Good day and welcome to the Lantronix 2021 Fourth Quarter Results Conference Call. [Operator Instructions] 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 fourth quarter 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 at 8:00 p.m. Eastern, 5:00 p.m. Pacific Time tonight through September 2 by dialing 877-344-7529 in the United States or for International callers 412-317-0088 and entering the pass code 10159500. 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 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 section of our website, describes the differences between our non-GAAP and GAAP recording and presents reconciliations for the non-GAAP financial measures that we use. With that, I’ll turn the call over to Jeremy Whitaker, Lantronix’ Chief Financial Officer.

Thank you, Rob and welcome to everyone joining us for this afternoon’s call. I am going to provide the financial results as well as some of the business highlights for our fourth quarter and fiscal year ended 2021 before I hand it over to Paul for 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 Net2Edge, which comprises the electronics and software business segment of Communication Systems, Inc., which closed on August 2, 2021. For the fourth quarter of fiscal 2021, we reported record revenue of $20.6 million, an increase of 19% when compared to $17.4 million for the fourth quarter of fiscal 2020. Sequentially, net revenue was up 21% compared to $17.1 million reported in the third quarter of fiscal 2021. We exited the fourth quarter 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 fourth quarter of fiscal 2021 as compared with 37.7% for the fourth quarter of fiscal 2020 and 45.1% for the third quarter 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 million in fiscal 2021. And while we don’t see a material change in the 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…

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 fourth quarter, we delivered record revenues of $20.6 million. For the full year 2021, revenues were also a record at $71.5 million. 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 fourth quarter, component shortages and delays caused us to push out approximately $5 million of revenue into future quarters versus $4 million in Q3 and $2 million 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 supply of key components. And while we clearly are not immune to the problem, we are in a position to continue growing despite the challenge. Turning to our product categories, our IoT products delivered $17.5 million in Q4, up 28% sequentially and 20% year-over-year. Ethernet modules continue 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 third quarter. In our Edge Compute solutions, we continue to set the table for future revenue growth. The opportunity in funnel…

Thank you. [Operator Instructions] And the first question will come from Scott Searle with ROTH Capital. Please go ahead.

Hi, 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. 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 expecting to grow double-digit growth rates going forward? And Jeremy, on the gross margins and OpEx front as we’re looking forward into the September quarter, OpEx was up, looks like some variable comp catch-ups in the fourth quarter 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?

Alright. 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. The backlog continues to grow. I think last quarter I said we were well over 4x our historical averages. And at this point, we’re well over 5x. 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. But we are seeing an overall nice macro trend on the business as a whole, and that we’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&D projects that we have that come on board and certifications that we needed to drive. But overall, you should see us continue to drive OpEx as a percentage of revenue down. Jeremy, do 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 gross margins to come down a couple of hundred basis points just as we get back to our kind of normal product mix. And then we are 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 particular? 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 to get back into growth mode over the next couple of quarters?

Yes. So, REM is definitely a lumpy business. This is kind of – it’s tied to more customer CapEx cycle. 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 pretty decent quarter. The prior quarter of Q3 was pretty strong for REM. I would expect, going forward, if you just even look at a two-quarter average, you’re going to see continued growth going forward. But this business is best measured on a quarterly trend basis.

Got it. And lastly, if I could just dive in into the guidance for fiscal ‘22, 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 million, $21 million 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 am wondering if you could address the big swing factors in terms of that range as we look out over the course of fiscal ‘22? Thanks.

Yes. It’s a bit of a broader range. You are 100% correct. And 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 a tendency to cause different localities to shutdown and maybe things pause for a couple of months as people wait for case rates to drop down. Again, I think we have get – we have built in kind of the new norm caution into the guidance. But aside from that, we feel really quite strongly that we will 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 have 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 are starting to see that results indicative of what happened in Q4. Definitely we expect that to continue. I would – where things are probably not as certain from a growth standpoint as some of the newly acquired revenue, obviously, we just closed this August 2. If you look at the prior calendar year, $34.5 million in terms of – they are 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 are 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 have 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 will be able to – we are optimistic about being able to pull that in. I will say that their demand is quite strong at the moment. The demand is stronger than what they can deliver. So, that’s a positive. But we are 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 have 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 Koontz with Needham & Company. Please go ahead.

Hi. Thanks for the question. I wonder if you can give us 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 – those verticals over the balance of the calendar year here?

Thank you, Ryan. Yes, great question. So, our market verticals today really is largely industrial. We do have an enterprise component as well. Industrial – municipalities, so we would 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 was really playing catch-up. Due to COVID, there was a rush of purchases. That moderated a bit during the back half of 2020. But what we are 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 are seeing some nice strength in medical, in particular. Industrial is definitely doing – it’s pretty strong across the board. As I look at it, the vast majority of our base business is really rooted in that industrial vertical, and we have seen a nice uplift. I would characterize it as a macroeconomic lift. We are 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 kind of classify them as smart city applications. But the energy sector, energy delivery sector, security sector, these are more municipal applications. We have seen some new program launches and new orders placed from the likes of Flock Safety, for instance, these are security camera applications. There has just been some real strength there. And then lastly, that in price component that we have talked about last year, in terms of video conferencing applications that’s going rather well. 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 that’s hampered by COVID right now, but not from an ordering standpoint, they are just in general strength across the board.

Sure. Okay. I mean in terms of headwinds, I was thinking maybe with the auto sector kind of seeing some challenges on supply chain, you are not seeing an impact on use from the industrial side there?

Well, for us, automotive is fairly new. We do have some programs in automotive, but it’s mostly application development and new platform launches. Our customer TOGG in Germany – I am sorry, in Turkey rather, we do have arrival to an electric cargo ban based in the UK 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 would have a little bit of a problem doing that just because of the lead time so that with that product.

Yes, helpful. Got it. Thanks. And on the supply chain, any real shifts in terms of your concerns, your long poles. Is it the similar characters that we have seen for the last few quarters, or are you seeing shifts into other different types of chips, analog chips, etcetera, that are becoming more of a problem for you?

It’s the analog chips mixed signal more of the specialty processes that are not dependent on the high-volume fab. 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 to getting the small lithography type devices versus some of the specialty devices. We have seen some of our oscillators, come back – has come back online. And so we are starting to see a little bit of easing there with some of those components. That’s why our WiFi business picked up. But overall, I think it really kind of comes down to raw materials and substrates is – 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 are back as a percentage of revenue, at least today, we are below where we were pre-COVID. So, we are doing okay there.

Great. Super helpful. Thanks for that color Paul. That’s all I have.

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.