Participants

Jeremy Whitaker; Chief Financial Officcer; Lantronix Inc

Saleel Awsare; President, Chief Executive Officer, Director; Lantronix Inc

Jaeson Schmidt; Analyst; Lake Street Capital Markets

Mike Walkley; Analyst; Canaccord Genuity

Scott Searle; Analyst; Roth MKM

Tyler Burmeister; Analyst; Craig Hallum

Presentation

Operator

Good afternoon, and welcome to the Lantronix third quarter fiscal 2024 earnings conference call. (Operator Instructions)
Please note this event is being recorded. I would now like to turn the conference over to Jeremy Whitaker, Chief Financial Officer. Please go ahead.

Jeremy Whitaker

Good afternoon, everyone, and thank you for joining our quarterly earnings call. Joining me on the call today is our President and Chief Executive Officer, Saleel Awsare. 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 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 non-GAAP and 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.

Saleel Awsare

Thanks, Jeremy, and thank you, everyone, for joining us on the call today. I'm pleased to report record revenue of $41.2 million for the third quarter of fiscal year 2024, a year-over-year increase of 25% compared to the same period of 2023 and a sequential increase of 11% compared to the December quarter. Non-GAAP EPS in fiscal year Q3 grew 88% compared to the same period last year, demonstrating leverage in our operating model as revenue improves.
Jeremy will provide you with more details and analysis on the third-quarter financial results shortly.
As I have recently completed five months with Lantronix and having spent a lot of time with our key customers, strategic partners, and most importantly, the Lantronix team, I'm very optimistic about the future, given our strong products and solutions, our growing customer engagement, and our improving EBITDA and solid balance sheet.
We see both compute and connect technologies converging at the edge of the network, and that's exactly where we play with our core capabilities and solutions. We have a deep understanding of edge compute requirements and provide our customers with complete solutions, including hardware, software, design services, and our perception IoT platform for device management and application integration.
Our focus going forward will be on three key vertical segments, including smart cities, automotive, infotainment and enterprise. We estimate the served available market companies addressing in the three different verticals is $8.5 billion, and we expect compound annual growth rate over the next few years to be approximately 12%.
Let me give you an example in each of these verticals in smart cities, we have the opportunity to drive revenue growth over a couple of key areas, namely smart grid and critical infrastructure. We estimate the serviceable addressable market of the smart cities, vertical to be approximately 3.9 billion and the compound annual rate over the next few years to be approximately 12%.
In the Smart Grid sector, we see continued momentum with a lead SmartGrid customer there. We received our first follow-on order for the first half of fiscal year 25 as this customer is transitioning from design and initial production to a run-rate business. Our relationship continues to deepen with our lead customer, and we are engaged at all levels of the organization. We expect that as they expand their market beyond the current rollout and into broader applications and geographies. With the QAD device and its variants, we will continue to partner with them to address these needs. I expect this to be a long-term mutually beneficial engagement.
Now moving to critical infrastructure. A great example of this sector is a recent design win with a tier one telecom customer, who's using our FOX telematics device, coupled with our perception SaaS solution for monitoring and managing cell site power generators. We are replicating this design win with multiple generator makers who have similar needs looking further out the same solution can be extended to applications at construction sites, hospitals and other such locations in automotive infotainment. The trend is clearly towards Pillar two pillar large interactive displays with the digital cockpit becoming a highly valued part of the vehicle. We estimate the current SAM in the automotive infotainment to be approximately 900 million and the annual growth rate to be about 21%. Our IP resides in the automotive infotainment compute system. We developed for COG, the Turkish based automotive OEM, and we are seeing strong interest from Tier two and Tier three automotive OEMs as well as manufacturers of commercial trucks, motorcycles and heavy machinery.
Let me also add an update on talk. They recently unveiled the second vehicle, the T. 10 f. sedan and our embedded compute solution is designed into the vehicles digital cockpit. Additionally, they have told us they plan to start shipping vehicles in Germany in the calendar year 2025 we continue to collaborate and innovate with them as they expand their business.
In the enterprise vertical, we are focused on out-of-band video conferencing and security and surveillance. We estimate the served available market of our enterprise vertical opportunity to be approximately $3.7 billion, growing at about 9% annually over the next few years.
Let me add some color on one of our products addressing the growing need for out-of-band management. Autobahn solutions provide alternative paths to access servers, networks and routers. When the primary access is unavailable, providing uptime and resilient networks is important for many sectors, including banks, government, healthcare and the retail sector. We provide not only hardware but also management software, ongoing support and warranty services.
In summary, we are focused on three growing attractive vertical markets with a combined served available market of $8.5 billion and growing our business teams are actively targeting new customer design wins across the three verticals and all our major geographic areas. I remain excited about the growth opportunity ahead for Lantronix, especially given our broad portfolio IP and great customer base.
In summary, we have a great company and we are building on strength moving forward. We will become an even stronger company given the technology and talent we have in place, driving profitable growth and shareholder value.
With that, I will now turn the call over to Jeremy, our Chief Financial Officer, for his comments of fiscal year Q3 and guidance for the next quarter. Jeremy?

Jeremy Whitaker

Thank you, Saleel. Now I will provide the financial results and some business highlights for our third quarter of fiscal year 2024. Before commenting on our financial outlook for the fourth quarter of fiscal 2024. For FQ. three 2024, we reported revenue of $41.2 million, an all-time record for electronics. Revenue was up 11% and 25% from the sequential and year-ago periods, respectively. Iot systems solutions revenue increased by 16% and 91% from the sequential and year-ago periods, respectively. The increase was primarily driven by the continued ramp of production shipments for our lead SmartGrid customer. In addition, the year-over-year increase was impacted by strong sales from our out-of-band management products for the remainder of the fiscal year, we expect continued growth from our IoT system solutions. Sequentially, embedded IoT Solutions revenue was up 6%, with continued contribution from our lead automotive customer 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 that ended in Q4 2023 in FQ. three 2020 for software and services. Revenues were down from the year-ago period, primarily a function of the completion of two large design services projects that transitioned into production during the first half of fiscal 2024. Gaap gross margin was 40.1% for FQ3 2024 compared to 40.6% in the prior quarter and 44.4% in the year-ago quarter. Non-gaap gross margin was 41% for FQ3 2024 compared to 41.6% in the prior quarter. And 45.1% in the year-ago quarter. The decline in gross margin percent was primarily a function of a change in product mix driven by the product ramp with our Smart Grid customer. In Q4 2024, we expect to gross margins in a similar range.
Gaap SG&A expenses for FQ. three 2024 were $9.9 million compared with $9.7 million in the year ago quarter and $10.2 million in the prior quarter. Gaap R&D expenses for FQ. three 2024 were $5.2 million compared with $5.1 million in the year-ago quarter and $4.7 million in the prior quarter. In the upcoming quarter we expect a sequential increase in OpEx related to variable compensation as revenue and earnings are expected to improve. And Q4 2024 GAAP net loss was 423,000 or $0.01 per share during FQ. three 2024 compared to GAAP net loss of $3.1 million, or $0.08 per share in the year ago quarter. Non-gaap net income doubled from the year ago quarter, demonstrating leverage in our operating model and cost control. Non-gaap net income was 4.2 million or $0.11 per share in FQ. three 2024 compared to non-GAAP net income of $2.1 million or $0.06 per share in the year ago quarter.
Now turning to the balance sheet. We ended Q3 2024 with cash and cash equivalents of $24.6 million, an increase of $2.5 million from the prior quarter. Working capital was 54.3 million, an increase of $2.4 million from the prior quarter. Net inventories were 40.6 million at the end of FQ. three 2024, a decrease of $2.2 million from the prior quarter.
Now turning to our outlook for the fourth quarter of fiscal 2024, we expect revenue to be in the range of 46.5 to $51.5 million and non-GAAP EPS in a range of 12 to $0.18 per share.
In summary, we are maintaining the annual guidance for fiscal 2024 that we provided during our February 2024 earnings call. At the midpoint of our SQ. four 2024 outlook. We expect to deliver revenue and non-GAAP earnings for fiscal 2024 with 22% organic revenue growth and a 74% increase in non-GAAP EPS as compared to our fiscal year 2023 results.
With that, we complete our prepared remarks for today, so I will now turn it over to the operator to conduct our Q&A session.

Question and Answer Session

Operator

(Operator Instructions) Jaeson Schmidt, Lake Street.

Jaeson Schmidt

Hey, guys, thanks for taking my questions. I just wanted to start with The Croods properties. Curious if you could help us size this follow-on opportunity or how we should be thinking about this additional order? And relatedly, should we assume you're still sole-sourced here?

Saleel Awsare

Hey, Jaeson. It's Saleel. Thank you very much for the question, so let me take it on. As discussed in our prepared remarks, we have a steep product ground with our Smart Grid customer during our fiscal Q3 and fiscal Q4 with around 20 million of product expected to ship in the fourth quarter of the fiscal year. We expect them to remain a very important customer and the opportunity for further growth while we don't expect 20 million a quarter to be the immediate run rate. We expect it will take some time for them to deploy the units we are currently shipping and they demonstrate their success. We expect the business will continue to grow over time. That said, I'm very pleased that we received our first follow-on order, even though they're just at the beginning of the deployment.
And the initial order is around $11 million to be delivered in the first half as they've also gone to a run rate sort of business.
It shows the customer's commitment to the program and as they put in more supply for a successful rollout.
To conclude, we expect the overall opportunity is much larger is what they've told us than what we shipped in fiscal 24. And we really look forward to enabling the continued success in the rollout of Falcon isn't all in the second half of your question I had just a we should assume you're still sole sourced.
Yes, to my knowledge, we are sole-source.

Jaeson Schmidt

Perfect. And then just as a follow-up, curious if you could update us on what you're seeing from sort of customer inventory or channel inventory standpoint?

Saleel Awsare

So great question. So if I think about our business, Jeason, it's in two areas. We've got a broad based channel business. And based on the quarter that we just completed and our current forecasts, it appears that our broad-based channel business is normalizing and is poised for growth over the next several quarters. In addition, we've looked at the inventory and it's come down from the prior quarter and is running at this historical average. So that's on the channel side. On the embedded compute. We've said in the past that there were some delays in our embedded compute, one specific couple of designs designs that were done in fiscal 23. There was supposed to ramp in 24, but they're now going to ramp in 25. And Jason has a great opportunity of visiting the CEO of another large company that we're working with and they're on track to start ramping in fiscal 25. So as they're successful, we'll be successful with them.

Jaeson Schmidt

Okay. That's really helpful. Thanks a lot, guys.

Operator

Mike Walkley, Canaccord Genuity.

Mike Walkley

Great. Thanks for the question. I guess, so you've just done a three targeted segments here that makes a lot of sense given product portfolio.
Yes, as you went through the portfolio, are there some areas maybe that you're pruning that could impact to fiscal 25 growth on a run rate basis?

Saleel Awsare

Yes. So we did a review with the products and put up a whole product our technology. I'm really happy to report. I'd really like where we're sitting at today. We've got a pretty broad, but also deep product portfolio for the three verticals that I spoke of. As I'm looking in the future, we are going to be putting a lot more focus on products that are really going to provide us some outsized growth embedded compute being one of them out of band being one of them. Some of the other ones I won't go into, but really we'll get some outsized growth out of them.
Also the products that we are focusing on pull in our perception, IoT software for device management and application integration.
So in summary, as I think about the Company, three verticals transitioning not just selling point products, but a solution that consists of our hardware, our cloud-based software and in some areas, even our design services. So putting it all together, really big, bringing a holistic solution to our customers.

Mike Walkley

Okay, thanks. And just a follow-up question here. Thanks for some of the color in the Q&A on grid strategic as they go through a digestion period. Maybe I know you're only giving a quarter at a time guidance, but as you shared the SAMs for the for the three different targeted areas. How should we think maybe about like a baseline run rate for modeling fiscal 25, given grids produces likely to have a decline from the strong initial shipments?

Saleel Awsare

As we mentioned in our last call, we are transitioning like most companies to providing a quarterly as opposed to an annual guidance. And I'm really looking forward to providing an outlook outlook in our fiscal Q1 in the August call for our fiscal Q1 25. But having said that, let me be very clear. The long-term growth prospects are tremendous here. We've got a big SAM. We're growing at 12%, $8.5 billion SAM. And with our product portfolio and a growing customer base, I expect over the longer term we can grow at or really better than the market.

Mike Walkley

Okay. That's helpful. I'll pass to, and thank you, sir.

Operator

Scott Searle, Roth MKM.

Scott Searle

Good afternoon. Thanks for taking the questions on. Nice job on the March quarter and nice to see the continued growth into June. So we'll maybe to follow up on the grid expertise outlook. It looks like they're starting to rapidly expand or create some other opportunities, both within the pan-European opportunity as well as in the U.S. markets. I'm wondering if you could help us kind of size and understand the opportunity set there and the time line that might be associated with it. Then I had a couple of follow-ups.

Saleel Awsare

Yes. So let's start with what they have told us specific to their largest customer, which is and now we've been told that the opportunity size that is in the hundreds of thousands of units. So we're just getting started, Scott, to that extent, they are putting in a big team in the United States to get started, they were at DistribuTECH and they're now going to be in the show in San Diego, and it's mainly public power company is going to be there. So it's early days for them to get started in the US, but we have engaged with them on many areas, and that's another area that we are really looking forward to.
So the P&L opportunity, we understand as we look at the US in the future, we will be working with them as they deploy, but it's early days for the United States for them.

Scott Searle

Right, great. And maybe to couple that into Mike's question and looking at the design pipeline, it seems like there's a lot of opportunity going on within that right now. I think the blended category was about 12% deal and beyond with the three different verticals that you talked about and growing faster than that. I'm wondering if you could tell us how that design pipeline is looking up and then again, we should be thinking about 12%-plus growth as a long term growth rate, excluding any sort of I'll call it normalization in the near term grids for TVs, shipment rates?

Saleel Awsare

Yes. So the opportunity pipeline is really healthy. We've reviewed it. We reviewed the relatively often. So I'm happy to report. It's very healthy. We'll continue to target large customer deals with our compute and connect. So they'll give us visibility as we look at the business.
Longer term, we are focused on three key verticals, Scott, that I talked about and you know, it's an $8.5 billion, SAM growing 12%. So as I said, we expect to be growing at or better than us in the longer term.

Scott Searle

Great. And one last one, if I could. You certainly have expertise in terms of edge compute and connect and that together equals a lot of discussion around AI. So I'm kind of wondering how that's filtering into the conversation with customers and how you're specifically positioned for those types of opportunities? Is it driving a larger opportunity both in terms of hardware, software and cloud. I mean, how is that shaping up? And when do we start to see, I'll call it a more defined impact from that?

Saleel Awsare

Thanks. That's a great question and thank you for bringing that up, Scott. So Plantronics is really integrating edge compute devices with our perception, IoT software to simplify and streamline the edge applications. As I think about it as build, deploy and accelerate. It's going to start with our compute, some which allows for rapid development. And as you know, we've got with the NPU on that. So it and it gives you a robust to the streamlined optimization. So this resulted a powerful, scalable solution that accelerates the transition from prototype to production, significantly boosting efficiency and product reliability. We gave an early look at this at embedded embedded show in Nuremberg as a matter of our partner actually called it out and we showed it working. It's early days, but we feel really good about it. And that was one of the areas we are focusing on as I look about look into the future.

Scott Searle

Great. Thanks so much.

Operator

Christian Schwab, Craig Hallum.

Tyler Burmeister

Hey, guys, this is Tyler on for Christian. Thanks for letting us ask a couple of questions on, I guess first, maybe the three care key areas you highlighted, I think we can kind of do some math to understand what the smart city one kind of looks like they've produced. And could you maybe frame a little bit how much revenue you know you're doing? I understand you outlined the size of the markets, but how much revenue in those three three areas are you currently doing so right now where we report our revenue right now?

Saleel Awsare

So I want to not change our reporting on the call today, we reported as other embedded solutions, IoT and software and systems. So that's how we reported today. And that's how I Jeremy and I will talk about it specifically going into the specific verticals. I don't want to break out the revenue right now because some of the products that we report like on embedded compute go into a couple of different verticals to go into the automotive vertical, they go into the smart cities, verticals and even even in the enterprise side. So it kind of goes into different verticals. So I don't have it specifically for those three verticals. We specifically gave it out for what we have said we're talking about there, but you know, the way I look at it right now, our enterprise is probably our largest. Our smart cities is our second largest And automotive is the third one just to kind of put it in the perspective for you, that's that's completely fair.

Tyler Burmeister

And I appreciate that's the range to order color on, I guess, maybe to be a little bit pointed, but I understand not trying to give guidance for next year, but what capacity's going to be, you know, sounds like down next year with some digestion this first order, which I think makes sense or can you still grow your top line your total top line next year? And if so, comparatively, I guess where's where's that off?

Saleel Awsare

Yes. So again, just going back to what we said, right, we've gone to a quarterly guidance so I'm really looking forward to spending a lot of time with you guys as I get into the August call with you to give you a much better view into fiscal Q1 25. Having said that, let's be clear, we had a big ramp with them excited about that. But the team has a follow-on order and they're deploying systems as we do forward. So as it goes to run rate and our follow-on orders only for the first half of the fiscal year, so that, you know, we're working with them for the future.

Tyler Burmeister

Yes, yes, fair enough. Right. That's all for us. Thanks.

Operator

This concludes the question-and-answer session. And the conference has also now concluded. Thank you for attending today's presentation. You may now disconnect.