Earnings Call: Q4 2021

Aug 26, 2021

Good day, and welcome to the Lantron and 2021 Fourth Quarter Results Conference Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Mr. Rob Adams. Please go ahead, sir. Thanks, Chuck. Good afternoon, and thank you for joining the Q4 fiscal 2021 conference call. Joining us on the call today are Paul Pickle, our President and Chief Executive Officer and Jeremy Whitaker, our 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 8 p. M. Eastern, 5 p. M. Pacific Time tonight through September 2 by dialing 877-344 7,529 in the United States or for international callers, 412-317-0088 and entering the passcode 101,590,500. During this call, management may make forward looking statements, which involve Thank you, Mr. Angus, which was furnished to the SEC today and is available on our website and in the company's SEC filings, such as its 10 ks or its 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 With that, I'll 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 Q4 and fiscal year ended 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. As a reminder, our fiscal 2021 results do not include any revenue or operating costs for the acquisition of Transition Networks and Netto Edge, which comprises the Electronics and Software Business segment of Communication Systems Inc, which closed on August 2, 2021. For the Q4 of fiscal 2021, We reported record revenue of $20,600,000 an increase of 19% when compared to $17,400,000 for the Q4 of fiscal 2020. Sequentially, net revenue was up 21% compared to 17,100,000 recorded in the Q3 of fiscal 2021. We exited the Q4 of fiscal 2021 with record backlog from a combination of increased customer demand and supply chain constraints. Gross profit as a percentage of net revenue improved to 48.8% for the Q4 of fiscal 2021 as compared with 37.7 percent for the Q4 of fiscal 2020 45.1% for the Q3 of fiscal 2021. The sequential improvement can be attributed to improved product mix, driven in part by software license revenue. That said, we continue to face headwinds and supply chain costs affecting gross margin. This cost us over $2,000,000 in fiscal 2021. And while we don't see a material change in this situation at the moment, We expect it to improve as the environment changes as well as through anticipated price increase for Lantronix product offerings. Selling, general and administrative expenses for the Q4 of fiscal 2021 were $6,100,000 compared with $4,700,000 for the Q4 of fiscal 2020 $5,000,000 for the Q3 of fiscal 2021. Research and development expenses for the Q4 of fiscal 2021 were $3,600,000 compared with $2,000,000 for the Q4 of fiscal 2020 and $2,500,000 for the Q3 of fiscal 2021. The sequential increase in SG and A and R and D was impacted by variable compensation costs accrued in the 4th quarter. GAAP net loss was $1,100,000 or $0.04 per share during the Q4 of fiscal 2021 compared to a GAAP net loss of $1,700,000 or $0.06 per share during the Q4 of fiscal 2020. Non GAAP net income was $1,700,000 or $0.06 per share during the Q4 of fiscal 2021 compared to non GAAP net income of $1,200,000 or $0.04 per share during the Q4 of fiscal 2020. Now turning to the full year results. Net revenue for fiscal 2021 was $71,500,000 An all time record and an increase of 19% when compared to $59,900,000 in fiscal 2020. Gross profit as a percentage of net revenue for fiscal 2021 was 46.2% as compared with 44.9% for 2020. The improvement in gross margin was primarily due to product mix. GAAP operating expenses For 2021 were $36,400,000 compared with $37,400,000 for fiscal 2020. As a percentage of revenue, Non GAAP operating expenses for fiscal 2021 improved to 39% of revenue compared to fiscal 2020 at 42 percent of revenue. For fiscal 2021, we reported a GAAP net loss of 4,000,000 or $0.14 per share compared to a GAAP net loss of $10,700,000 or $0.42 per share for fiscal 2020. Non GAAP net income increased by 132 percent to $5,800,000 or $0.19 per share for fiscal 2021 as compared to $2,500,000 or $0.09 per share in fiscal 2020. Cash flow from operations totaled $1,700,000 in Q4, up 14% sequentially from $1,500,000 in Q3 and up 86% from $914,000 in the year ago quarter. Now turning to the balance sheet. We ended the June 2021 quarter with cash and cash equivalents of $9,700,000 an increase of $2,000,000 from the prior fiscal year. Working capital improved to $20,300,000 as of June 30, 2021, as compared with 18,700,000 as of June 30, 2020. Net inventories were $15,100,000 as of June 30, 2021, compared with $13,800,000 as of June 30, 2020. Now turning to our annual outlook, which includes approximately 11 months of contribution from our recent acquisitions of Transition Networks and Net2Edge. For fiscal year 2022, we expect revenue growth of 45% to 75% and non GAAP EPS growth of 85% to 135%. I'll now turn the call over to Paul. Thank you, Jeremy. Q4 was a watershed quarter for us here at Lantronix, and I am extremely pleased to report these results as well as the significant momentum we carry into our next fiscal year. In the Q4, we delivered record revenues of $20,600,000 For the full year 2021 revenues were also a record at $71,500,000 We saw strong results from our software offerings, continued booking strength, and we are entering fiscal 2022 with a new record backlog. Given our results and the robust outlook Jeremy just detailed for you, We have much to look forward to in this next fiscal year. As you have probably heard from our peers or experienced in some manner yourself, The supply chain disruptions caused by the pandemic are ongoing. In the 4th quarter, component shortages and delays caused Just to push out approximately $5,000,000 of revenue into future quarters versus $4,000,000 in Q3 $2,000,000 in Q2. However, you may recall that when Lantronix first noted supply disruptions over a year ago, we were one of the first companies to talk about the issue. We moved quickly to Secure's pie of key components. And while we clearly are not immune to the problem, we are in a position to continue growing despite Turning to our product categories. Our IoT products delivered $17,500,000 in Q4, up 28% sequentially and 20% year over year. Ethernet modules continued to pace the group with strong double digit revenue growth year over year and sequentially. WiFi posted a solid comeback quarter as we started to catch up with demand, mitigated somewhat by IoT Gateway and Telematics revenue, which moderated after a very strong Q3. In our Edge compute solutions, we continue to set The table for future revenue growth. The opportunity funnel is robust and we continue to expand internal resources to meet demand. As customer revenues move from development kits to design services and ultimately to volume product shipments, we are circling Several opportunities, each of which we anticipate could result in multimillion dollar volume shipments. All in, for the fiscal year 2021, IoT revenues totaled $59,200,000 up 19% from 2020, With a record backlog in place and accelerating design momentum at our customers, we look forward to another strong year in fiscal 2022. Turning to remote environment management or REM, revenues in Q4 totaled $3,000,000 down 8% sequentially, but up 14% from a year ago. For the fiscal year 2021, REM revenues totaled $11,800,000 up 28% from 2020. Demand Our out of band products drove this growth, augmented by the continuing customer adoption of our SaaS solutions. While this business Can be volatile quarter to quarter. The demand for remote management solutions is seeing an enduring uptick post COVID. Our visibility is increasing and we expect Q4 results were bolstered by strong software licensing revenues. We continue to make progress toward our SaaS and other services goals and exceeded our internal expectations for recurring revenue in 2021. While we are still in early innings, our pipeline is growing, adoption is accelerating and we have Every conviction that we are well on the way for recurring revenue to reach 10% of total revenues within 3 to 5 years. Finally, while it didn't close in Q4, we finalized the carve out of Transition Networks and Net to Edge from CSI earlier this month, and we Expect to report almost 2 months of revenue in our 1st fiscal quarter ending September. This is an exciting acquisition for us for a number of reasons. The acquired business revenues totaled $34,500,000 in calendar year 2020, about half our current size. And as Jeremy just guided, together we our go to market manufacturing flows are similar. The acquired product lines bring Lantronix a highly complementary product offering, a number of sticky federal and municipal Customers and exposure to several growing smart city IoT applications. We are already Hard at work meeting our new customers and we see several revenue synergy opportunities which we expect to capture. For example, Transition Networks sells its powered Ethernet switches to a number of government departments of transportation for deployment of security camera applications. The data captured is then uploaded to the cloud via cellular router that is currently supplied by one of our competitors. We have the very same capability in house and with the new product offerings, we can deliver a higher performance solution to our customers at a compelling price point. This is just one example of the type of revenue synergies we see and expect to deliver over time, thus accelerating our growth rate. Finally, due to the complementary nature of the products, we are confident in our ability to deliver over $7,000,000 of operating and manufacturing Just to put the power of this accretion into perspective, in fiscal 2020 At the midpoint of the earnings guidance Jeremy laid out at the beginning of the call, we're expecting to more than double non GAAP EPS versus fiscal 2021. In summary, we are pleased to deliver these results and provide guidance to our shareholders. Our team has executed well in a very challenging environment. We exited our fiscal year 2021 growing organically at a double digit rate and expect that trend to continue through fiscal 2022. We are acquiring strategic assets, integrating them and realizing synergies so as to drive improving cash flows. We look forward to reporting our progress to shareholders in the coming months as we continue to execute on our strategy. That completes the prepared remarks for today. So I will now turn it over to Chuck to conduct our Q and A session. Thank you. We will now begin the question and answer session. And the first question will come from Scott Searle with ROTH Capital. Please go ahead. Good afternoon. Thanks for taking my questions. Nice quarter guys. Very nice to see the top line growth as well as the gross margins coming through with some of the software contribution. Hey, just want to clarify a couple of things. A little bit of the audio was choppy. But Paul, I want to make sure I heard correctly. Organically, you're And Jeremy, on the gross margins and OpEx As we're looking forward into the September quarter, OpEx was up, looks like some variable comp catch ups in the Q4 there. How should we be expecting OpEx to Trend sequentially, I know you got a lot of moving parts right now with 2 months of the quarter for transition networks being on board, offset by some of the cost reduction plans you've got ongoing. And then also the impact of the transition networks gross margins as well as the software impact. So how should we think about gross margins and OpEx as we go into September quarter? All right. I'll take the Growth rate piece first. Definitely had a strong organic growth rate this past quarter. We've been talking about those backlogs building, having some of those long lead time components on order. We got those in house. We were able to deliver On those shipments on that backlog, backlog continues to grow. I think last quarter I said we were well over 4 times our historical Averages and at this point we're well over 5 times. Part of that is the new programs that customers have been placing production orders for. These are new programs, that's all organic business and so we've got lots of visibility on that. Overall nice macro trend on the business as a whole and they're seeing quite a bit of strength, not to mention a number of new POCs for the remote environment management products as well. And I'll comment real quick on the OpEx trend and then I'll turn it over to Jeremy. I think the important thing to look at what we're driving as a percentage of revenue. So if you look at the last even 3 years, 2.5 years, we've been driving that OpEx as a percentage of revenue down. And on a quarter on quarter basis, it's always going to be up and down depending on the R and D projects that we have that come on board And we have a few of the certifications that we needed to drive. But overall, you should see us continue to drive OpEx as a percentage of revenue down. Jeremy, you want to comment further? Yes. As it relates to margins, we came off a really strong quarter, and that was helped by Some pretty meaningful contribution from software licensing revenue that is expected in the future, but it's going to be kind of lumpy. And so I would expect margins to come down gross margins to come down a couple of 100 basis points Just as we get back to our kind of normal product mix, and then we're targeting EBITDA, our non GAAP income in the low double digits. And so with that, as Paul mentioned, I would expect that While OpEx will go up because we are adding another business, as a percentage of total revenue, I would expect that To decline, in particular as we roll out the different synergies that we have planned. Got you. Helpful. And Paul, it seems like all the product categories fared pretty well in the quarter except for remote management. Could you provide a little bit more color there? Is there anything going on in Are there some component availability issues or something going on from an end market perspective? Or is this just kind of it's a little bit of a lumpy business and expect that Yes. So REM is definitely a lumpy business. This is kind of it's Tied to more customer CapEx cycles. So we end up getting large purchase orders even though we have visibility that those things are going to happen and we kind of watch The opportunity funnel and the design ends, we really track POCs to design ends and then look for when those purchase orders are going to get placed. So They do kind of happen in a lumpy fashion. A quarter doesn't make a trend. It was coming off of a A pretty decent quarter the prior quarter, so Q3 was pretty strong for REM. I would expect going forward, if you just even looked at a 2 quarter average, you're going to see continued growth going forward. But this business is best measured on a quarterly trend basis. Got you. And lastly, if I could, just dive in into the guidance for fiscal 2022. Thanks for providing the longer term perspective. But If I kind of back out some assumptions for Transition Networks, it's a pretty wide margin to begin with. I think it's $20,000,000 $21,000,000 in terms of the variance over the course of the year. And the low end of that is kind of a high single digit, low double digit kind of organic growth rate to up to 30%. So it's a wide range there. Certainly, it sounds like component availability plays a part in that, but I'm wondering if you could address the big swing factors in terms of that range as we look out over the course of fiscal 2022? Thanks. Yes, it's a bit of a broader range. You're 100% correct. I think it's more indicative of the times that we live in. We do expect as Delta variant, not to bring up COVID again, but this does have Tendency to cause different localities to shut down and maybe things pause for Again, I think we've built in kind of the new norm Caution into the guidance, but aside from that, we feel really quite strongly that we'll be If we look at the Lantronix proper business that we just exited Q4, that business really is in a great position to grow. We've been turning it around for the last 2 years, Working on new product offerings and working on our blocking and tackling a little bit better, and I think we're starting to see that results indicative of what happened in Q4. Definitely expect that to continue. I would where things are probably not As certain from a growth standpoint is some of the newly acquired revenue, obviously, we just closed this August 2nd. If you look at their the prior calendar year 34.5 in terms of they're pretty linear in the way that they ship. And there is a growth component of the business, but as we were kind of analyzing the December close In January, we were asking them if they were seeing component shortages. Of course, we were definitely seeing them at that time. We're already placing the orders necessary for the future quarter revenue, but they weren't seeing component shortages at that time. I think that was Perhaps a little bit of a hindsight because they were definitely seeing it in the March quarter close. And then as a result, backlog has gone up. So I do think that we've got a little bit of catch up to do operationally to get Things in shape there and as we start to leverage much larger purchase orders with our suppliers, I think that we'll be able to We're optimistic about being able to pull that in. I will say that their demand is quite strong at the moment. The demand They're stronger than what they can deliver, so that's a positive. But we're just being a little bit cautious on their ability to deliver it. So I don't really judge That revenue at double digits quite yet, but certainly the business that we've been working on for the past 2 years is definitely growing at a double digit rate. Great. Thank you. The next question will come from Ryan Kountze with Needham and Company. Please go ahead. Thanks for the question. I wonder if it gives any color on your market verticals in terms of where you saw Strength in Q4 and maybe where COVID is still a headwind and how you think about that over the balance of those verticals over the balance of the calendar year here. Thank you, Ryan. Yes, great question. Our market verticals today really is largely industrial. We do have an enterprise component as well. Industrial Municipalities, so we'd normally put that in an industrial bucket. We will Later provide some color on it in terms of smart cities opportunities. And then that medical piece was really strong during 2020 as The industry is really playing catch up due to COVID. There was a rush of purchases that moderated a bit during the back half 2020, but what we're seeing is new programs coming on where just about every patient monitoring the device needs to have some Type of connectivity and device management. So we're seeing some nice strength in medical in particular. Industrial is definitely doing it's pretty strong across the board. As I look The vast majority of our base business is really rooted in that industrial vertical and we've seen a nice uplift. I would characterize it as macroeconomic We're seeing strength in Europe as a result of that as well as North America, even seeing some new opportunities in APAC. And then those new kind of still industrial, but you could kind of classify them as smart city applications. But The energy sector, energy delivery sector, security sector, these are more municipal applications. We've seen some new program launches And new orders placed from the likes of FOX Safety, for instance, these are Security camera applications, there's just been some real strength there. And then lastly, that in price component that we talked about last year In terms of video conferencing applications, that's going rather well with our customers' transition to supporting Microsoft Teams as well. That's opened up a whole new SAM for them and given us a lot more volume opportunities there as well. So a little bit of strength across the board. I don't know that I see a particular sector tampered by COVID right now, but not from an ordering standpoint, but just in general strength across the board. Sure. Okay. I mean, in terms of headwinds, I was thinking maybe with the auto sector Seeing some challenges on supply chain, you're not seeing an impact on you from the industrial side there? Well, for us, automotive is fairly new. We do have some programs under automotive, but it's mostly application development and new Platform launches, our customer, TOG, in Germany I'm sorry, in Turkey rather. We do have Arrival to an electric cargo van Based in the U. K. As well, both of those are ramping up production and so things are going quite nicely for us. But once again, if they wanted us to deliver 10,000 units tomorrow, we'd have a little bit of a problem doing that just because the lead times have sort of got that product. Yes. Helpful. Got that. Thanks. And on supply chain, any real shifts in terms of your concerns, your long poles? Is it the Similar characters that we've seen for the last few quarters? Or are you seeing shifts into other different types of chips, analog chips, etcetera, that are It's the analog chips mixed signal, more of the specialty processes that Are not dependent on the high volume fabs. TSMC, we ran into a problem at the end of last year because of the iPhone 12 launch. Things got a little bit better for us, and then it came down to substrates. Substrates are a real problem right now. Raw materials are a real problem right now. But in terms of silicon, It's a little bit easier getting the small lithography type devices versus some of the specialty devices. We have seen some of our oscillators come back. The sauce has come back online, and so we're starting to see a little bit of easing there with some of those components. That's why our Wi Fi business picked up. But overall, I think it really kind of comes down to raw materials and substrates It seems to be the big issue and capacity is tight in general across the board. So I couldn't point to a single culprit at this point. One positive, we talked about supply chain issues associated with logistics and increased freight costs. Those have moderated and we're back as a percentage of revenue at least today. We're below where we were pre COVID. So we're Okay. I'm okay there. Great. Super helpful. Thanks for that color, Paul. That's all I have. You're welcome. Thank you, Ryan. This concludes our question and answer session. I would like to turn the conference back over to Paul Pickle for any closing remarks. Please go ahead, sir. Thank you, Chuck. And thank you all for joining us and have a great evening. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.