Good day, and welcome to Lantronix Q1 2022 Results Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, please press star, then one. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Rob Adams. Please go ahead.
Thank you, and good afternoon, and thank you to all of those joining us for our Q1 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 at 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 reporting 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's Chief Financial Officer.
Thank you, Rob, and welcome to everyone joining us for this afternoon's call. I'm gonna 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 were $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 for 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 thousand 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 acquisition. Non-GAAP net income was $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 half a 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 acquisition. 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%-75% and non-GAAP EPS growth of 95%-135%. I'll now turn the call over to Paul.
Thank 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 solution 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 critical acclaim and continuing design-in activity for our ConsoleFlow SaaS platform. 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 noted these disruptions over a year ago, and given the growing forecast 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 leave 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 detail 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, Neat, which went into production last year. The forecast and subsequent orders have tripled last quarter, which requests to pull scheduled shipments in 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 this 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 a Lantronix-developed AI-driven SOM 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 acquisition. Electric vehicle is a new vertical for us where we are making great strides. You may recall we've spoken in the past about our involvement with Arrival, 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 one 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. Uptake 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 compute 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-$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.
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 a 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. I'll now turn it over to Betsy to conduct our Q&A session.
Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Scott Searle with Roth Capital. Please go ahead.
Hey, good afternoon. Thanks for taking my questions and nice job on the quarter, guys.
Thank you, Scott.
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.
That's a good question. We did see an increase and that delinquencies to CRD , and it's basically customers requesting it in the quarter. About an additional $1 million, $6 million in total revenue that customers would like us to deliver that we just can't quite, you know, deliver in the timeframe that they want due to lead times. If we look at particular components, it's a little bit across the board. You know, some of the less impactful, but, you know, difficult to find nonetheless. We do see some oscillator shortages. In general, most of the semiconductor chipsets, that would be Wi-Fi network controllers, Wi-Fi controllers, certainly Qualcomm processors are at some significant lead times.
If I go 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're 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're doing a good job keeping up with customer demands for us, and it's mostly because of that tight partnership.
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 a direction of software as well as recurring services. You've 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%-10% goal of software and recurring services as we look out three years or so?
Well, I appreciate the fact that you lowered the bar on us a little bit, but it's 10% of revenues in 3-5 years is what we're looking for. I will say, we're on track for that. We're tracking internally on a SaaS recurring platform and microservices 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 much better uptake than we certainly have, you know, last year. So, making great progress on that front.
If I could follow up on the energy supply deal that you talked about as your largest win ever. I think you said $10 million-$20 million in the fiscal 2023 timeframe. Does that look like it's gonna be a recurring win where you're gonna see those kind of levels of revenue going forward once you start to get that into production?
We certainly hope so. You know, 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're doing the AI's application software for the platform as well, and then handling the build for the completed hardware. You know, that opportunity is quite large and you can't quite think in terms of their total substation attach rate. You know, they have over a million substations out there, and we're just really participating in the first 35,000 units today. You know, what that solution looks like in the future, we expect to still capture a considerable dollar amount. We just happen to be handling the whole thing at the get-go.
I would expect in the future we will pick up bigger programs like this. 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 we do a good job through the prototyping phase, and this is evidence of the first one that we've captured. We do have two other programs in the wings that would be similar.
Lastly, if I could, and then I'll get back in the queue. You've raised the lower end of the guidance for this year. It basically implies $110 million-$125 million. 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 the lower end of the range. It sounds like component availability, and you could be above that. 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 gonna fuel 2023 and beyond. Any thoughts you could kind of elaborate on that front would be helpful. Thanks.
Yeah. We're in a particularly strong trend. You know, the base business that we've historically had is really 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, you know, we got this award for energy smart grid utilities, and this is for a December quarter build of next year. We're starting to have to place orders for components which our customers are on the hook for.
We're having to place those today, can't really realize that revenue until that timeframe. We could be growing much, much faster, but overall, it's still, you know, we're probably north of 20%.
Great. Thanks so much. Nice quarter, guys.
Thank you.
The next question comes from Jaeson Schmidt, excuse me, from Lake Street Capital. Please go ahead.
Hey, guys. Thanks for taking my questions. Just wanna start with the backlog. Would you mind sharing what that backlog number is entering the December quarter?
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. To put it in perspective, you know, we've got $39 million on Lantronix proper, and it's, you know, if you look at historical run rates, we're about $1 million going into the quarter.
Okay, that's helpful. Have you seen any cancellations in the pipeline, or are you at all worried about any potential decommits?
Not at the moment. You know, 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 procuring product, our customers are on the hook for that product. You know, you could effectively see them as NCNR. We have not seen the double ordering. Just to do a contrast to last quarter, if we looked at starting backlog or total backlog last quarter, what we started with was about $28 million. It's grown substantially this quarter, but most of that is new programs that have kicked in ramps. A year ago, it would have been $8 million.
If you kind of went back a year and a half, that $1 million that I talked about. It's new programs, all organic, and our customers are on the hook for the material that we acquire, and so, you know, we feel pretty good about the order status there.
Okay. No, that's good to hear. Just the last one from me, and I'll jump back into 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 2022?
Yeah. We're still targeting, you know, margins in the mid-40s%. Mid- to upper 40s% is, I think, where, you know, we think we can, you know, get to over time as a lot of the synergies come into play from the recent acquisition. But I think we're pretty comfortable with that mid-40s% range.
Okay. Thanks a lot, guys.
Thank you.
The next question comes from Christian Schwab with Craig-Hallum. Please go ahead.
Hey, congratulations on a great quarter and outlook. On some of the big design wins, you know, we did highlight one of them that, you know, we said, you know, can be $10 million-$20 million, you know, kind of starting at the very end of 2022 and going into 2023. We highlighted a couple other meaningful ones. Are you in a position at all to give us a range of potential outcomes of those design wins in hand yet, or not quite yet?
Yeah. The first one that I highlighted in audio-video conferencing, if I look at the totality of compute hardware going into video conferencing systems this year, it'll 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. Substantial increase in terms of that particular program. On the security camera side, this one on the order of 5-6 this year. This was fairly small, a couple of million dollars last year. Both of those are already in production. We talked about one that's 10-20 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. We do have programs in production today that we are seeing some meaningful, $10+ million revenue run rates on.
Great. On the smart grid energy one, the $10 million-$20 million one, you said there's a couple other programs. I was confused. 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 a non-design win stage to a design win to revenue?
Not necessarily in smart grid. We do have some follow-on programs with this particular customer, but I'm not trying to double count those. I was really referring to other compute hardware opportunities in other verticals.
Okay. In other verticals. Okay. We've got three possible, you know, customer situations that we've highlighted here, and we're working on two other programs of similar to same size revenue opportunities or could they be even greater?
Could be similar. I'll say similar size at this point, so I don't put the cart ahead of the horse.
Great.
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, you know, $1+ million worth of Lantronix product. There's a lot of strength in the funnel for us, the design-in funnel across the board, across all product lines.
Then on the ASP increases that you've done, is this across the board ? You know, 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 pushback or, you know, does everybody firmly understand the world that we're in today? When did you let them know prices were gonna increase, and when are they increasing?
The notices, the letters went out in November for standard products. 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 targets. 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 at margin. It will be something that's already negotiated and something that we'll end up passing along. I think you know, the point that we wanted to stress is that, you know, the pricing pressure we're seeing from components are not gonna drive our gross margins down.
We'll be able to maintain those and still continue to grow at the rate that we currently are.
Fabulous. Then it. You know, I know we're in a component constrained environment that, like all things, will eventually end. It seems like given, you know, 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. We've already kind of talked about where, you know, that we're still in a component constrained environment, but we're gonna grow north of 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, certainly looks to be 15% plus, but, you know.
Is it just too early to kind of categorize what that number could be over a longer timeframe other than you know the next 12-24 months?
Provided that there's not a stop 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. I feel I expect to have growth over you know significant growth over the next 1.5-2 years. That's a little bit further out than we would normally want to project, but you know given where this environment's 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 it to moderate a little bit. You know, are we gonna continue to be able to keep up 20%+?
We'd have to continue to fill the design funnel and knock those down. That's certainly possible. 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%+ environment. Most of the new growth right now is happening in new designs, and so I look at that as organic pickup and some market share gains.
Great. 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, you know, a record quarter. You know, not quite 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-$125 million in revenue, and we were just starting the December quarter and going into, you know, the next calendar year, how much backlog would you be sitting on today?
It'd be typically one month of backlog. We're talking total backlog, not starting backlog. It typically would be one month total backlog. We were a very heavy turns business, and the makeup of the business has changed so that that is no longer the case. Obviously, lead times have added to visibility, but the vast majority of it has come from a shift in the type of business that we target and the type of business that we book.
Great. I don't have any other questions. Thank you, guys.
Thank you.
The next question comes from Ryan Koontz with Needham & Company. Please go ahead.
Thanks for the question. A little more color on the integration, if you could. It sounds like you're pretty much there on headcount and, you know, restructuring. You know, what still lies ahead of you in terms of IT and manufacturing? And then, you know, so what still remains there? Then secondly, as you look at some of the revenue synergies that you brought up and when you originally did the deal, do you have an updated outlook there on, you know, those opportunities for cross-selling and the like? Thanks.
Yeah, great question, Ryan. Thank you for that. I'd say we're, you know, we talked $7 million over 18 months, and we're definitely ahead of that projection. I'd say we've taken two-thirds of the actions necessary, but right now probably capture or 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 and then j ust migration of the building, and we've got that identified and are moving forward on that.
In terms of longer term capture, we've got 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 COGS synergies. At that point, I think we'll be in pretty good shape. But right now, everything's going really well. 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 product and the cross-selling opportunity is a bit higher than what we expected. We've also been able to to drive their aggressiveness a little bit more in terms of capture, and so they're doing a little bit better than we would have originally projected in the model.
Pretty happy with where this is going so far.
That's fantastic to hear. Thanks. Quick follow-up. As you look at your different verticals, which verticals would you say you have the best kind of near-term opportunities to sell in your SaaS solutions?
That's a great question. Right now, the vast majority of the traction has been in data center, financial, telecom opportunities. That's because we have a lot of deployed boxes that in the past did not have, you know, device management capability. Now that we've added that, upgraded the firmware, it's greenfield opportunity to go back into the existing install base and try to migrate those platforms over. If we kinda 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.
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.
Got it. Substantial portion of it is selling into your installed base as well, not just greenfield wins.
Near term, definitely, selling into the installed base is kind of the low-hanging fruit, but then, you know, a lot of pickup in some of the distributed IoT applications.
Okay. Terrific. That's all the questions I had. Thanks for that.
Thank you.
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 all for joining us today, and have a fantastic evening.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.