創力 (LTRX) 2021 Q2 法說會逐字稿

Good day and welcome to the Lantronix, Inc. 2021 Q2 results conference call. (Operator Instructions). Please note, this event is being recorded.

I'd now like to turn the conference over to Amber Tinz. Please go ahead.

Good afternoon, everyone, and thank you for joining the Lantronix Second Quarter Fiscal 2021 Conference Call. Joining us on the call today are Paul Pickle, Lantronix's President and Chief Executive Officer; Jeremy Whitaker, Lantronix's Chief Financial Officer; and Jonathan Shipman, Vice President of Strategy. 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 February 18 by dialing (877) 344-7529 in the U.S. or for international callers, (412) 317-0088 and entering passcode 10151719.

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-Q.

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, describe 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 Jeremy Whitaker, Lantronix's Chief Financial Officer.

Thank you, Amber, 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 2021 before I hand it over to Paul for his commentary. Please refer to today's 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 2021, we reported $16.6 million in net revenue, an increase of 25% when compared to $13.2 million for the second quarter of fiscal 2020. Sequentially, net revenue was down 3% compared to the $17.1 million reported in the first quarter of fiscal 2021. We exited the second quarter of fiscal 2021 with record backlog as a result of supply chain constraints driven by component shortages, which affected our ability to ship against current customer demand and meet our quarterly revenue target.

Gross profit as a percentage of net revenue was 42.2% for the second quarter of fiscal 2021 as compared with 51.2% for the second quarter of fiscal 2020 and 48.1% for the first quarter of fiscal 2021. Approximately 500 basis points of the year-on-year decline in gross margin percentage can be attributed to increased manufacturing costs as a result of component shortages and elevated logistics costs. As the component shortages and logistics costs subside, we expect a large portion of these costs to return to normal levels.

Selling, general and administrative expenses for the second quarter of fiscal 2021 remained consistent at $4.9 million. Research and development expenses for the second quarter of fiscal 2021 were $2.4 million compared with $2.3 million for the second quarter of fiscal 2020 and $2.6 million for the first quarter of fiscal 2021.

Non-GAAP operating expenses as a percent of net revenue decreased from 47% in the second quarter of fiscal 2020 to 39% in the second quarter of fiscal 2021, demonstrating our synergy capture and leverage in the operating model. GAAP net loss was $1.5 million or $0.05 per share during the second quarter of fiscal 2021 compared to a GAAP net loss of $1.4 million or $0.06 per share during the second quarter of fiscal 2020. Non-GAAP net income was $861,000 or $0.03 per share during the second quarter of fiscal 2021 compared to a non-GAAP net income of $666,000 or $0.03 per share during the second quarter of fiscal 2020.

Now turning to the balance sheet. We ended the December 2020 quarter with cash and cash equivalents of $7.6 million, which is consistent with the prior quarter. Working capital improved to $19.4 million as of December 31, 2020, as compared with $18.7 million as of June 30, 2020. Net inventories were $14.3 million as of December 31, 2020, compared with $13.8 million as of June 30, 2020.

Now turning to our annual outlook. We are now targeting fiscal 2021 revenue growth of 15% to 25% and non-GAAP EPS growth of 75% to 125%.

I'll now turn the call over to Paul.

Thank you, Jeremy. As you may recall from our Q1 earnings call, we entered Q2 with the hope that COVID-19-driven supply chain issues would be on the decline. However, unprecedented component demand that's in our lead times continued to stretch and component cost rise. In addition, the second wave of the virus has ensured that logistics issues persist in expenses due to an ongoing growth of commercial flights worldwide remained at 3x their normal levels. In all, it remains a challenging environment from an operations standpoint.

Recall that in our June 2020 earnings call, we noted that lead time stretched for the processing components used in many of our products. We also reported that lead times worsened in the September quarter, with our late shipments to customer request date coming in at just over $1 million in revenue. We expected to keep that number flat in the December quarter, but the component shortage has worsened with some suppliers announcing 50-week lead times. All in, the continuing supply chain disruptions impacted gross margins by approximately 500 basis points, as Jeremy referenced in his opening remarks, and pushed over $2 million of revenue out of the quarter.

However, we have been taking the steps necessary to mitigate these challenges by placing component orders as soon as these lead times are announced, and we can currently expect we would be able to achieve growth in the second half, albeit somewhat tempered. Partly due to these constraints, we entered our third fiscal quarter with a customer-requested hardware backlog 35% higher than the prior quarter. Our demand during the quarter was strong, as evidenced by the hardware book-to-bill solidly above 1, driven by our Intelligent Edge computing and remote environment management solutions. As the supply chain disruptions ultimately ease, we expect to turn these bookings strength into organic growth.

With that, let's delve into some more specifics on the quarter. Turning to our product categories. Our IoT products delivered $13.4 million in Q2, down 8% sequentially, although up 20% year-over-year, while WiFi and Ethernet modulated somewhat after strong results in Q1, solid growth from our device service led IoT revenues in Q2. On the design front, we are building on our reputation for high-performance Intelligent Edge Solutions, and we are seeing an influx of design opportunities. Our team is stretched to capacity, and we are expanding to capitalize on that momentum.

While we have shared with you previously some examples of audio and video conferencing designs, we're executing in industrial and automotive design activities as well. For example, during Q2, we signed 2 significant design contracts I'd like to share with you here. First off, we inked a contract with Enel, the world's largest manufacturer and distributor of electricity and gas, to design their next-generation IoT smart grid analytics and control solution with embedded AI.

And in the automotive market, we signed a design contract with [Tufts], a design and manufacturer of next-generation electric vehicles to design their infotainment and automotive control console. All in, we are extremely pleased with the growing pipeline of high-volume opportunities we have for our Intelligent Edge computing solutions.

As we look to Q3 and Q4, we expected -- we continue to expect to ramp up production of our video conferencing compute solutions, and we expect this to drive second half growth for Lantronix with the caveat that delays from key semiconductor suppliers likely back-end load these revenues in our fiscal year.

Turning to remote environment management or REM, revenues totaled $3.1 million, up 29% sequentially and up 69% from a year ago. As we translate recent proof-of-concept activity into design wins and revenue, we expect the growth of remote work and access initiatives buoyed by the inertia of our ConsoleFlow SaaS solution will drive strong growth over the longer term.

With that, I'd like to focus on our acquisition strategy and recent activity. While we are not immune to the effects of the supply chain disruption, thanks to our acquisition strategy, Lantronix is in a much better position than it was just 1 year and 2 acquisitions ago.

Q2 revenues were 25% higher than the year-ago quarter, while non-GAAP OpEx came down by 17 percentage points, thanks to our increasing scale and the efficiencies created by the integration of these assets. These are excellent numbers regardless of what is going on in our supply chain. And of course, we are not done acquiring. We remain focused on acquisition targets, which brings scale, strategic value, and earnings accretion to our model. And we must also acquire the talent and the technologies to deliver the solutions our customers need and to realize the massive, but fragmented opportunity that is IOT. We currently have a strong pipeline of acquisition targets and we expect to report on our next acquisition in the near term.

In sum, despite the disruption, there is still much to celebrate in our second fiscal quarter. Total revenues grew 25% year-over-year, while non-GAAP OpEx came down by 17 percentage points, thanks to our acquisition strategy despite the headwinds of COVID-19 on the supply chain. We're entering the quarter with record backlog and we continue to expect a second half ramp of multiple Intelligent Edge designs. Our design services group is booked to capacity and we are hiring so as to expand our revenue potential. And we have a strong pipeline of acquisition targets on which to execute in the coming quarters.

As the supply chain disruptions caused by COVID-19 dissipate and world economies inevitably recover, Lantronix will become an industry-leading IoT solutions provider with the depth of products necessary to solve our customers' biggest problems and scale to deliver industry-leading profit margins to our shareholders.

That completes our prepared remarks for today. So I will now turn it over to the operator to conduct our Q&A session. Grant?

(Operator Instructions) Our first question today will come from Scott Searle with ROTH Capital.

Guys, I hope you, your families, and your teams are healthy and safe. Paul, just to dig right in on the component availability issue. I think you said $2 million clipped upside in the quarter, it was $1 million-plus last quarter. Is that still largely restricted to processor baseband component availability? Or are you seeing it in other areas? And then as it relates to the guidance, you still have 25% out there as a potential growth target for the fiscal year. So it implies a pretty big snapback in the second half of this year. So what are you seeing in terms of that capacity in component availability loosening up to enable you to get there? And I guess what would have to get there in terms of driving? It sounds like the video conferencing opportunity is ramping. And then you've got some other design wins as well that you just announced. But what has to really kick in to start to move up to those -- that type of 25% growth for the year because it actually implies $2 million a quarter above, I think, where consensus is.

Yes. Understood. So on the first part of your question, so in the early days, it was just processor. So we talked about Qualcomm processors. We talked about the 865. Largely, it was related to capacity constraints on the low lithography lines at TSMC. This past quarter, we've seen it expand. When we ship an eval board or a SOM, it's not just a processor, it's memory, it's PMIx. And we're starting to see those constraints all across multiple processing nodes. And even we had oscillator and crystal shortages this past quarter.

So definitely has gotten worse. Qualcomm was at, in our previous calls, we talked about going to 25 weeks, then 30 weeks. We're 34 plus with them. And then Broadcom just announced 50 weeks. And so it's just gotten worse and it seems to be a bit across the board. I don't know that we've seen it spread quite into passage yet, but there's some talk about that.

In terms of how we get that second half growth. So the fact that we were on this early on, and we had the benefit of some forecasts coming out of our customers. So back in June, we were actually -- that June quarter of 2020, we were placing purchase orders and putting things in place to make sure that we got in the queue, and we're able to deliver. So we do have some long pole in the tent components, especially as it relates to memory. And so that's tempering it a little bit. We can get the processors, but we can't get necessarily some of the other components that we need to deliver on the total solutions. But we have enough product in WIP to still be able to deliver a decent number in the second half.

And so that range really is to indicative of if we're -- I think we safely see a minimum growth trajectory for the second half, as guided. And then it's -- I think we can see some upside as we get some things and other product areas that come in. It won't necessarily depend on shipping out compute modules, for instance, but it would be dependent on delivering on some of the other products where we don't have the extreme shortage.

But it sounds like you're comfortable with sequential increases into the March and the June quarter. And then as component availability loosens up, there could be a little bit more of a springboard demand. Demand is not the issue. It's a supply issue at this point in time.

It's definitely a supply issue, but I don't know -- I know we have deliveries coming in the back half -- the back end of the -- our second half, so our Q4 time frame. We've got firm commitments in that time frame. So I would caution you to think in terms of just the step function Q3 and Q4. But definitely, as we look towards that second half, hopefully we can take a little bit of it out of that $2 million of delinquencies or late CRD, as we'd like to call it, and then deliver on the increased growth of the backlog that we have in the books for the Q4 time frame.

Got you. And lastly, if I could, since you got Jonathan on the phone, maybe an update in terms of platform development, how things are progressing on that front in terms of recurring revenue opportunities. And Paul, to follow-up on your commentary around M&A. If you could talk a little bit about the pipeline, the level of activity and kind of valuation expectations. You guys have been very, very adept at doing good deals. Are the valuation parameters changing now, making things more difficult? Are you pretty comfortable that you're going to be able to get some things on? It sounds like you've got something near term in the hopper? Thanks, and I'll get back in the queue.

Jon, I'll let you take the SaaS question.

Sure. Thank you. Yes, it's still -- as false as early innings or as I think that the snowball rolling and gathering snow, we added an additional 6 new customers and expanded our proof-of-concept pipeline from 20 to 28 opportunities worldwide. So we continue to expand there. We also are looking at continue adding resources to our development team on the SaaS side to not only add additional value and functionality today, but to also work with customers to meet specific customer expectations around customer operational efficiency and hearing back. An example of this is zero touch provisioning, while we have a system today, and it's okay, it's not great. And listening to our customers, it's important that we add this value for all customers, but it's very critical for customers over 100 devices and beyond.

And so we're working on multiple road maps. And every new product we have coming out is going to be tied into our recurring revenue and SaaS model to make sure we're adding full solution value to our customers and really understanding what they're trying to solve. And then we're tackling that from a SaaS software perspective, value-added services perspective, like our cellular connectivity we just launched. So we really become a one-stop shop for management, services, engineering services and hardware. And we're continuing to see increased interest from opportunity sizes over 500,000 in total opportunity size when we look at the complete package with the customer.

Yes. And I'll just tag onto that. It's a very different landscape that we have today with current SaaS product. It still requires a couple of feature sets that we will be delivering on the next 6 months. But right now customers are liking what they see and we're getting them to sign up. So on the M&A front, in terms of valuations, the environment has definitely changed a little bit. There's a bit of a frothy money-raising environment, I think, to put it lightly. And so companies that were possibly looking at acquisitions have a judgment call to make whether or not they'd be better off raising funds and going it alone or being part of a larger entity.

And I will say that that -- while that is another option for them on the table, I don't know that that changes so much the landscape it's making. Maybe some of the valuation expectations push up a little bit and we have a tendency to look for value for our shareholders. So I don't expect us to feel like we have to complete an acquisition. We're going to make sure that we find something that fits with who we are and delivers that accretion to the bottom line and it's really strategically important for our future, while we continue to work on our organic plans insight.

In terms of immediacy, we're always actively working a pipeline with multiple engagements. I think at this point, we're certainly at a point where we can take on an acquisition and integrate it. Our last operational synergies were captured here in this last quarter, related to Intrinsyc. And so the team is really ready to take on the challenge of doing an integration and executing on it quite quickly. So we're certainly ready to get one done and we're working the pipeline and ensure that we do.

Our next question will come from Harsh Kumar with Piper Sandler.

So Paul, I heard you on the call, a bunch of seasonal guidance. Can I a quick question on that? Is your second half guidance in any way dependent upon a pending deal or is this something that you guys can accomplish? Do you feel like based on the backlog and the supply time swinging a little bit away? And then I've got a follow up on the M&A side, better conditions.

Yes. Definitely not dependent on a deal. We wouldn't forecast the revenue, anticipating getting something done unless we had something definitive.

Understood. And then for my follow-up. In terms of your pipeline, it sounds like you're always pretty active. So in terms of competency, would you take on a new competency with an IoT with the pipeline that you have? Or is it something that will be additive just to the competency that you currently have already, just expand the functionality?

That's a great question. We would definitely take on a new competency. We still kind of fall back to that 5 layer spec that we call IoT. And we're looking for always to expand our expertise in those middle 3 layers where we believe that we have to have critical mass in order to really win. So anything along the comprehend, connect, and compute line, we'll definitely be looking at. We do have some sensor products in the collect layer function. But we don't believe that that's necessarily someplace that we have to build a competency. If we found something that was attractive from a financial standpoint, we'd certainly take a look at it. But great question. I definitely think that we have enough critical mass to service our customers today. What we don't have, we can outsource easily, but we definitely are not afraid to pick up something new.

Our next question will come from Jaeson Schmidt with Lake Street.

Paul, just curious if you could comment on any particular end market strength or weaknesses you're seeing within the IoT segment.

So I don't know that we've seen a ton of weakness. All right. So the one area that we do play into is retail, small business office stacks. Those obviously are -- had been a weak area. If we look at EMEA, I think it's the second wave. I don't know that it's so much an end market vertical so much as a geographic problem, but definitely, the telematics devices, routers, gateways, those had a little bit of a setback in EMEA with the second wave. Just the whole scare of the U.K. really kind of shut everything down. And so I think we -- I'd hesitate to call it an end market with the exception of small business office and retail -- small business office stacks. Those definitely are suffering, continued to suffer. I would expect would continue to suffer going forward. But other than that, nothing stands out offhand.

Okay. That's helpful. And then you mentioned the exiting December with strong backlog, acknowledging sort of the supply constraints you've laid out. Just curious if you could comment on how order patterns have been so far this March quarter.

Yes. So ordering patterns are still -- I think what we have going on with our customers, they're still a little bit late in the quarter. So customers are seeing the long lead times, but at the same time they're not placing orders. And this is a general comment because in some areas we definitely have secured backlog. But as a general comment for our turns business, we are seeing late ordering being a significant component. We're not able to turn the product. If I can give you an anecdote, we exited the quarter with just over $2 million of late shipments to customer request dates. Those typically get fulfilled -- almost all fulfilled in the following month or 1.5 months. And then we ended up having late ordering, just can't respond fast enough at the end of the quarter with the turns business to turn it. So the good news is, is we're able to fulfill it. We're not losing those sockets. No revenue is lost, it's just delayed. And it gets pushed to the right by a couple of months. If that continues to build and obviously it produces a headwind overall and then there's a catch-up period that happens where it does snapback as that -- as logistics and manufacturing become a little bit easier.

Okay. That makes sense. And then just the last one from me. Jeremy, how should we think about gross margin? Is sort of this mid 40% range for the remainder of this fiscal year a good ballpark?

Yes, I think that's a decent target. The one caveat would be this quarter and it started a little bit in the quarter before is that we are spending more as it relates to the component shortages where we happened to go out and do spot buys and secure materials sometimes at higher prices, which is creating higher manufacturing costs and some variances. And so when we can -- when I look at margins, the quarter we just completed versus a year ago, we had probably 500 basis point difference in margin just related to increased freight and increased manufacturing costs related to expedites and in component shortages. So until that, I think longer term, I would expect as things normalize that we would be able to recover most of that and get back to the mid-40s, even a little bit higher than that. But in the short term, there's going to be a little bit of pressure on that, I think, that continues. It's hard to predict. I think 2 quarters from now, we thought we'd be through some of this stuff and it's actually -- it seems to have gotten worse now with component shortages actually getting worse. So it's hard to predict, but longer term I definitely think we'll get back to those mid to upper 40s as we get more to a normal state.

Our next question will come from Rich Valera with Needham.

As it relates to the record backlog, is that more a function of your inability to ship? Or have you actually seen bookings picking up from the September quarter to the December quarter as they're kind of building bookings momentum? Or are you just kind of seeing relatively steady demand and you just -- your inability to ship is creating a rising backlog?

It's a little bit of both. So obviously when you can't deliver the customer request date, that builds into a starting backlog. And the fact that it went from $1 million to just over $2 million, it is definitely partially responsible for the increased backlog. Having said that, we are having strong bookings, don't see double bookings in there. But part of it is related to -- if you look at that compute side of the business, it definitely has -- it sets up for nice backlog. So we've gotten some nice bookings that have happened for that particular product. As you look at the turns business, the turns business is really responsible for the late to CRD and what has caused that pushup. So it's a little bit of both.

Got it. And then is the remote management business being affected by the component shortages?

Not as -- not to date. If you look at it, we don't -- some of our boxes, the pretty high resale. And so not a ton of units and we've definitely been able to manage the inventory with that product. So it has not affected us for remote environment management.

And how's the pipeline there? How should we be thinking about that business? I know it's always a little bit chunky, but how are you thinking about that business for the balance of the year?

It's definitely chunky, but we're expecting to see some growth in it. What we've been building into, all of the hardware is ConsoleFlow capability and with the new ConsoleFlow products that -- the code drops that are coming out, it has a tendency to take even the boxes that have been deployed and kind of breathe new features into them that allow -- it gives us a nice subscription opportunity, revenue opportunity. And then we have some new products that are -- have some features that -- in them that customers have been asking for, for a while. And so it'll be a little bit of both, but we see a nice little pipeline going for us.

This being our last question, this will conclude our question-and-answer session. I'd like to turn the conference back over to Paul Pickle for any closing remarks.

Thank you, Grant. I appreciate you guys joining us today. Have a great day.

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