Lantronix - Earnings Call - Q3 2025

Executive Summary

• Q3 FY2025 delivered revenue of $28.5M and non-GAAP EPS of $0.03, in line with guidance; revenue was modestly below consensus while EPS matched consensus, with margins expanding sequentially and YoY as mix and cost actions improved profitability.
• Revenue softness reflected zero shipments to the large European smart grid customer (Gridspertise) as they digest deployments; management also guided Q4 revenue to $26.5–$30.5M and non-GAAP EPS of $0.00–$0.02 with some gross margin pressure vs Q3.
• Strategic initiatives progressed: EU channel expansion with TD SYNNEX, Edge AI wins (Teledyne FLIR), and launch of the Open‑Q 8550CS SoM (Qualcomm QCS8550) underpin the medium-term growth narrative into FY’26+.
• Balance sheet strengthened: operating cash flow of $3.2M in Q3, cash ~$20M, and ~$2M of term debt repaid in the quarter, leaving ~$12.5M of debt and ~$7.5M net cash; management is exiting China manufacturing within ~90 days to de-risk tariff exposure.
• Stock-reaction catalysts: improving gross margins, prudent but achievable Q4 outlook (potentially conservative on macro/tariffs), AI design ramps, and distribution leverage in Europe; watch for smart grid re-orders and out-of-band reacceleration as key swing factors.

What Went Well and What Went Wrong

• What Went Well

  • Sequential and YoY gross margin expansion: GAAP GM 43.5% (vs 42.6% Q2 and 40.1% YoY); non‑GAAP GM 44.1% (vs 43.2% Q2 and 41.0% YoY) as mix and cost actions flowed through.
  • Strong cash discipline: Q3 operating cash flow of $3.2M; paid down ~$2M (15%) of term debt, leaving ~$12.5M debt and ~$7.5M net cash at 3/31/25.
  • Strategic progress: expanded EU distribution with TD SYNNEX and advanced Edge AI portfolio (Teledyne FLIR camera integration; Open‑Q 8550CS SoM launch), supporting FY’26 growth ramps.
  • Quote: “We’re positioning Lantronix to lead the next wave of industrial and enterprise transformation at the edge,” said CEO Saleel Awsare.

• What Went Wrong

  • Revenue declined to $28.5M (vs $31.2M in Q2 and $41.2M YoY) due to no smart grid shipments; base business growth only partially offset the gap.
  • GAAP net loss widened to ($3.9M) or ($0.10) per share given restructuring (~$1.6M) despite margin gains; non‑GAAP EPS declined to $0.03 vs $0.11 YoY.
  • Outlook tempered: Q4 guided to $26.5–$30.5M revenue and $0.00–$0.02 non‑GAAP EPS with expected gross margin pressure; no Gridspertise revenue assumed in Q4 either.

Transcript

Operator (participant)

Good day, and welcome to the Lantronix 2025 Q3 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, you may press star, then one, on your telephone keypad. 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 Brent Stringham, Chief Financial Officer. Please go ahead.

Brent Stringham (CFO)

Good afternoon, and thank you for joining our quarterly earnings call. Joining me today is our President and Chief Executive Officer, Saleel Awsare. A live and archived webcast of today's call will be available on the company's website. In addition, you can find the call-in details for the phone replay in today's earnings release. 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-Qs. Lantronix undertakes no obligation to revise or update publicly any forward-looking statements to reflect future events or circumstances.

Please refer to the news release and the financial information in the investor relations section of our website for additional details that will supplement management's commentary. Furthermore, during the call, the company will discuss 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 Saleel.

Saleel Awsare (CEO)

Thanks, Brent, and thank you, everyone, for joining today's call. We reported revenue of $28.5 million for the third quarter of fiscal 2025, and our non-GAAP EPS was $0.03. Both metrics were well within our quarterly guidance range. Brent Stringham, our CFO, will be providing more details on the third quarter financial results shortly. On the call today, I would like to cover four topics with you. First, I will speak briefly to the current operating environment and how we've moved quickly with our own task force on tariffs while remaining focused on executing our business and controlling costs. Second, I'd like to talk about how we are expanding our distribution network in the European Union and Asia Pacific. Third, I would like to highlight some recent customer wins and mention products we've launched.

Lastly, I want to highlight our solid operational execution and strengthening financial position, which Brent will speak to in more detail in his prepared remarks. First off, we are carefully monitoring the current operating environment, and we are working very closely with our customers, suppliers, and contract manufacturers. In anticipation of the tariffs, we established an internal task force to identify our top priorities and devised a 90-day action plan. We are currently implementing this plan and closely managing expenses due to the uncertainty surrounding tariffs and any disruptions to the supply chain. Regarding pricing, we are working on a customer-by-customer basis with the goal of minimizing the impact on Lantronix. We are in discussion with our largest partners and contract manufacturers to manage and reduce cost. In this operating environment, we will continue to analyze, adjust, and execute our action plan.

Second, regarding our effort to grow our channel distribution, we announced this past quarter that we are expanding our partnership with TD SYNNEX, our major distributor in North America. They are now distributing throughout Europe, focused on out-of-band management, network infrastructure, and industrial IoT solutions, bringing expanded support to our customers and partners in the European Union. We are also leveraging the acquired channel network from Netcom to expand the distribution in Asia Pacific, Australia, and New Zealand. Overall, the integration of Netcom products into our business has gone very well, and I'm pleased with the level of customer engagement and new cross-selling opportunities that we are seeing. Third, regarding new customer wins, we recently announced a new AI-powered camera solution that uses our high-performance system-on-module paired with thermal infrared camera module from Teledyne FLIR.

In this solution, our Open-Q system-on-module provides advanced processing for AI-driven situational awareness, advanced thermal imaging, and real-time decision-making. This integration accelerates the next-gen AI camera solutions for drones, surveillance, and robotics. I'm also pleased that we announced our latest system-on-module using Qualcomm's Dragonwing 8550 processor that's uniquely designed for higher AI and ML applications such as video transcoding, camera applications, and edge gateway integration. As I've said previously, we are very focused on edge AI solutions because of the benefits of low latency, better security, and low power requirements at the edge of the network. We are seeing more customers moving to hybrid architectures that are leveraging both cloud computing for heavy computational processing as well as edge computing for intelligent real-time inferencing.

Finally, we continue to manage our cost structure tightly, and I'm pleased to report our cash position increased sequentially in fiscal Q3 compared to the prior quarter. We also took the prudent step to pay down some debt, helping us reduce our interest expense. Brent will be covering that in more detail in his script. Brent, over to you.

Brent Stringham (CFO)

Thank you, Saleel. I will review the financial results and some business highlights for our third quarter of fiscal year 2025 before commenting on our financial outlook for the fourth quarter of fiscal 2025. For the third quarter of fiscal 2025, or FQ3, we reported revenue of $28.5 million. As we expected, revenue was down both sequentially and on a year-over-year basis, with no shipments in the current quarter to our large smart grid customer in Europe as they work through their initial deployments. The revenue impact was partially offset by sequential organic growth in our embedded connectivity and switch products, along with growth in our gateways and routers led by products from the acquisition of Netcom last December. As expected and discussed on last quarter's call, we saw sequential and year-over-year increases in our GAAP and non-GAAP gross margins.

GAAP gross margin was 43.5% in FQ3 2025 compared to 42.6% in the prior quarter and 40.1% in the year-ago quarter. Our non-GAAP gross margin was 44.1% in FQ3 2025 compared to 43.2% in the prior quarter and 41% in the year-ago quarter. GAAP operating expenses for FQ3 2025 were $16 million compared to $16.6 million in the year-ago quarter and $15.4 million in the prior quarter. We reduced our non-GAAP OpEx for FQ3 2025 by approximately $1.2 million compared to the year-ago quarter and by about $200,000 sequentially. We continue to realize the impact of the various cost reductions we have spoken to in recent quarters. We know in the March quarter that non-GAAP OpEx, including costs related to Netcom, was within our previously stated quarterly target range of $11.25 million-$11.75 million, which did not originally contemplate Netcom operating costs.

GAAP net loss was $3.9 million, or $0.10 per share, during FQ3 2025 compared to GAAP net loss of $400,000, or $0.01 per share in the year-ago quarter. The current quarter GAAP net loss includes a restructuring charge of approximately $1.6 million related to the cost reduction initiatives that we undertook and completed in January. Non-GAAP net income was $1.1 million, or $0.03 per share, during FQ3 2025 compared to non-GAAP net income of $4.2 million, or $0.11 per share in the year-ago quarter. Turning to the balance sheet, cash and cash equivalents at the end of the March quarter totaled $20 million, slightly up from the prior quarter. For the three and nine months periods ended March 31st, 2025, we generated positive operating cash flow of $3.2 million and $6.2 million, respectively.

Net inventories decreased to $28.2 million as of March 31st, 2025, as compared to $29.1 million in the prior quarter. Given our recent margin expansion and cost reductions, the positive cash flow from operations allowed us to improve our balance sheet during the current quarter by paying down about $2 million, or 15% of our existing term debt. As Saleel previously mentioned, this will help improve savings on interest costs. As of March 31st, 2025, our remaining debt balance approximates $12.5 million, giving us net cash of $7.5 million. Now for the outlook. For the fourth quarter of fiscal 2025, we expect revenue to be in the range of $26.5 million-$30.5 million. Given the current environment, we are expecting some pressure on gross margins in FQ4 compared to our recent near-record gross margins in FQ3.

Accordingly, non-GAAP EPS for FQ4 is expected to be in the range of $0-$0.02 per share.

Saleel Awsare (CEO)

Thanks, Brent. As we considered our outlook for the June quarter, we have been cautious given the macro uncertainty. We are executing well in the current operating environment and managing our expenses closely. We are generating positive cash flow. Our balance sheet is strong. Our customer design activity is growing very nicely. In addition to solid business execution, we remain very focused on developing edge intelligence solutions with Compute and Connect for our customers. With that, I'd like to ask the operator to open the call for Q&A. Thank you.

Operator (participant)

Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up the 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. Our first question comes from Jason Smith from Lake Street. Please go ahead.

Jason Smith (Senior Equity Research Analyst)

Yes, thanks for taking my questions. Just curious what the Netcom contribution was in the March quarter. 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?

Saleel Awsare (CEO)

Hey, Jason, Saleel here. Thank you for that question. As we mentioned when we did the acquisition, we expect the revenue to be $6 million-$7 million on an annualized basis. We are tracking to exceed that run rate. If you remember, I had spoken we should expect to be 15%-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 two big customers, are Vodafone and Coca-Cola. I have spoken to them before, and they seem to be very well engaged with us. 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.

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 Netcom acquired products. One key aspect that we really like the business for was with the 5G. We got that 5G product, and it's already sampling.

Jason Smith (Senior Equity Research Analyst)

Okay. That's really helpful. 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.

Saleel Awsare (CEO)

Great question with the macro. The organization is ready. We've been handling the changes that are ongoing, and we feel really confident where we're at. A few points. We're not seeing any cancellations, push-outs, or any unnatural behavior from our customers. The design activity is continuing to be just fine. In the prepared remarks, maybe we talked about how we are managing it. Adding a little bit more color to this, we will be pretty much out of our China manufacturing by early FQ1 2026. Maybe you want to add to that a little bit, Brent.

Brent Stringham (CFO)

Yeah. This has been an ongoing process for the last few quarters already before all these tariffs were announced. We are seeing the last remnants of some of the Netcom acquired manufacturing playing out over the next quarter or so. Really, from a metric standpoint, we have less than 5% of our products that are manufactured in China are destined for the U.S. As Saleel said, we are in the process of fully decommitting from China in the next 90 days or so.

Jason Smith (Senior Equity Research Analyst)

Gotcha. And then just the last one for me, and I'll jump back into queue. Just following up on some of those comments, has the macro changed how you're thinking about Gridspertise in fiscal 2026?

Saleel Awsare (CEO)

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.

Jason Smith (Senior Equity Research Analyst)

Okay. Appreciate that color, guys. Thanks a lot.

Saleel Awsare (CEO)

Thanks, Jason.

Jason Smith (Senior Equity Research Analyst)

Yes, that's fine.

Operator (participant)

Thank you. Our next question comes from Scott Searle from ROTH Capital. Please go ahead.

Scott Searle (Senior Research Analyst)

Hey, good afternoon. Thanks for taking my questions. Hey, 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 design activity pipeline looks like, when we should start to see some revenues. How quickly does that ramp up in fiscal 2026 and kind of frame in the opportunity?

Saleel Awsare (CEO)

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. We are working with them on that. Specifically, three areas were 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, we'll go into production in the June quarter, small amounts. As we then go into fiscal 2026, it's going to start to pick up speed. On the surveillance side, we are engaged with two companies where they're looking at our technology to put into their new, I would call it, AI-enabled cameras, Scott.

In 2026, 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, Grandview, 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. We've really been laser-focused enabling cameras with edge AI. That's what we do really well. 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'll pay off in fiscal 2026.

Scott Searle (Senior Research Analyst)

Great. Thank you. It's good to see some of the traction momentum building on that front. In terms of the guidance for the June quarter, I'm wondering at this point a couple of things. 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? I know it's early, but I'm wondering if you could give us your initial thoughts in terms of growth into fiscal 2026. 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. Thanks.

Saleel Awsare (CEO)

Yeah, yeah. Thanks for that. 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. 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. As I said in my prepared remarks, Scott, I was very prudent and cautious with the number that we put out there. Sitting today, we feel fine about the number we put out there for you guys. We were cautious, though, as we thought about it. We did not go over our skis by any means.

As I think about the future for 2026, from the run rate business that we are at now from this quarter or last quarter, we should definitely grow double digits. We have the design momentum and customers that we are working with that will allow us to show that.

Scott Searle (Senior Research Analyst)

Hey, very helpful. 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. Are you starting to get some stability and, I'll call it, recurring customers in terms of their buying patterns here? Thank you.

Brent Stringham (CFO)

Yeah. Hey, Scott, this is Brent. Thanks for the question. Yeah, as you mentioned, we've seen some lumpiness in that business. 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. We're seeing good momentum with the pieces we've put in place at the company, resources and the like. 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 two going forward.

Saleel Awsare (CEO)

Scott, let me just add, we brought in a new General Manager to run that business, and we feel really good about it. He comes out of Open Gear, and I think you know those guys. I anticipate we will start to see some good momentum in the probably second half of 2026 from where we're at with some new design activity.

Scott Searle (Senior Research Analyst)

Great. Thanks so much.

Saleel Awsare (CEO)

Thanks, Scott.

Operator (participant)

Thank you. A reminder to all the participants, if you wish to register for a question, please press star then one on your telephone keypad. Our next question comes from the line of Christian Schwab from Craig-Hallum Capital Group. Please go ahead.

Christian Schwab (Senior Research Analyst)

Thanks for taking my question. I just want to follow up on 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, Netcom rolling in? 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.

Saleel Awsare (CEO)

Hey, Christian, thank you for that question. As I said, from the base business that we are at today, it's $28.5 million approximately. We definitely see a growth of 10%, 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 a new box that's going to be coming out in probably 90 days. All of that is in my plan and the company's plan as you think about fiscal 2026 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. 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?

Christian Schwab (Senior Research Analyst)

That's great color. My last question is, are you still currently the only sole supplier to Gridspertise? Should they digest the inventory they have and their rollout and get back on track, would you still be the only one they would call?

Saleel Awsare (CEO)

Yes, we are single-sourced with them. We continue to be single-sourced. 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're still working with them, but I've tried to de-risk the number as much as I can. Does that make sense? We are fully only the single-source with them right now. I confirmed that as of a month ago.

Christian Schwab (Senior Research Analyst)

Perfect. That's all my questions. Thank you.

Saleel Awsare (CEO)

Thank you so much.

Operator (participant)

Thank you. This concludes our question and answer session. I would now like to turn the conference back over to Saleel Awsare for closing remarks.

Saleel Awsare (CEO)

Thank you, everyone, for joining the call. We will be in Minnesota at the Craig-Hallum Conference the week after Memorial Day. Thank you so much. Bye-bye.

Operator (participant)

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