LANTRONIX INC Q3 FY2025 earnings call

• Current operating environment: Monitoring tariffs, established internal task force with 90-day action plan, working on pricing and cost management with customers and partners.
• Distribution network: Expanded partnership with TD SYNNEX in Europe for out-of-band management, network infrastructure, and industrial IoT solutions; leveraged NetComm's channel in Asia Pacific.
• New customer wins and products: Announced AI-powered camera solution using Lantronix's System on Module and Teledyne/FLIR's thermal infrared camera module; launched System on Module with Qualcomm's Dragonwing 8550 processor for edge AI applications.
• Operational execution: Positive operating cash flow, improved balance sheet, and cost reductions leading to margin expansion.

For the third quarter of fiscal 2025, Lantronix reported revenue of $28.5 million. GAAP gross margin was 43.5% compared to 42.6% in the prior quarter and 40.1% in the year ago quarter. Non-GAAP gross margin was 44.1% in Q3 2025 compared to 43.2% in the prior quarter and 41% in the year ago quarter. GAAP operating expenses for Q3 2025 were $16 million. Non-GAAP OpEx was reduced by approximately $1.2 million compared to the year ago quarter. Cash and cash equivalents at the end of the March quarter totaled $20 million, and the company paid down about $2 million of term debt, resulting in remaining debt of approximately $12.5 million and net cash of $7.5 million.

• For the fourth quarter of fiscal 2025, revenue is expected to be in the range of $26.5 million to $30.5 million.
• Non-GAAP EPS for Q4 is expected to be in the range of $0.00 to $0.02 per share.
• Cautious outlook due to macroeconomic uncertainty but executing well in current environment with focus on edge intelligence solutions.

• Uncertainty surrounding tariffs and potential supply chain disruptions.
• Pressure on gross margins in Q4 compared to recent near-record gross margins in Q3.

Q: Just curious what the NetComm contribution was in the March quarter. And I know you noted that you've been pleased with sort of customer engagement on that. But how should we think about potential growth of that business going forward?

A: Jaeson, it's Saleel here. Thank you for that question. As we mentioned when we did the acquisition that we expect the revenue to be $6 million to $7 million on an annualized basis. We are tracking to exceed that run rate. And if you remember, I've spoken, we should expect to be 15% to 20% higher than that run rate, if you think about it on an annualized basis. The second part is how are the customers tracking? The majority -- the 2 big customers are Vodafone and Coca-Cola. I've spoken to them before, and they seem to be very well engaged with us. But what has happened is some of the other customers that we were working with are also opportunities for some of our other products like out-of-band and some of our other industrial IoT products that we have. So in the mid- to long term, this is going to be very good as we put it all together with the Lantronix products and the NetComm-acquired products. And one key aspect that we really like the business for was with the 5G, and we got that 5G product, and it's already sampling.

Q: Okay. That's really helpful. And then just given the current macro, curious what you're seeing from sort of a quoting activity and order pattern perspective so far here in Q4?

A: Great question with the macro. And the organization is ready. We've been handling the changes that are ongoing, and we feel really confident where we're at. So a few points. We're not seeing any cancellations, pushouts or any unnatural behavior from our customers. The design activity is continuing to be just fine. And in the prepared remarks, maybe we talked about how we are managing it and adding a little bit more color to this, we will be pretty much out of our China manufacturing by early FQ1 '26. Maybe you want to add to that a little bit, Brent.

Q: Got you. And then just the last one for me, and I'll jump back in the queue. Just following up on some of those comments. Has the macro changed how you're thinking about Gridspertise in fiscal '26?

A: They continue to do their deployment. We continue to remain engaged with them. There is nothing new for me to add other than the fact that we are in good conversations with Gridspertise. Their deployment is ongoing, and we are engaged, and we are still single sourced. That’s the clarity that I have for you on specifically Gridspertise.

Q: Saleel, maybe just to jump in on the edge compute side of the equation. A lot going on from a product development standpoint, starting at CES, I think continuing at Mobile World Congress. I wonder if you could give us some updated thoughts in terms of what that engagement and design activity pipeline looks like. When we should start to see some revenues? How quickly does that ramp up in fiscal '26 and kind of framing the opportunity?

A: Great question, Scott, and thank you for that question. Our Edge AI initiatives and focus is starting to pay off. First one was we announced with Teledyne/FLIR, a cooperation where our product is in their new thermal imaging camera and it's going to go into production shortly, I believe. So we're working with them on that. Specifically, 3 areas where we were focused on. One was drones, robotics and security and surveillance. I'm very pleased to report our first drone customer, if all the trials complete well, will go into production in the June quarter, small amounts. But as we then go into the fiscal '26, it's going to start to pick up speed. On the surveillance side, we are engaged with 2 companies where they are looking at our technology to put into their new, I would call it, AI-enabled camera Scott. So in '26, we do see revenue from the AI activities that we are doing, specifically around cameras. From a market size, as you've seen the numbers, Grand View, all of these folks are talking about markets in the billions of dollars longer term. We do believe that we will be able to grow nicely with some of the engagements. And we've really been laser-focused enabling cameras with Edge AI, and that's what we do really well. So I'm happy to report that we have our first design in and hopefully first volume shipments in this quarter. It's a start, but it will be -- it will pay off in fiscal '26.

Q: Great. It's good to see some of the traction momentum building on that front. And in terms of the guidance for the June quarter, I'm wondering at this point, a couple of things. Like what visibility do you have to that range at the current time? What are kind of the swing factors on that front to the upside and the downside? Is Gridspertise part of the equation at all in the June quarter? And then I know it's early, but I'm wondering if you could give us your initial thoughts in terms of growth into fiscal '26. It looks like the decks are cleared here with Gridspertise now largely out of the numbers. What are the early thoughts in terms of how that's starting to shape up? I know it's outside of the near-term tariff window, but I'd love to get your initial thoughts.

A: Yes, yes. Thanks for that, and let me try to take one at a time. For the June quarter, we have no Gridspertise revenue, similar to what it was for the March quarter. So as you can see, our base business is starting to grow. I'm very pleased to tell you that. As I think about where we are sitting today, without getting into the details, our bookings were good last quarter. Our bookings continue to be good this quarter. So as I said in my prepared remarks, Scott, I was very prudent and cautious with the number that we put out there. So sitting today, we feel fine about the number we put out there for you guys. And we were cautious though as we thought about it. So we did not go over our skis by any means. And as I think about the future for '26, from the run rate business that we are at now from this quarter or last quarter, we should definitely grow double digits. And we have the design momentum and customers that we're working with that will allow us to show that.

Q: Very helpful. And lastly, just on the out-of-band side of the equation, I'm just wondering some updated thoughts on that front. It's tended to be a little, I think, volatile over several quarter periods. But are you starting to get some stability and, I'll call it, recurring customers in terms of their buying patterns there?

A: Yes. Scott, this is Brent. Thanks for the question. Yes, as you mentioned, we've seen some lumpiness in that business. And that's largely because, as we know, it's dependent on project-based capital spending and also to a certain amount of federal spending, which there's some slowdown there. So we're seeing good momentum with the pieces we put in place at the company resources and the like, and we feel good about the business going forward and kind of expect to get out of the slowdown we've seen over the last quarter or 2 going forward.

Q: I just want to follow up on some of the commentary you just made just a few seconds ago that you're confident you can grow double digits again in 2026. Is that based on obviously, NetComm rolling in. But does that include Gridspertise coming back and large digestion of previous orders being done? Or is that just based on the core business and expansion of opportunities, partnerships with TD SYNNEX or new design wins ramping through your Qualcomm relationship? Any color there would be great.

A: Christian, thank you for that question. So as I said, from the base business that we are at today, it's what, 28.5% approximately. We definitely see a growth of double digits, could be 10%, could be 12% from a couple of things, design activity, the Qualcomm relationship with new products that we're releasing, new industrial IoT products coming. Also with out-of-band, we're releasing some -- a new box that's going to be coming out in probably 90 days. So all of that is in my plan and the company's plan as you think about fiscal '26 from the run rate we are at now. Without getting into too much with Gridspertise, all I'll say is they need to get their deployments done. And I'm working with them closely, but I wouldn't say I'm putting in any big numbers for Gridspertise in the number. Does that kind of give you enough clarity?

Q: Yes, that's great color. And then my last question is, are you still currently the only sole supplier to Gridspertise? Should they digest the inventory they have in their rollout and get back on track, would you still be the only one they would call?

A: Yes, we are single sourced with them, and we continue to be single sourced. And as I've spoken in the past, they're doing a few POCs in the U.S. and things like that. I'm hopeful for the longer term, but we've helped them. We've shipped a lot of product. We are still working with them, but I've tried to derisk the number as much as I can. So does that make sense? Like we are fully only the single source with them right now. And that I've confirmed as of a month ago.