Good afternoon and welcome to the Lantronix Third Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions, to ask your question [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Rob Adams, head of Investor Relations. Please go ahead

Thank you, and good afternoon, everyone. And thanks for joining the third quarter of fiscal 2022 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, 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 the 10-K and 10-Q. 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 commentary. 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 reporting, and presents reconciliations for the non-GAAP financial measures that we use. With that, I'll turn the call over to Jeremy Whitaker, our Chief Financial Officer. Jeremy.

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 third quarter of fiscal 2022 before I hand it over to Paul for his commentary. For the third quarter of fiscal 2022, we reported revenue of $32.3 million, an increase of 89%, when compared to $17.1 million for the third quarter of fiscal 2021, and down 4% sequentially as compared to $33.7 million reported in the second quarter of fiscal 2022. The year-on-year increase was driven by organic growth of 32%, in addition to contribution from our recent acquisition of the TN companies. GAAP gross margin. It was 42.1% for the third quarter of fiscal 2022 as compared with 42.9% in the prior quarter. The sequential decline in gross margin was primarily due to increased supply chain costs, in addition to product mix. While logistics and supply chain costs were higher than our initial expectations, due to significant disruptions and the Asia-Pacific region experienced during the quarter, we navigated these issues, delivered revenue above our initial expectations, and largely met customer needs. Selling general and administrative expenses for the third quarter of Fiscal 2022, were $8.3 million, compared with $5 million for the third quarter of fiscal 2021, and $8.9 million for the second quarter of fiscal 2022. Research and development expenses for the third quarter of fiscal 2022 were $4.5 million compared with $2.5 million in the third quarter of fiscal 2021, and $4.3 million for the second quarter of fiscal 2022. The year-on-year increases in SG&A and R&D were largely driven by the acquisition of the TN companies at the beginning of this fiscal year. GAAP net loss was $3.2 million, or $0.09 per share, during the third…

Thank you, Jeremy. I'm pleased to report another solid quarter to our shareholders here today. While our view of component commitment early in the March quarter coupled with expectations for typical governments customer, seasonality pointed so soft in Q3. Thanks to the hard work of our operations team here at Lantronix, we managed to deliver over $32 million in revenue, down only 4% sequentially, and we booked well above that rate. Borrowing supply chain constraints, demand in the March quarter would've been sequential growth. To that point, shipments late to customer expectations in Q3 totaled just over $7 million, up from $5.7 million as compared to the second quarter. Q3 was uniquely challenging in this regard with the large regional disruptions in Asia-Pacific region. And even where direct factory dependencies did not exist, we still experienced challenges in, both secured components import, export, logistics routes. These disruptions created both significant operational challenges and costs, but I am pleased to say that we were able to largely mitigate the disruption and deliver. We view these costs as transitory in a more normalized environment. I am especially pleased to report March results because they were driven by strong organic growth on the the order of 32% year-over-year. This is happening for a number of reasons. First of all, we're now three years into the transformation of Lantronix and many of the basic blocking and tackling assumptions we set forth to improve upon three-years ago are beginning to show results. We're going to market better. We are more in tune with our customer and our customers ' needs, and we're doing a better job in closing those sales. Secondly, in transforming Lantronix through acquisition, we have acquired pieces of the puzzle necessary to deliver our customers the technologies they need in order to…

We will now begin the question-and-answer session. [Operator Instructions]. The first question comes from Michael Walkley of Canaccord Genuity. Please go ahead.

Great. Congratulations on a strong quarter, and thanks for taking my question.

Thank you, Mike.

Paul, just starting with the now with the 20,000 additional units ordered, how does that impact that $10 million to $20 million outlooks? Does that put the higher than the range or those 20,000 units more follow-on into future years?

Yes, that's a great question. I would say, at this point, we would say it's probably at the higher end of that range. The details are really associated with customers roll out. There is one additional vendor dependency that we have. One of [Indiscernible] vendors has to deliver some boards. They're experiencing some difficulty and. So this production is expected to go forward in stages. So at this point, we understand what it is the customer would like. There are schedules a lot more aggressive than what we belief that they can execute on. So we're still being a little bit cautious in terms of the roll-out, how we see that revenue rolling out over the next fiscal '23. But it could be towards the high end of that range.

Great. That's great to hear. Follow-up question. Can you update us on your strong relationship with Qualcomm? You made some comments about good demand for Intelligent Edge going forward. Can you just update us on that pipeline and your ability to procure supply to support your opportunity funnel.

Sure. The relationship's going really well with Qualcomm. We had several meetings with different geographies within Qualcomm to talk about expanding the relationship and chasing more opportunity. And I think they've seen in us a unique ability to make customer applications come alive with the software that we developed that runs on their platform in addition to the hardware that we put together for our customers. So it's going really well. I think this is the area that we really want build -- to continue to build a core expertise, computing platforms and the architectures that Qualcomm is pushing will define what Edge hardware looks like in the future. And we definitely want to be a part of that process on a go-forward basis. So it's going really well at this point.

Okay. Thanks. Last question for me and I will jump back in the queue. Just, you mentioned 7 million that you weren't able to ship up, but sounds like you did a good job working through tough supply chain issues that are well-known out there. Can you just give us a little more color of what are the areas that are still stretched for problematic from a lead time standpoint and how you see it, maybe improving over year June quarter and the second half of the calendar year?

Yeah. So this quarter we had some significant upside to component availability in the December quarter. March, we didn't have the commitments at the time of the earnings call, but we were able to get some additional supply from Qualcomm. They were very supportive on that front, which did get us some additional revenue. Having said that, some of the additional upside, we should have been able to shift. We weren't able to shift because we don't necessarily have a manufacturer that was necessarily isolated. Then it is a major import, export hub. We actually saw a cargo carrier set up a new route. But the 747 going from Shenzhen to Hong Kong, if you know anything about geography, that's a ludicrous proposition, but this past quarter, we just had extreme difficulty moving items. So lot of high-touch that made components a bit harder to get a hold of. Specifically to your question, where we see difficulty, I think we see a little bit of easing on the digital side. Processors, Qualcomm has always been supportive, but into this quarter we didn't have as many as we would like. Memory is coming in line, both Flash, CDR. Mixed signals, still a bit tough. Some of the ethernet switches, still a bit tough. But as it relates to light at the end of the tunnel, we're starting to even see some RTCs that are in very, very short supply. We're starting to get committed scheduling for manufacturers in the January time frame. So it does feel like we're turning that corner. However, Q3 was bit unique in terms of its challenges.

Great. Well, congrats again on the strong results. And I'll jump back in the queue.

Thank you.

The next question comes from Christian Schwab of Craig Hallum Capital Group. Please go ahead.

Great. Great execution of this environment. A couple of quick questions. I'm sorry, I jumped on a little bit late. Did we say we now have a 20,000-unit order in hand from [Indiscernible] Did I hear that correctly?

It's an additional award. So the previous award was 15,000 units, 1,000 prototypes, 15,000 preliminary, or I should say, preliminary production runs, 1,000 units of pilot build. And so that 15,000 has now been taken to 35,000. So we got to an additional 20,000 unit award for production in the quarters to come.

Okay. And is that roughly at the same dollar content as you guys have talked about before? I think roughly at about $1,500 plus or minus.

Yes, I think that's what we're anticipating. The pilot run is a bit higher at $1,900 content, but we would expect as we entered more volume production to be able to reduce some of that. We're spot buying for some of the early builds, and we're trying to stage as many orders as we can for the production run. And we would anticipate to start that preliminary production run, to start recognize revenue in the December quarter, and then ramp up to target volumes after that.

Great. And I know we're all hoping for lead times on components of logistics to eventually normalize, but did you guys disclose exactly what your backlog was at the end of the quarter?

We did not. I can say that we did have record starting backlog for Q4. We had a record in terms of quarter-ending total backlog. We had -- we stated we added a significant or a book-to-bill -- bookings number that was considerably higher than our current quarters revenue. So -- But if you wanted to total backlog, it's -- at this point in time, it's on the order of where we were last quarter, but the late to CRD number bid tick up a little bit. We should've had -- last quarter, we had a late customer request data, $5.7 million. It went just above $7 million this time around. So we should've had about another $1.4 million, $1.3 million of revenue in the quarter that we weren't able to get out the door. So that late to CRD did move up a little bit.

Great. And then, my last question, as it relates to future growth, you've talked about before it being very confident in 20% CAGR outlook, which you would hope would be conservative dependent a public rollout of some of these big awards. Now, given potential bit more clarity on those awards, I understand supply chain logistics. I think everybody listening does. But that being said, is that still the baseline number that you feel very confident in? Or could that be starting to prove a little bit too conservative?

That's a tough question, Christian. If I do the roll-up today, I'm too conservative, but if I factor in a little bit of moderation in terms of some of the older products. And I think that's prudent. I think I'm probably on the conservative side, but we are talking about 15 months outlook at this point. And so we'll give updated fiscal year guidance at the next quarter, but we do feel pretty good about that 20% number at this point in time. And as my old boss used to say, you have to shoot above the hoop in order to get the ball in the basket. So we're definitely shooting above that, but we're still putting together an outlook that we think is prudent.

Great. Congratulations to get on a solid quarter. Thanks.

Thank you.

[Operator Instructions]. The next question comes from Chad TiVo of Needham. Please go ahead.

Hey, it's Chad on for Ryan Koontz, just on margins in the quarter, I think last quarter their down sequentially primarily due to a strong, Intelligent Edge quarter. It sound like supply chain they have take a better a bigger impact this quarter. Is there any way to quantify that impact?

Yeah, I think if you -- if we look at our -- we gave a PPV number for last fiscal year. So on the order of 2. -- I think the number I gave previously was about $2.1 million and $71 million in revenue. The reality is, it was probably more on the order of $2.4. I think if you think in terms of we're shipping a lot more revenue, but in terms of percentage of revenue, it's uptick slightly. It would be easily the impact this quarter that we had was,, I guess just above 200 basis points. If you look at the total costs is substantially higher, and I think on a positive, we're managing the OpEx in order to compensate for that. And we've been doing slightly better than we had originally projected on the integration of the two companies. If we go back to our August 2nd close and the performance that we said we get out of the two P&L's, we're still delivering that a number ahead of expectation, and we still have around the July time frame to do a couple of additional integration maneuvers, the last pieces of it to get some additional costs out. So I think we're running a bit ahead of leverage in the P&L where we expect to be, so that's a positive. We're managing the OpEx to compensate for some of the pricing pressure that we're experiencing from having to go up to the stalk market. But if you said it was a couple a 100 basis points, you wouldn't be that far off.

Awesome. That's very helpful. Thanks, guys.

This concludes our question-and-answer session. I would like to turn the conference back over to Paul Pickle for closing remarks.

Thank you, Danielle. Thank you for joining us today and have a great week.

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