet solutions, which are supported by our recent acquisitions. Electric vehicle is a new vertical for us, where we are making great strides. You may recall we have spoken in the past about our involvement with the rival who produces electric cargo vans, as well as TOGG the Turkish state vehicle company. Our design work with these customers has led Qualcomm to designate us as a Tier 1 authorized design center or ADC, an invitation only program put in place to develop and accelerate EV Automotive Innovation. This ADC status designation places us in a position to better benefit from a Qualcomm opportunity funnel. Moving on, update of our remote management solutions in the Telecom, Data Center and Financial end markets remain strong due to a robust macroeconomic trend along with new design wins. COVID-19 has made a lasting impact on this market and our customers continue to build their out of band and remote management capabilities. After posting 20% organic growth in our fiscal 2021, the enduring boost to this end market drove Q1 results, 57% sequentially and 98% year-over-year. We caution that this has historically been a lumpy business quarter-to-quarter, but we expect that the remote management upward trend will continue. In the industrial smart grid energy market, I am excited to announce we have just been awarded our largest design win in the history of the company to supply the world's largest energy supplier with an AI Driven Intelligent Power Substation Monitoring Computer Hardware. This relationship has already provided us with meaningful design services revenue over the last several quarters, and I'm pleased that Lantronix is executing on a more dollar content per design strategy with several hardware components and software in the total design. We expect to begin shipping in the second half of calendar year 2022, with an approximate $10 million to $20 million of revenue impact in our fiscal year 2023. In sum, Q1 was not without challenges, but we continue along our growth path and delivered strong sequential and year-over-year results for our shareholders. And as I expect you can hear in my commentary, the company is starting to gain some momentum in key verticals with key customers. While we expect the constrained environment for the remainder of fiscal 2022, we are at the same time increasingly confident in our ability to drive industry leading growth and profitability as we deliver for our shareholders. That completes the prepared remarks for today. So I'll now turn it over to Betsey, to conduct our Q&A session.
Operator: Thank you. . The first question comes from Scott Searle with Roth Capital. Please go ahead.
Scott Searle: Hey! Good afternoon. Thanks for taking my questions and nice job of the quarter guys.
Paul Pickle: Thank you, Scott.
Scott Searle: Paul, maybe just to jump in on the supply chain issue, it seems like you guys have done exceptionally well on that front. But I'm wondering if there were any sales that were left on the table as an inability to ship and I'm wondering if there are any components in particular that you guys are struggling with.
Paul Pickle: That's a good question. We did have – we did see an increase in that delinquency to CRD, and it's basically customers requesting it in the quarter, so about an additional million, $6 million in total revenue that customers would like us to deliver that we just can't quite deliver in the time frame that they want due to lead times. And so if we look at particular components, it's a little bit across the board, some of them less impactful, but difficult to find unless. We do see some oscillator shortages. In general, most of the semiconductor chipsets that would be WiFi network controllers, WiFi controllers, certainly Qualcomm processors are at some significant lead times. And then if I go to a little bit longer, we are seeing flash in fairly short supply and then some of the specialty memory devices that we need, pop-memory devices that are in short supply and largely because they are somewhat exotic packages and they go along with the Qualcomm Processors. I will say that Qualcomm is, you know they are not the long pole in the tent. They are doing a good job keeping up with customer demands for us and it's mostly because of that tight partnership.
Scott Searle: Great! Very helpful, thank you. Maybe to follow up, it seems like there's a lot of design activity in the pipeline and you've been moving more and more in the direction of software, as well as recurring services, and you had some I guess lumpy sales that have come through in the not too distant past. I'm wondering, in terms of some of the future opportunities going forward, how big is the software attach rate? Are you still tracking to that 5% to 10% goal of software and recurring services that look at three years or so.
Paul Pickle: Well, I appreciate the fact that you lowered the bar on us a little bit, but it's 10% of revenues in three to five years is what we're looking for. I will say, we're on track for that. We'd like – we're tracking internally on a SaaS recurring platform and micro services to be at about a $1.5 million ARR exit rate this year. That is in addition to the on-prem licensing business that we have. So I’d say we're making good progress, we're adding features and services to the platform and we're seeing a much better uptake then we certainly have last year, so making great progress on that front.
Scott Searle: And if I could follow-up on the energy supply deal that you talked about, is it the largest win ever. I think you said $10 million to $20 million in the fiscal ‘23 timeframe. Does that look like it's going to be some, a recurring win where you are going to see those kind of levels of revenue going forward once you start to get that into production.
Paul Pickle: We certainly hope so. I'd like to think that that's on the conservative side of what we're able to capture, but in this particular one we're shipping, we've designed in several hardware components. We are doing the AI application software for the platform as well, and then handling the build for the completed hardware. So you know that opportunity is quite large and they don't, you can't quite think in terms of their total substation attach rate. They have over 1 million sub-stations out there and we're just really participating in the first 35,000 units today, but what that solution looks like in the future, we expect still capture a considerable dollar amount. We just happen to be handling the whole thing at the get go. So I would expect in the future us to pick up. We will pick up bigger programs like this and we have been talking in terms of when we do these design services, there’s seven digit contracts, there’s eight digit hardware opportunities on the backside of that if you do a good job through the prototyping phase and this is evidence that the first one that we captured, we do have two other programs in the wings that would be similar.
Scott Searle: And lastly if I could, and then I’ll get back in the queue. But you raised the lower end of the guidance for this year. It basically implies $110 million to $125 million and depending on what you pencil in for transition networks, you know organic growth is low teens to maybe as much as 30%. Those are some pretty big numbers. I'm wondering if you could kind of talk around the variance there. What kind of moves you to the higher end of the range versus lower into the range? It sounds like component availability and you could be above that. And then what's the longer term organic growth rate? I know you said double digits, but it's a pretty big number that you got out there for this year and it seems like you've got some other wins in the pipeline that are going to fuel ‘23 and beyond. So any thought you could kind of elaborate on the front would be helpful. Thanks.
Paul Pickle: Yeah, we are in a particularly strong trend. The base business that we’ve historically had is really, it’s doing double digits and then we have these organic growth plans that are kicking in as well. I’d say this year it’s definitely – you know if you look at demand, it’s definitely north of 20%. We might actually be able to deliver on that 20% and our customers would love for us to do a bit better than that, but it is component supply constraint. So when we place an order and – you know we got this award for energy, smart grid utilities and this is for December quarter build of next year. We're starting to have to place orders for components which our customers on the hook for. We are having to place those today. I can’t really realize that revenue until that time frame. So we could be growing much, much faster, but overall it's still – we're probably north of 20%.
Scott Searle: Great! Thanks so much. Nice quarter guys.
Paul Pickle: Thank you.
Operator: The next question comes from Jaeson Schmidt from Lake Street Capital. Please go ahead.
Jaeson Schmidt: Hey guys! Thanks for taking my questions. I just want to start with the backlog. Would you mind sharing what that backlog number is entering the December quarter?
Paul Pickle: Yeah, I think we're – Jeremy, you can correct me if I'm wrong, but I think we're just about $43 million total with approximately 3.3 coming from the new acquisition. So to put it in perspective, we've got $39 million on Lantronix Proper, and this, if you look at historical run rates, we are about $1 million going into the quarter.
Jaeson Schmidt: Okay, that's helpful. And have you seen any cancellations in the pipeline or are you at all worried about any potential de-commits?
Paul Pickle: Not at the moment, and usually the next question is do we see any double ordering. I'll point out that when we take in these orders and we start preparing product, our customers on the hook for that product and so you can effectively see them as NCNR. We have not seen the double ordering, and just to do a contrast to last quarter, if we looked at starting backlog or total backlog, last quarter what we started it with was about $28 million. So it's grown substantially this quarter, but most of that is new programs that have kicked in, ramps. A year ago would have been eight and then if you kind of went back a 1.5 year that $1 million that I talked about. So it's new programs, all organic and our customers are on the hook for the material that we acquire and so we feel pretty good about the order status there.
Jaeson Schmidt: Okay, that's good to hear. And then just the last one for me and I'll jump back in the queue. Jeremy on gross margin, with all the moving parts and different dynamics, how should we think about that here in the December quarter, and I guess bigger picture for fiscal ’22?
Jeremy Whitaker: Yeah, we're still targeting margins in the mid-40s, mid upper 40s is I think where, we think we can get to over time as a lot of the synergies come into play from the recent acquisition. I think we're pretty comfortable with that mid-40 range.
Jaeson Schmidt: Okay. Thanks a lot guys.
Paul Pickle: Thank you.
Operator: The next question comes from Christian Schwab with Craig Hallum. Please go ahead.
Christian Schwab: Hey! Congratulations on a great quarter and outlook. On some of the big design wins, you know we did highlight one of them that we said can be $10 million to $20 million, you know kind of starting at the very end of ‘22 and going to ’23. But we highlighted a couple of other meaningful ones. Are you in a position at all to give us a range of potential outcomes of those design wins and hand gathered not quite yet?
A - Paul Pickle: Yes, the first one that I highlighted in audio-video conferencing, if I looked at the totality of compute hardware during this in the video conferencing systems this year, it will be on the order of $10 million. This has grown from and I'm going off of memory, I don't have this in front of me, but about $2 million last year. So a substantial increase in terms of that particular program. On the security camera side, this one on the order of five to six this year, and then this was fairly small, call it $1 million last year and both of those are already in production. So we talked about one that’s $10 million to $20 million, that we're having to plan for today. You know once we sign that supply contract, it'll likely be something that we’ll announce as well, but we do have programs and introduction today that we are seeing some meaningful $10 million plus revenue run rates on.
Christian Schwab: Great! And then in the smart grid energy one, the $10 million to $20 million one, you said there's a couple of other programs. I was confused as – is there a couple other programs in the space with other customers or is there a couple other programs with that same customer that could you know go from you know a non-design win stage to design win, to revenue.
Paul Pickle: So not necessarily in smart grid. We do have some follow-on programs with this particular customer, but I'm not double – I'm not trying to double comp those. I was really referring to other compute hardware opportunities in other verticals.
Christian Schwab: Okay, other verticals, okay. So we've got three, well you know customer situations that we've highlighted here and we are working on two other programs of similar to same size revenue opportunities or could they be even greater.
Paul Pickle: Could be similar, I’ll say similar size at this point, so I don't put the part ahead of the worst.
Christian Schwab: Great, great!
Paul Pickle: One that we didn't highlight, you know we talked about remote environment management and data center financial institutions being quite strong, we do have some of our classic blue chip customers that are rolling out to the tune of $1.2 million infrastructure upgrade opportunities that will consume $1 million plus worth of Lantronix products. So there's a lot of strength in the funnel for us, the design end funnel across the board, across all product lines.
Christian Schwab: And then on the ASP increases that you've done, is this across the board to – it sounds like we're renegotiating on contracts and then we're renegotiating or just going to tell the distribution channel prices are going up. Are you getting any push back or you know since everybody firmly understands the world that we're in today, and when did you let them know prices were going to increase and when are they increasing?
A - Paul Pickle: The notices, the letters went out in November for standard products, and to be clear, it's not a set percentage across the board. We don't intend to give up market share, but at the same time we intend to maintain our gross margin target and you know one other point of clarification, we're not renegotiating contracts. Most of the contracts that we have on some of these large opportunities, given the environment, we built in safeguards to be able to pass along those component costs, that margin. So it will be something that's already negotiated and something that we’ll end up passing along. And I think you know the point and we wanted to stress is that, you know the pricing pressure we're seeing from components are not going to drive our gross margin down. We’ll be able to maintain those and still continue to grow at the rates that we’re currently are.
Christian Schwab: Fabulous! And then you know I know we're in a component constrained environment that like all things will eventually end. It seems like given – you know I think you guys had previously talked about in an environment that wasn't component constrained, you know you would target kind of a 15% organic growth rate and we've already kind of talked about we’re, you know that we're still on a component constrained environment, but we're going to grow north that. You know as you think about the company, I know it might be a little bit early, but you know is this a sustainable you know – it certainly looks to be 15% plus but you know – or is it just too early to kind of categorize what that number could be over a longer time frame other than, the next 12 to 24 months.
A - Paul Pickle: Provided that there's not a stock in demand. If you just kind of project normal run rates, even if it moderates we have significant backlog that’s built up to customer requests that you know would fuel growth going forward for quite some time. So I feel – I expect to have growth over – you know significant growth over the next 1.5 to 2 years. That's a little bit further out than we would normally want to project, but you know given where this environments going, it seems like we're in a good place to continue to have that. That macroeconomic trend though on the base business, I do expect that to moderate a little bit. So are we going to continue to be able to keep up 20% plus, we’d have to continue to fill the design funnel and knock those down. That's certainly possible, but I do expect some of the base business to pull back just a little bit and that still would put us in a healthy 15% plus environment. So we – most of the new growth right now is happening in new designs and so I looked at that as organic pick up and some market share gains.
Christian Schwab: Great! And one last question if I may, if I could sneak it in. We have $43 million in backlog. You know we just did $27 million, which is a record quarter, so that equate two quarters of complete revenue and backlog. But it seems to be like – I think you mentioned the number, but in a pre-COVID environment, if you were doing the same revenue that you're doing today or projecting to do today for example, roughly $110 million to $125 million in revenue and we were just starting the December quarter and going into the next calendar year. How much backlog would you be sitting on today?
A - Paul Pickle: It would be typically one month of backlog and we're talking total backlog not starting backlog, but it typically would be one month total backlog. We were a very happy turns business and the make-up of the business has change so that that is no longer the case and then also obviously lead times ahead have attitude, visibility, but the vast majority of it has come from a shift in the type of business that we target and that's the type of business that we booked.
Christian Schwab: Right. I don't have any other questions. Thank you, guys.
Paul Pickle: Thank you.
Operator: Your next question comes from Ryan Koontz with Needham & Company. Please go ahead.
Ryan Koontz: Thanks for the question. A little more color on the integration if you could. It sounds like you're pretty much there on a headcount and you know restructuring, but you know where are you? What still lies ahead of you in terms of IT and manufacturing and then you know so what still remains there? And then secondly, as you look at some of the revenue synergies that you brought up when you originally did the deal, do you have an updated outlook there on those opportunities for cross selling and the like? Thanks.
A - Paul Pickle: Yeah, great question Ryan, thank you for that. I’d say we’re – you know we talked $70 million over 18 months and we're definitely ahead of that projection. I’d say we’ve take in two-thirds of the actions necessary, but right now probably capture – are on-track to capture half of the synergies to date. In terms of next steps that we have, we have to get out of that transition services agreement with CSI that involves bringing up our own instance of an ERP, importing that data over. That's slated to happen this quarter, so – and then just migration of the buildings and we've got that identified and are moving forward on that. So in terms of longer term capture, we get some go-live events in July that will get us all on one ERP and we’ll start to pick up some more of the cog synergies. At that point I think we'll be in pretty good shape, but right now everything's going really well. And then I have to say, very thrilled with the new sales team. You know we're finding quite a bit more opportunities with that team for Lantronix proper products and the cross selling opportunity is a bit higher than what we expected. We've also been able to drive their aggressiveness a little bit more in terms of capturing and so they are doing a little bit better than we would have originally projected in the model. So pretty happy with where this is going so far.
Ryan Koontz: That’s fantastic to hear, thanks. And a quick follow-up, as you look to your different verticals, which verticals would you say you have the best kind of near term opportunities to sell in your SaaS solutions?
A - Paul Pickle: So that's a great question. So right now the vast majority of the traction has been in data center financial telecom opportunities and that's because we have a lot of deployed boxes that in the past did not have device management capabilities. So now that we've added that, upgraded the firmware, its greenfield opportunity to go back into the existing installed base and try to migrate those platforms over. But then if we kind of look at security camera, most of those remote security camera applications like in smart cities, they all have LTE or 5G backhauls. We see a lot of opportunity for zero touch provisioning and data connectivity services in that space and so that's where we're expecting that $1.5 million exit ARR rate from this fiscal year to be kind of a big chunk of that particular type of products and services for that vertical.
Ryan Koontz: Got it, so a substantial portion of it is selling into your installed base, well not just green fielders.
A - Paul Pickle: Near term definitely selling into the installed base is kind of the low hanging fruit, but then you know a lot of pick-up in some of the distributed IoT applications.
Ryan Koontz: Okay, terrific! That’s all the questions I had. Thanks for that.
A - Paul Pickle: Thank you.
:Operator: 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 : Thank you, Betsey. Thank you all for joining us today and have a fantastic evening!
Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
