創力 (LTRX) 2022 Q2 法說會逐字稿

Good day, and welcome to Lantronix's 2022 Second 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, Investor Relations. Please go ahead.

Thanks, Betsy. Good afternoon, everyone, and thank you for joining the Second Quarter fiscal 2022 Conference Call. Joining us on the call today are Paul Pickle, President and Chief Executive Officer; Jeremy Whitaker, Chief Financial Officer; and Jacques Issa, Vice President of Marketing. 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 p.m. Eastern, 5 PM Pacific today through February 17 by dialing (877) 344-7529 or for international callers (412) 317-0088 and enter passcode 341-3427. 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. 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 report and presents reconciliations for the non-GAAP financial measures that we use. With that, I'll now turn the call over to Jeremy Whitaker, Lantronix's Chief Financial Officer.

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 second 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.

For the second quarter of fiscal 2022, we reported record revenue of $33.7 million, an increase of 103% when compared to $16.6 million for the second quarter of fiscal 2021. The year-on-year growth was driven by contribution from our recent acquisition and organic growth of 57%. Sequentially, net revenue was up 22% compared to $27.7 million reported in the first quarter of fiscal 2022. GAAP gross margin was 42.9% for the second quarter of fiscal 2022 as compared with 45% in the prior quarter. The sequential decline in GAAP gross margin was primarily due to product mix.

Selling, general and administrative expenses for the second quarter of fiscal 2022 were $8.9 million compared with $4.9 million for the second quarter of fiscal 2021 and $7.9 million for the first quarter of fiscal 2022. Research and development expenses for the second quarter of fiscal 2022 were $4.3 million compared with $2.4 million in the second quarter of fiscal 2021 and $4 million for the first quarter of fiscal 2022.

The increase in SG&A and R&D was impacted by increased headcount and operating costs related to the recent acquisition. We've made good progress in implementing our synergy plan. And as a result, non-GAAP operating expenses as a percentage of revenue declined sequentially and from the year-ago quarter. GAAP net loss was $2.4 million or $0.08 per share during the second quarter of fiscal 2022, compared to a GAAP net loss of $1.5 million or $0.05 per share during the second quarter of fiscal 2021.

The increase in GAAP net loss was primarily due to costs related to our recent acquisition. Non-GAAP net income was $3.3 million or $0.10 per share during the second quarter of fiscal 2022 compared to non-GAAP net income of $861,000 or $0.03 per share during the second quarter of fiscal 2021.

Now turning to the balance sheet. We ended the December '21 quarter with cash and cash equivalents of $36.4 million, an increase of $26 million from the prior quarter. During November of 2021, we raised $32.6 million in an offering and sale of $4.7 million common shares at a price of $7.50 per share.

In January of 2022, we used $12 million of the proceeds to pay down a high-interest second-lien term loan facility that we used as partial consideration for our recent acquisition. Working capital improved to $64.2 million as of December 31, 2021, as compared with $32.2 million as of the prior quarter. Net inventories were $29.4 million as of December 31, 2021, compared with $26.6 million as of September 30, 2021.

Now turning to our annual outlook, which includes approximately 11 months of contribution from our recent acquisition. We exited the December quarter with strong customer demand and backlog. We continue to believe that without supply chain constraints, we could deliver annual revenue and non-GAAP EPS above the high end of our guided range. Based upon forecasted improvements in the supply chain and our current outlook, we expect to see a much stronger fourth quarter. And as a result, we are increasing our annual revenue guidance.

For fiscal year 2022, we are raising our annual revenue target to a range of $112.5 million to $127.5 million, representing growth in the range of 57% to 78%. In addition, we are adjusting our annual earnings target to take into account our recent capital raise and expect non-GAAP EPS in a range of $0.32 to $0.40 per share, representing growth in a range of 68% to 111%.

I'll now turn the call over to Paul.

Thank you, Jeremy. I am especially pleased to report record results to our shareholders here today. During the second quarter, we made progress on several fronts. Number 1, we reported record revenues of $33.7 million, up 22% sequentially and 103% year-over-year. Excluding our most recent acquisition, organic revenue grew an impressive 47% year-over-year and 21% sequentially. Number 3, we continue to move high potential edge compute projects through the pipeline, and we currently expect the volume production on multiple projects will drive our growth well into next fiscal year. Number 4, the team did a fantastic job navigating supply chain constraints, and we were able to meet some of the upside demand and backlog that we experienced in the September quarter.

And finally, we successfully completed a secondary equity offering, raising almost $33 million to fund our growth, pay down high interest rate debt and potentially fund our next acquisition. With the headlines out of the way, let's get into some detail on second quarter results and our outlook. As I pointed out, revenues of $33.7 million were a new record. Q2 benefited from a full quarter of contribution from our most recent acquisition, an incremental 1 more month than in Q1. Removing these newly acquired revenues from the equation, organic growth was 22% on a sequential basis and an exciting 47% year-over-year.

We saw broad strength in our business in the second quarter. Notable contributors included our remote environment management products, WiFi, cellular tracking and device server solutions. The largest upside came from our Intelligent Edge products where product revenues more than doubled from Q1 levels. Benefiting from our recent execution and bolstered by our strong relationship with Qualcomm, demand for our Intelligent Edge compute solutions continues to grow and the opportunity funnel is very healthy. We are in the process of expanding our capacity to meet this influx, and we are selectively focusing on those programs that offer the strongest revenue potential.

To capture this growth potential, however, we must also continue to navigate ongoing supply chain constraints, and we are pleased to report we made some progress on this front in Q2. After exiting Q1 with over $6 million in customer requested product that we could not deliver on, we managed to draw down that surplus, a few hundred thousand dollars sequentially to about $5.7 million. While the decrease is relatively small, this is the first time in more than a year that we have been able to bring that number down.

In this environment, securing components for upside in a given quarter does not necessarily translate to an ability to do it repeatedly. Each product and its related supply chain has its own set of circumstances, and we feel it is prudent to temper the upside potential in our outlook. But we will continue to navigate the situation and deliver upside whenever possible. Our current belief is that the shortages will continue to linger, especially for semiconductor products built on older, high reliability processes, but we are cautiously optimistic that the supply chain constraints are beginning to ease.

Finally, as Jeremy detailed earlier, we were able to successfully complete an equity offering in Q2, which increased the company's cash balance by $32.6 million. Since that time, we have used $12 million to pay down and expenses second-lien loan, thus eliminating a double-digit coupon that was poised to rise with interest rates. The remainder of these funds will serve as a source of working capital to enable our growth, allowing us to procure long lead time components for crucial shipments and potentially leaving us dry powder for acquisitions.

In summary, I'm pleased with our results in the second quarter. We navigated a supply environment that continues to be difficult, and we're able to deliver another quarter of record revenues. We grew at an impressive rate organically. We improved our balance sheet and put in place the capital to fund the next leg of our growth.

That completes our prepared remarks for today, so I will now turn it over to Betsy to conduct our Q&A session.

We will now begin the question-and-answer session. (Operator Instructions) The first question comes from Scott Searle with ROTH Capital.

Nice job on the quarter, guys. Maybe just to start quickly on the financial front. I was wondering if you could quantify a little bit the supply chain impact on gross margins. In terms of expedites, incremental component costs, I know there's a mix issue in the quarter, if you could kind of flush that out a little bit in terms of component costs maybe versus mix? And then I've got a couple of follow-ups.

Scott, this is Jeremy. So yes, most of the sequential decline was driven by mix. We had a record quarter with our Intelligent Edge solution products. They more than doubled from the previous quarter and probably even more than that from the year ago quarter. And this product group is on the lower end of the scale as you look at our various products from a margin standpoint. So that said, we are still feeling the pressure from component shortages and PPVs and other costs, but it was more a matter of mix this quarter than it was necessarily a change in costs because those costs have been relatively consistent over the last several quarters.

Got you. And Jeremy, if I could, to follow up on the OpEx front, it was up sequentially. You had a full quarter of impact from transition networks, I think, versus 2 months in the prior quarter. Is that the only impact in there? Is there anything else? Is this the base level that we should be thinking about extrapolating going forward into the second half of fiscal '22?

Yes. Because of the higher-than-expected revenue this quarter, we also had a higher amount of variable costs. So that was -- so as revenue tempers and we could see the variable costs come down accordingly as well.

Yes. But just cost as a percentage of revenue, maybe we proved that a little bit, but I wouldn't say that on a dollar basis that this is a base level. We are in a growth mode. We definitely have some good programs that we're looking to source and fund. So I would expect on a dollar basis, spending to go up over time as the revenue grows. But as a percentage of revenue, I think we'd continue to drive some additional efficiency.

Got you. And Paul, maybe to jump in on the supply chain. It sounds like you guys have been doing a pretty good job on that front. But could you provide a little bit more color in terms of what areas are stretched still problematic from a lead time standpoint. And then maybe just from an end market standpoint, I think last quarter, you talked about some larger opportunities as related to Intelligent meters. If you can kind of flesh out where some of the bigger opportunities are for you over the next couple of quarters and levers to move things up or down?

Okay. So yes, on the -- if I reflect back on some of the comments I made last quarter, I believe I said last quarter that Qualcomm would not be the long pole in the tent. So -- at this point, as I reflected doing additional upside, we've managed to secure a lot of the other components around the Qualcomm processors, and we were able to get some additional shipments in the quarter, but that does not necessarily mean it will translate to additional shipments in the March quarter time frame.

So we've got some good visibility on some upside potential, possibly in Q4, and Qualcomm in particular on processors are scrambling to try and get those deliveries to us. But at this point, it's mostly spot market buys. I have to say I did dive into the Rolodex last quarter to try and source some additional upside demand when we go out and look for it, we're able to find it. But the tough components are the exotic substrates as mentioned before, PoP memory in particular, even though the chips are in relatively good supply and then flash. So processors, flash, memory.

And then some WiFi chipsets and then I will say Ethernet switch is starting to creep up as a shortage here that we're able to navigate but is definitely getting a little bit more difficult. I think that's more related to certain suppliers. So if we go outside of those suppliers we're able to get those.

One other additional point. I will say that we did qualify some additional vendors on platforms this past quarter, which gave us more optionality. That will be definitely a planned shift in strategy as we kind of look forward to production in future quarters. Then in terms of end markets, on the opportunities -- we secured a couple of compute projects that are more in the, I'll say, AR space, but still not consumer electronics. This is more industrial safety type applications.

But AR, it's still kind of the same core competency in terms of camera processing, visual processing. But automotive, of course, remains strong, smart utility. Some additional projects were picking up in smart cities related to security cameras and then AR is a new one, a new contract that we just picked up of late.

The next question comes from Christian Schwab with Craig-Hallum Capital Group.

Great quarter. So do you have a record backlog -- or not a record backlog, but a backlog number? Or did you do -- did I miss that?

Yes, it's -- we gave backlog out last quarter because it was such a big jump. We had tripling of order rates and then several pull-in requests by customers and it went from essentially $27 million to $30 million to $39 million, excluding the $3 million of acquired backlog. So that's why we gave it last quarter, we really thought it was relevant. It's not necessarily something we want to fixate on. Having said that, I will say it's north of $50 million as of today. So it did grow despite being able to see some significant upside in revenue in the quarter. So it does continue to grow, but it's also not something that I think is something that we want to fixate on a go-forward basis, but it does continue to grow.

Great. And then do you have any update on the new smart grid energy customer win that was supposed to kind of maybe start kicking in, in the second half and drive more material revenue growth in the fiscal '23 time frame? Is everything on track, ahead of track? Any update there?

I'd say it's on track, on track to our expectations of customers driving some aggressive schedules, they're still driving those schedules. There's some consigned boards that come into the platform, some consigned components that come into the platform, I should say. Our customers had some difficulty procuring those components. So we've kind of stepped in and been able to secure them to ensure that the program continues to move forward. Happy to say we just finished a 3-day workshop talking about what the next generation looks like.

And then just for additional color, comparing the commentary from last quarter, we talked about a $10 million to $20 million contribution in the December quarter. Well, $10 million to $20 million in terms of fiscal year starting to impact the December quarter. And I'd say we're probably a bit more confident in the upper end of that range, and so far, things are going pretty nicely.

Okay. Great. That's good news. And then I guess my last question, I mean, the typical organic growth that you're seeing is quite material. And our backlog, we talked about being north of $50 million. You got a bunch of new programs here been there a while now, Paul. I mean, what do you kind of see is like the true organic growth rate of this business minus any acquisitions that could be layered on over time?

This is where I'd probably take a little bit of a more conservative position. But in terms of, I think that we can continue to drive 20-plus percent. And I'll caveat that. I don't think that is on the entirety of the business. We have not really worked the new road maps that we acquired with the business that we closed on August 2. So we need to turn that around. But I think if we look at what we've done so far, 20-plus percent is probably conservative. I'm factoring in that we're in just an extraordinary demand growth phase. That could very well continue through next year.

If you look at that smart meter program that is not -- or I should say, smart utility program, it's currently not in the backlog that would obviously add some considerable growth potential of 20-plus percent. So I think that's a good number even in a more normalized environment. I think we can manage to drive that level of performance.

The next question comes from Ryan Koontz with Needham.

What if you contrast really your core organic business and the acquired Transition Networks business as it relates to the different market verticals, you're seeing strength across the 2? And how is your progress coming along on your cross-selling strategies?

The cross-selling strategy, I'll kind of talk about that one first. I will say that, that's -- we're pleasantly surprised. We kept a good portion of the sales team that came with that with the Transition Networks asset. They're doing a phenomenal job. These guys are picking up the product lines from Lantronix proper we'll say. But -- and there's natural pull-through opportunities. We thought that potential was there, but I don't know that we put a lot of emphasis on it at the beginning of the acquisition.

But I have to say that team is performing quite well. So pretty happy about that. I would still say a little bit more muted from an organic growth rate, though, in terms of the rest of the business. Right now, the Compute business is really growing at just the staggering rate with a couple of key customer programs, and we expect that to continue. So newly acquired business, if I contrast that, I would say 10-plus percent is probably a reasonable expectation. Maybe we'll get to a point where we can confidently drive a steady 15%. But right now, contrasting that with 20-plus percent, even approaching 25% on the newer, the more compute-oriented solutions that we have.

Okay. And how about could I touch base on the different verticals across the 2 businesses and how they're different or similar?

Yes. So in the newly -- and I won't say that there's 2 different boards. We have 2 different sales teams that really can sell the entirety of the portfolio. So we've not separated the business. I think it makes sense to combine the product portfolio. We just have 2 distinct selling motions and there's a portion of account responsibility that went to the acquired sales team as well. So just -- I don't want to send a message that they're 2 different organizations.

But if we look at -- go through the verticals, there's 2 different sales motions certainly that come about. Smart cities is one that's a little bit more industrial. There's a Fed business on that particular sales motion as well. That one does move at a bit of a slower pace. It does have some cyclicality to it with having a stronger September and December quarter and a little bit pull back in the March and June time frame and then march towards that fiscal year-end for government spending.

So that one, we could look at it from a DOT standpoint, if -- within smart cities, that one is definitely slower moving. The sales cycles are a little bit longer. But then once again, it's a bit stickier. So if we move into where we expect some of the extreme growth to come from in the next several quarters, certainly, smart utility would be one of those. If I contrast that with where the growth is coming from today, it's really enterprise and some municipal applications and security vertical.

This concludes our question-and-answer session. I would like to turn the conference back over to Paul Pickle for any closing remarks.

Thank you, Betsy. Thank you for joining us today, and have a great evening.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.