Hello, and welcome to the Lantronix 2023 Q4 Results Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Robert Adams. Please go ahead.

Thank you. Good afternoon, everyone, and thank you for joining the Fourth Quarter Fiscal 2023 Conference Call. Joining us on the call today are Jeremy Whitaker, our interim CEO and Chief Financial Officer; and Jacques Issa, our Vice President of Marketing. A live and archived webcast of today's call will be available on the company's website. In addition, you can find the call and 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 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 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 will now turn the call over to Jeremy Whitaker, Lantronix's Interim CEO and Chief Financial Officer.

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 fourth quarter and fiscal year 2023 before I provide our financial targets for fiscal 2024 and an update on our CEO search. For FQ4 2023, we reported revenue of $34.9 million, up 6% sequentially and down 3% from the year-ago period. The sequential growth of 6% was largely a function of a strong quarter for our Embedded Solutions products, led by an embedded compute sale of approximately $3.4 million to an in-flight infotainment customer. We also experienced continued contribution from our electric vehicle customer, Togg. System Solutions were relatively flat quarter-over-quarter and included $1.4 million in revenue from the delivery of QED pilot production units to Gridspertise. We saw a weaker quarter in out-of-band products as our larger financial customers continue to exhibit cautious spending patterns. We expect out-of-band to improve against the backdrop of the upcoming Fed buying season. And sales here should increase in the September and December quarters, adding a boost to gross margins. And at Q4 2023, Software and Services revenues were down sequentially, a function of lower design services revenue. However, there was an ebb and flow to these design projects, and we expect improvement going forward. GAAP gross margin was 39.5% for FQ4 2023 compared to 44.4% in the prior quarter and 41.9% in the year-ago quarter. The decline in gross margin was primarily a function of product mix, with the biggest variances being higher embedded compute sales and lower out-of-band sales as a percentage of revenue during FQ4 2023. For FQ1 2024, we expect our sales mix to normalize, with lower compute sales and gross margins closer to the mid-40s. GAAP SG&A expenses…

[Operator Instructions] Today's first question comes from Scott Searle with ROTH MKM.

Nice to continue to see the reinforced outlook for fiscal '24. Jeremy, maybe -- I just want to quickly dive in and get some color around the gross margins. It sounds like that's purely mix in the June quarter and you're expecting a recovery back to where we've been in recent quarters, kind of given the recovery in out-of-band and some of the other products. Is that correct?

Yes, that would be correct. We had a really strong compute quarter, and our out-of-band was actually down sequentially. The compute being on the lower end of our margin scale and the out-of-band on the higher into the scale. For FQ1, we're expecting that to kind of flip where we're going to see much more contribution from out-of-band and lower contribution from compute. And the result of that would likely be returning to gross margins closer to the mid-40s.

Great. And then just looking at the top line, I thought I heard September sequentially down a little bit. Just want to clarify that. But then you start to see the ramp-up in the contribution from Gridspertise ramping up. I think you said $5 million in December, going to $10 million in the March quarter. I want to clarify that because it really implies, right, that you continue to see that big ramp-up over the course of the year and the contribution on that front. I'm wondering, 2 things on top of it. Gross margin profile, how is that going to impact you guys in the back half of the fiscal year? And then the follow-on contract, I'm wondering what other color you could provide around that in terms of the magnitude, size and timing related to that?

Yes. I think you're characterizing how we expect the year to play out. As it relates to -- as it relates to margin, we are expecting to maintain margins in the mid- to low-40s, similar to what we saw in fiscal '23. As grid rolls in, it's pretty close to our corporate average. That said, it will bring down margins slightly. But we do have some tailwinds as it relates to -- we've been experiencing lower supply chain costs and lower PPVs. And so I would expect as those lower costs roll in, we will see some benefit from that, which would offset some of the lower gross margin that we would get on a combined basis from Gridspertise.

Great. And lastly, if I could. You talked about some of the other opportunities in different verticals, guys like Togg, et cetera. But I'm not sure if I heard a number in terms of the opportunity pipeline. I think last quarter, you talked about $150 million plus in opportunities. I'm wondering if there's a number that you would put on it.

Yes. That number has continued to grow. We're still pursuing a large number of opportunities greater than what the company has seen in the past. A lot of that is in applications such as smart cities, smart grid, EV, automotive, as well as security and surveillance.

The next question comes from Mike Walkley with Canaccord Genuity.

Great. And yes, my congrats on reiterating the guidance closer to Gridspertise ramping. Just on Gridspertise, you talked about your early negotiation for the follow-on contract. If that goes well as we look out to fiscal '25, could -- could that be at least another $40 million? Or would you think it could grow off that as you have another -- maybe a full year of production versus ramping throughout the year?

Yes. I think on the high end, we would grow year-on-year with Gridspertise based upon the units that they have and the pricing that we're currently talking about. And so yes, we do have a really good, I think, opportunity to continue the business with Gridspertise and to grow it year-on-year.

Great. That's helpful. And then as Gridspertise ramps or as you look at your mix throughout the year, Jeremy, is there anything to call out on gross margins? I know you're saying Q1 should bounce back kind of to that mid-40-ish. Is that a good way to think about for the full year? Or is there any puts and takes, how we should think about gross margin throughout the year based on your pipeline?

Yes. With the models that we put together and based upon our current forecast, the gross margin profile for the full fiscal year looks pretty close to what we had in fiscal '23. And like I said, as I mentioned previously, we do see some benefit from greater absorption as revenue increases from some of our fixed costs. And also, we are seeing quite a bit of relief in both in logistics and purchase price variances, which should start showing themselves as we get into Q2 and the second half of the fiscal year. I think in addition to that, just on the operating margin, there's also quite a bit of leverage in the business. And so as we do grow the top line, we don't expect to add OpEx at a similar level, which would allow us to exit the year with an EBITDA margin in the mid-teens.

Great. That's helpful. As you think about the ramp in the model. I guess, last question for me, just on Embedded, very strong quarter due to that shipment, and you talked about it down sequentially. Is this a business that builds from there? And do you think it grows year-over-year? Or is most of the growth coming from IoT systems in 2024?

Yes. So on the Embedded compute side, the next couple of quarters will be a little bit soft there. We have a couple of new -- a number of new design wins that are beginning to ramp in Q3, which would continue to grow that business. But in general, the compute business is driving the growth. Gridspertise itself is part of the, I would call it, the compute business, although it's not an embedded product and that -- that opportunity was brought to us through our design services on the Qualcomm processor.

Great. Thanks for taking my question. I'll pass the line.

The next question comes from Christian Schwab with Craig-Hallum Capital Group.

So I just wanted to verify that you guys still believe you can do $50 million over the next few years with Togg. Is that still the production goal?

Yes. And if anything, it's gotten better. We just received this quarter, a follow-on order from Togg, which was much greater than we had initially anticipated. So they're on track, if not doing better than what we've indicated previously.

Fantastic. And then my final question is like a follow-up to the first question, I think, from Scott. There's about 40 projects that you kind of highlighted before that could contribute $150 million of the annual revenue. Are any of those projects in your expectations for next fiscal year?

There are a couple that could help fiscal '24. I would say the vast majority of them would be projects that we'd be winning in fiscal '24 and then most likely contributing to revenue in fiscal '25. I think more about the future with that pipeline, although some of them have a high likelihood of closing and contributing in the current fiscal year as well.

The next question comes from Ryan Koontz with Needham.

Yes. Just kind of drilling down on the near term, it sounds like a promising pipeline and contracts that with kind of the current state of the business out there in terms of -- are you still dealing with inventory in the distribution? And there was some Qualcomm commentary about kind of general softness in industrial IoT. Can you kind of contrast your pipeline versus near-term dynamics? That would be helpful.

Yes. Starting with channel inventories. We saw several quarters with our inventory in the channel declining at least with our distributors. This quarter, we did see it bump up a little bit, but it is within, I would say, our historical norms. So we're not seeing elevated inventory at our distributors. We have heard from a couple of customers where they feel like they have inventory that they need to burn through, but it's not necessarily systematic, I think, in our distributor channel. I think it's a situation where like a lot of companies with supply shortages and COVID, everybody was -- companies were putting more inventory on hand because of the difficulty in getting it. We did mention previously on several calls that coming out of post-COVID, we did see some weakness in certain parts of our business. That said, most of our growth drivers for fiscal '24 are really driven by large programs that we've won and in particular, Gridspertise and Togg, where we have orders on hand to be able to drive that growth. In addition, we are seeing some new demand being generated from some of our newer product releases in connectivity. In particular, we have a nice opportunity with AT&T that we mentioned on our previous call that's made some nice progress over the last quarter. And that will also help with the growth next year.

That's great to hear. And a quick follow-up on the competitive front. Any changes? I've heard about a few kind of new entrants kind of coming at this with industrial hard and type products in areas that you play out of Europe and other spots. Are you seeing much of an impact? Or is it a pretty stable competitive landscape?

Yes. I think we're not necessarily seeing any new entrants at this point. With our out-of-band product, with our recent acquisition of Uplogix, we think we've got a market-leading product there. On the Qualcomm side with the design services, I think we have a great ability there to differentiate ourselves. And so not necessarily seeing anything new in those areas today.

Thank you. This concludes our question-and-answer session. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.