All right. Well, welcome to the 19th Annual Needham Technology and Media Conference. I'm Ryan Koontz. I cover the CommTech sector here at Needham, which is inclusive of cloud communications, broadband networking, and IoT. Really happy to be joining us today is Lantronix, leading provider of connectivity solutions, including SaaS and engineering services for remote environment management and IoT in general. We're joined today by CFO Jeremy Whitaker. Welcome, Jeremy.
Great. Thanks for having us today. Looking forward to it.
Yeah. Sure. Let's start with unpacking the quarter a little bit. Nice to see come up as expected and obviously a big contribution from your large customer there. Can you kind of walk us through some of the puts and takes on the March quarter?
Yeah. We did about $41.2 million in revenue for the quarter. It was a record for the company, about a 25% growth from the year-ago period and about 11% sequentially. A good portion of that growth was driven by our lead grid customer, our smart grid customer. And then we also saw some nice strength from our other IoT solution product. In particular, our Out-of-Band products have been growing nicely this fiscal year. And we also had a little bit of sequential growth in our embedded business as well after a few down quarters. So that was good to see as well.
Nice. In general, in terms of profitability, OpEx, all that came in pretty much as you were hoping to achieve as CFO?
Yeah. Margins were slightly below the previous quarter, but that was primarily due to mix from this large customer that's ramping in the quarter. We've had a little bit of headwinds related to what we're seeing on the logistics side going through the Middle East. So that's had some impact on us. But looking forward, hopefully that'll provide tailwinds as that part of the world kind of normalizes, hopefully, in the next several quarters.
Yeah. Hope so. For those not familiar, can you give us some background on this big win with Gridspertise and their relationship with Enel? It's really a transformative win for you guys. But what's the background? How did we get there with Gridspertise?
Yeah. This is a really nice win that the company had. They're going to be about $40 million in revenue expected this fiscal year. So they'll be nearly a 25% customer. Initially, this started out as a design. They came to us for some design services to embed a Qualcomm processor into their product. And I think we were able to kind of demonstrate our design services and our other capacity around design and manufacturing. And ultimately, we won what was initially maybe a $5 million opportunity, ended up being about a $40 million customer as we were able to provide a much broader range of services to them than originally anticipated. It's quite a large opportunity in general. Gridspertise is a subsidiary of Enel. Enel is probably the world's largest power grid provider based in Italy.
They spun out Gridspertise maybe a year or two ago, at least about 50% of it. They sold to private equity, and they still hold 50% of the company. Enel is now Gridspertise's biggest customer. They're modernizing the grid in Europe. There's a lot of regulation around the grid. What this product that Gridspertise is offering both to Enel and also into other markets has quite a large market. So far, we've been enabling them to do that and looking forward to it in the future as well.
And so what percentage of Enel's footprint will they have upgraded with your product when this first tranche is deployed?
Yeah. So what this is, this goes into a substation. And they're little boxes about maybe the size of a 4x 4x 4 box. And there's maybe something like I don't know. We've been told something like a million substations that Enel would have within their.
Service areas.
Yeah. Within their service areas. And maybe 30%-40% of those potentially would use the product that we're providing to Gridspertise. So it's several hundred thousand dollar or several hundred thousand potential unit market that they're going after and that we would participate in going forward. If they're successful in their deployment and rollout, that we'd be able to participate in.
How do you think about the follow-on business here for the current product and kind of future variants that Gridspertise might want?
Yeah. So this initial contract and deployment that they're doing was kind of an initial phase, which we're delivering here in fiscal 2024. In 2025, we just received our initial follow-on order to the project for about $11 million, which would cover the first half of fiscal 2025. And then longer term, as they're successful in their deployment, we would expect that this would transition to more of a run-rate ongoing business, all subject to their success. On a larger front, the opportunity is a bit bigger than this one product. Our customer is looking to expand their market as well. And this product only serves a portion of that. And they believe that they can also, with follow-on products that are maybe defeatured, lower cost, that they can expand their SAM.
So that's something that we're in discussions with and we're working on becoming a partner of choice as they look to expand their markets and put in the new products. And then they're also looking to enter into some new markets. They have a very strong presence in Europe, but their North America presence is much smaller, or they don't have much here. And so they're also looking at us maybe to provide some help and partner with them in the North America market. I mean, these are all really longer-term things we're working on, but I think it really shows that we can continue to grow this business and increase the SAM over time.
Yeah. I mean, it's exciting. Sounds like the potential is also for Gridspertise to deliver this product to other power operators.
Yes. I believe that's one of the reasons they spun Gridspertise out of Enel is so that it wouldn't be competitive. So their potential other power companies would be buying from, not necessarily directly from Enel. So I think they view this as a rich market that they can go after above and beyond just internally using it.
Yeah. Exciting stuff. So your new CEO, Saleel, has specified three growth pillars here that really are kind of the foundation of your kind of product strategy going forward. Can we unpack those a bit? Maybe start with Smart City as the first one and sort of applications and types of customers you see in that opportunity?
Yep. Yeah. Really, what we've been trying to do is narrow the focus a little bit more into verticals to really drive the bigger customers and growth at the company. So we've identified three verticals that we have lead customers in, which we feel are good growing verticals that we can address. The first one being Smart Grid, Smart City. The biggest lead customer we have there is Gridspertise. That has a really great potential to help us drive penetration and growth in the business in those markets. Another more recent example of a nice design win that we have in that marketplace is with a large tier-one telecom company. What they're using our solution for is to help them monitor and manage power generators at a cell tower site.
In that situation, we're providing a complete solution that includes both hardware and SaaS solution to help manage and monitor the power generators. So, one, there's a lot of environmental regulation around that. So they need to be able to know when a generator's turned on, turned off. They also need to want to understand where the generator's located. Apparently, these are oftentimes stolen or something happens to them. So there's a tracking aspect of it. And so we're providing that hardware solution that provides the connectivity and access and remote control of the unit and then also the software solution that allows them to connect to the device, get data from it, and take that into their own applications. And that has another potential to be quite a large customer for the company. And we started deploying our shipping units to them last quarter.
That was a nice incremental revenue we saw last quarter that helped drive some of the growth.
Yeah. It's exciting. I know in California, where I'm from, there's new regulatory mandates that every cell site has backup power and backup generator available. So we're going to see a lot of investment there, I think, by the operators.
Yeah. This is playing right into that as one of the major factors for them selecting us.
Nice. And I think the next big pillar, important one, is the infotainment in the automobile. Walk us through that.
Yeah. This is an interesting one. This is a new area for Lantronix and high-growth opportunity, probably a much longer gestation period. But we do have one large customer that's currently in production, Togg. They're a Turkish automotive manufacturer. They approached us to help them develop the automotive infotainment computer that goes within the pillar-to-pillar display in auto. So we initially started doing some design services for them to develop the AIC, we'll call it. And that's now transitioned into a production agreement where they're buying the product for us. The nice thing about this development is it really kind of gave us an introduction into automotive. We did have some joint IP on the development. So we've taken what we've done for Togg, and we're leveraging that development to offer a similar product to other automotive customers in the space. We're not going after the tier ones.
We're focusing probably at, say, tier two, tier three level. So the lower volume, high-mix automotive opportunities, maybe it's EV. It could be trucking, motorcycles, etc. Usually, the automotive customers that aren't going to get the attention of the tier one supplier like Qualcomm. So we would be one level below that. So there's a number of different engagements we have in that area. And it has a lot of potential to drive growth longer term.
Yeah. Exciting. I don't know how many of you have seen the new Togg vehicle, which is not quite a brand name known much over here yet, unless you're an automobile aficionado. But it's a sexy car.
Yeah. It's a nice-looking car. I think they've surprised a lot of people.
It's kind of like a Tesla equivalent coming out of Turkey. It's pretty exciting.
Yeah. This has opportunity to drive meaningful growth in 2025 as well. They're currently in production on the automobile. In fiscal 2024, we're probably supporting 40,000-50,000 vehicles a year production based upon the run rate. They've indicated externally that they believe the production will get up to about 175,000 vehicles a year. And they also recently announced a second vehicle to help drive that volume, which we're also designed in. So that has a great opportunity for some near-term growth for us in fiscal 2025 if they meet their production goals.
I think I saw they recently launched in Germany or something.
Yeah. Yeah.
In 2025, I think it's coming?
Yeah. They're looking to expand out of Turkey into the German market. The nice thing about the Turkey market, they have it somewhat captive in that it's sponsored by the government. There's a lot of national pride. So it has a little bit of a captive market there somewhat. So we'll see how that rolls out for them.
You've got some pretty strong share there, right, with Togg?
Yes. Yes. Yeah. At this point, yeah, I think we're the primary component in that.
Awesome. Yeah. Nice. So the last pillar, I think, is in traditional enterprise, which I think is your heritage, your Lantronix heritage. Walk us through how we should think about that.
Yeah. This comprises our Out-of-Band products, our traditional Connect products that provide connections for industrial machines and medical devices and those sort of products. Then also, we've had quite a bit of success with our Compute and audio and video applications, whether it's cameras or conferencing systems, etc. I think a nice example of that where we've seen some really good growth this fiscal year and anticipated continued growth is in our Out-of-Band products. With those, a typical customer for that that we have would be a large bank where network resiliency, uptime, and cybersecurity are all driving the need for secondary networks in case your primary network goes down. So we have a solution that provides an Out-of-Band network if there's a cyber attack or a primary network goes down.
Our products provide a secondary network that allows the user or the bank or whatever to go in and troubleshoot and bring the network back up in the case of an attack. So with all the regulation and cyber, this is an area in Fed, government, military, data center, banking where we're getting some great traction. High-margin product as well, which is really nice.
Lots of critical infrastructure. I'm pretty interested in what you think about that.
Critical infrastructure. Yep.
Yeah. It makes a lot of sense. Relative to your kind of future strategy here, any changes in go-to-market do you envision you guys are looking at at all in terms of you've now got some pretty big international customers. Is that being an important part of your investment there on GTM?
Yeah. More and more with we're taking the business, and we're leading with our Compute products, which tend to drive larger customer engagements. And so I don't see a major shift in our go-to-market in that area. That said, we brought in a new VP of Sales and a Chief Strategy Officer over our marketing as well. So I think we'll see some refinements on how we're going to market in those areas. We may need automotive is new to us. And so that might be an area where we need to invest a little bit more as we continue to gain traction. But I view it more as kind of some refinements in our existing go-to-market.
Pretty incremental.
Some investment in some of these newer areas that we're going after.
Great. And so relative to your really impressive growth here in the last fiscal half, which is this calendar half, how are you messaging investors on your outlook for top line in 2025 right now?
Yeah. So we're.
In fiscal 2025.
Yeah. We're in a unique situation where we're going to this year, based upon the midpoint of our guidance in the year, somewhere around $160 million. It'd be about 22% year-on-year growth. And a lot of that growth is being driven by a single customer that I've talked about in the Smart Grid. They're in their initial rollout. And in Q4, the expectation is they'll do about $20 million in revenue. Longer term, we expect that this is a large opportunity for the company. But we don't expect in the following quarter a big rollout that we're going to continue at that same rate going forward. We are pleased that we did get the initial follow-on order of $11 million for the first half. So it does show, I think, the commitment that the customer has in this product and this deployment that they have.
But it's at a rate that's lower than we're exiting in Q4. So I think as this transitions to more of a run-rate business, we'll have much more clarity on the second half of the fiscal year. I think the rest of the business, we believe, is on a growth trajectory. We have some nice tailwinds as it relates to both on our Compute, some design wins that we're expecting to go into production in 2025. Togg's expected to have a good year. And then Out-of-Band has been performing nice. So overall, we think the rest of the business is at a nice growth trajectory. But we'll have to see how the Gridspertise rollout plays to determine how that impacts fiscal 2025. But longer term, we feel good about it.
Yeah. Yeah. Great. Before we get to questions from the audience, any shifts in the competitive landscape? What's that been like lately? How do you compete on a case-by-case basis out there?
Yeah. In our Compute business, we have been seeing a little bit more competition entering that market, some of it Chinese-based. But what we're seeing is a lot of customers that we deal with, critical infrastructure, government, military, there's been, as we've heard, a shift away from that region for security reasons. And so we've been able to although we are seeing more competition in that area, what's driving some of our larger wins is being a U.S.-based company with engineering teams in the U.S. And so if somebody needs a checkup, needs to ensure that, one, they're getting a high-quality end product, but also for security reasons, they're looking towards companies like us. So that's been helpful on the competitive side.
On the margin side, I know we've been through a little bit of a roller coaster here, going to have supply chain and all that. Has that pretty much settled down from your seat?
Yeah. Until the Middle East kind of erupted, it had. Yeah. But yeah, for the most part, we do have some tailwinds there. We had built up some of the costs that we incurred during the pandemic related to supply chain and also expediting. Most of those costs have amortized into the P&L, have come off the balance sheet. So we got a little bit of tailwinds, I think, on the gross margin from that. And I think as the Middle East sorts itself out over the next couple of quarters, I would expect we'll get back to more of a normal run rate on logistics as well. So I think we have some nice tailwinds, at least on the margin front.
When you talk about Middle East, is that mostly Red Sea, like shipping from Asia to Europe?
Yeah. We've seen a pretty significant increase in shipping rates going through that region.
Wow. Gotcha. Any questions from the audience? Anyone want to lean in? Well, let's wrap up on just your thoughts about 2025 and things you have ahead of you, you're excited about looking at the new fiscal year.
Yeah. As we talked about, it looks like we did provide some more, I think, information on the markets that we're in. Those we're expecting to grow around 12% a year if we keep up with those markets. We believe longer term, we can meet or do better than that, especially with the business excluding grid. We feel I think we also feel positive about the long-term prospects for grid. I think really what we have to work our way through currently is just coming off a large deployment and what you normally would see on the other side of that, which would be some time to digest the deployment, get it rolled out, and then continue with the greater opportunity that they have.
It sounds like maybe even some new leadership coming in. We might be hearing more about new ideas.
Yeah. Yeah. We just have our Chief Strategy Officer, we announced, I think, today, actually, him coming on board. So we're excited to have Mathi on board. He's also going to be focused on M&A activities of the company. We've done four acquisitions in the last four or five years. And so we still view that as an important part of our growth strategy. So we're looking forward to have him on board. And he's got some great experience in the IoT sector in areas that we're interested in expanding our footprint, so.
Great. Excellent. Well, thanks so much for joining today. Thanks, Jeremy.
Thank you.
All right.