Good day, and welcome to the Lantronix Fourth Quarter 2024 Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Jeremy Whitaker, Chief Financial Officer. Please go ahead.

Good afternoon, everyone, and thank you for joining our quarterly earnings call. Joining me on the call 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 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 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’ll now turn the call over to Saleel.

Thanks, Jeremy, and thank you, everyone, for joining us on the call today. I’m pleased to report record revenue of $49.1 million for the fourth quarter of fiscal year 2024, a year-over-year increase of 41% compared to the same period of 2023 and a sequential increase of 19% compared to the March quarter. Non-GAAP EPS in fiscal year Q4 grew 150% compared to the same period last year, demonstrating the leverage in our operating model as revenue grows. Jeremy will provide you with more details and analysis on fiscal year 2024 and the fourth quarter financial results shortly. At Lantronix, we enable Edge intelligence with our compute and connect solutions, allowing our customers to improve both the operational efficiency and real-time decision-making. We understand the complexity of Edge compute requirements, and we provide our customers with complete solutions, including hardware, software, device management and design services. Because our offerings are differentiated, sticky and help customers solve problems, we are able to achieve a relatively higher value for these solutions in the marketplace. We remain focused on three key vertical markets: Smart Cities, Automotive and Enterprise, that have double-digit growth rates, favorable secular trends and combined serviceable addressable market, of approximately $8.5 billion representing a tremendous opportunity for Lantronix. Today, let me start with the enterprise vertical market. Our out-of-band management solutions business is performing very well and grew more than 70% from fiscal year 2023 to fiscal year 2024. Our out-of-band management product portfolio makes it easier to securely manage distributed enterprise networks and devices by providing access, resiliency and tools for daily management tasks when a disruption occurs. For example, during the global CrowdStrike outage that occurred last month, our out-of-band management products with remote access were likely used to reduce network downtime. Our solutions minimized mean time to…

Thank you, Saleel. Now I will provide the financial results and some business highlights for our fiscal year 2024 and fourth quarter before commenting on our financial outlook for the first quarter of fiscal 2025. I will start with a brief recap of our fiscal 2024. We reported record revenue of $160.3 million, representing 22% growth from the prior year. In addition, we reported record non-GAAP earnings of $15.4 million, representing 83% growth from the prior year. We also reported record non-GAAP EPS of $0.40 per share or 76% growth from the prior year. The significant growth in non-GAAP earnings demonstrates the leverage in our operating model and our commitment to maintain financial discipline while still delivering record revenue for the fiscal year. Not only did the team deliver record revenue and earnings, we also improved our balance sheet and liquidity from the prior year. We ended the year with cash of $26.2 million, up 95% from the prior year by generating $18.6 million in cash flow from operations. We reduced inventories from $49.7 million in the prior year to $27.7 million, a reduction of 44%. Furthermore, we increased our working capital to $59 million, an increase of 17% from the prior year. In addition, this week, we extended the maturity of our $16.2 million term loan by one year, further improving our short-term liquidity. With these balance sheet and working capital improvements, we remain well-positioned to drive our strategic growth plan. Now turning to the FQ4 2024 results. For FQ4 2024, we reported revenue of $49.1 million, slightly above the midpoint of our guide and an all-time record for Lantronix. Revenue was up 19% and 41% from the sequential and year-ago periods, respectively. IoT System Solutions increased by 33% and 156% from the sequential and year-ago periods, respectively. The…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Scott Searle with ROTH Capital. Please go ahead.

Good afternoon. Thanks for taking my questions. Quick clarification, Jeremy. You mentioned charges impacting gross margins in the fourth quarter. Could you detail them a little bit what was the magnitude of the impact there? It sounds like they go away as we go into the September quarter. And given the favorable mix from the out-of-band management solutions that gross margin should come back a little bit.

Yes. It was several hundred basis points, probably 200 or 300 basis points, and it was primarily related to some charges for excess and obsolete inventory. And in addition to that, some costs that were accumulated with the growth of inventory during the pandemic. And as inventories have come down significantly, those costs also came off the books.

Okay. Very helpful. And Saleel, on the out-of-band management front, it’s very exciting to hear the growth that’s going on in that business. Could you size it a little bit or give us a range in terms of how big that business is right now? And maybe what the expected growth outlook would be as we look into fiscal 2025 and how and where that pipeline is shaping up?

Sure thing. Scott, we are very pleased with our out-of-band management growth. And as I mentioned, it grew 70% Y-o-Y. We wouldn’t expect the same 70% growth, but it’s got double-digit growth as we get into fiscal year 2025. And it’s above average gross margins for the business. So the way the market has been sized is approximately all in with all vendors around $400 million to $500 million is our data shows in that area. So the market sizing. Now we don’t, Scott, break out revenue by subsegments, so I won’t go into that, but really exciting business for us.

Got you.

And for clarification, the gross margins are on the upper end of our scale as well. So it’s a nice high margin product.

Got you. And two more questions, if I could. The Qualcomm relationship has obviously been very favorable. And more and more, we’re seeing edge AI pushing into the equation these days. I’m wondering, is there some way to help us better understand the design funnel, the opportunity funnel of what you’re seeing out there on that front? And then coupling that with organic growth. You talked about 10% sequential growth from June to September, if we ex out Gridspertise. what is the normalized number we should be thinking out about taking Gridspertise out of the numbers of the organic growth we should be looking for over the next several quarters?

So let me take the edge AI first. And this one is really exciting as I think about it, right? And what would Lantronix offer? We will offer compute SOMs and a full Edge AI Box. And we demoed the Edge AI Box at the Industry Analyst Day in June at Qualcomm headquarters. As from a sizing, it’s early for me to give you a revenue number for that, but we are very closely aligned with Qualcomm on this. Additionally, if you caught in my prepared remarks, you’re building on the platform, we’re working with our partner, who we expect to deploy our software tools into their tool chain to enable developers to rapidly build and deploy solutions. So that would make what they’re doing a little bit more unique to us and we can be differentiated in the market. So that’s specific to Qualcomm. So it’s early days, as you know, for edge AI data centers already happened. So that’s in the early days. On the market, we are doing – we’re giving you quarterly guidance. Sequentially, as Jeremy mentioned, we grew 10%. The SAMs [ph] that we are addressing are – gives us a lot of headroom, so $8.5 billion plus, as I’ve said in the past, I’ll say again, we expect to be growing at or better than the growth rate that we’ve said in that area. And the growth rate that we mentioned is about 12%. So we expect to be growing better than that in the longer term, Scott.

Okay. Thanks so much. I’ll get back in the queue.

The next question comes from Jaeson Schmidt with Lake Street. Please go ahead.

Yes, thanks for taking my questions. Just want to follow up on your comments on the North American smart grid opportunity. I know you mentioned demoing some units. How should we think about the potential timing of this opportunity contributing to the P&L?

Yes. As you know, the – we work with our partner there. And they have just started demoing with a pretty large North American utility, a proof-of-concept system that’s going in there. It’s early days to give you revenue ramps on that. But the key point is the system is very similar to what got deployed in Italy. So it’s not like it’s a brand-new system. Now it’s going through lots of testing like it does. I expect it’s 18 months to 24 months before you see a big ramp on that, but it’s out there, but they’ve started the POCs with it already as I speak. And it’s a proof of concept is what we are doing.

Okay. That’s helpful. And then, Jeremy, just a clarification on gross margin in September. I know you mentioned low to mid-40%. Does that include any continued excess inventory charges though?

No, it doesn’t. We currently don’t anticipate meaningful charges going forward. We do forecast kind of a historical run rate as part of our modeling. But with the significant decline in revenue coming down nearly 50% from the year ago period and also at this point in time, having amortized off, pretty much all of the costs, like purchase price variances and capitalized overhead related to the buildup during the pandemic, we have some nice tailwinds there that should help drive that improvement. In addition to that, with a lower contribution anticipated from our smart grid customer in fiscal 2025, we’ll also expect to see improvement from mix as well.

Got you. Thanks a lot guys.

Thank you.

[Operator Instructions] The next question comes from George Gianarikas with Canaccord Genuity. Please go ahead. The next question comes from George Gianarikas with Canaccord. Please go ahead.

Hi. Good afternoon, everyone. Thank you for taking my questions.

Hi, George.

So maybe to start, can you just sort of give us a little more detail on this engagement that you have on the auto side? Any profile on the average selling price and margins there?

So let me give you a little bit more on the specific things that we’re doing there. So we’ve signed a purchase order with a German truck OEM for software and services. They are developing a new infotainment platform focused on long- and short-haul trucks. We know the cycle is long for automotive customers, but it really adds to our customer diversification in this emerging automotive infotainment business. I expect the gross margins should be – what we have done in the automotive in the past. We haven’t given a specific number out there, but I expect it to be around that area. And by the way, George, this is the key point here, what’s really exciting, it’s greenfield. Part of the story is to go beyond our one customer or a couple of customers that we have into many more, and this is really the start of that. And it shows that our technology is getting adapted.

Okay. Thank you. And maybe just on the M&A side, the inorganic side, I’m sort of new, obviously, to the story. I’d love to understand a little bit about your philosophy around accretion, earnings accretion when you look at acquisitions in addition to strategic fit. Thank you.

Yes. So on the financial side, the type of things we’ve done in the past and that we look at doing on a go-forward basis are very focused on becoming accretive, straight out of the gate or at least having a very short time line to get there through synergy capture. So that’s been a pretty significant focus for us in the past and I’d say all four of the last deals that we’ve done have met that criteria. And at this point that’s also how we’re evaluating deals on a go-forward basis. And I’ll let Saleel comment on the strategic side of things.

Yes. So George, great question, right? We have three verticals we really like, smart cities, enterprise and automotive infotainment. We like compute, we like connect, and in those spaces where we are going to be looking at acquisitions, and we are seeing a pipeline now coming, so we’re starting to look in that stuff. And I’ll just add my own personal experience with acquisitions in my previous company, being accretive from day one is really important, and we’re going to be focused on that for sure.

Thank you.

The next question comes from Ryan Koontz with Needham & Co. Please go ahead.

Thanks for the question. Quick clarification on your autonomous truck; did you mention your time frame at all when you thought that might be able to move into first revenue?

We did not mention the timing of first revenue right now. What we said is we got our first pool – for working with them closely on software and services. The hardware revenue is going to be out a little bit. As you know, the cycles, Ryan, for automotive are longer, so we did not give you a schedule on the hardware revenue yet. But we said we did get RPO for software and service, which then in the future leads to hardware.

That’s great. And Jeremy, quick housekeeping on – it looked like the inventory was down substantially Q-over-Q. Is that mostly related to your shipments to your large smart grid customer? Or was it a write-off high impact there or other things that are driving into your sale?

Yes. The biggest impact was the shipments to our smart grid customer. Then after that, we also brought down inventory levels in other areas. That’s been a focus of ours. And then some of the write-downs were probably the smallest impact to the bringing down the inventory for the quarter.

Got it. So our lead times, I’m sure much more manageable now. Anything you can share there about your lead times you’re seeing for kind of key component – strategic components?

No. The lead times are very manageable. And to what Jeremy said for the past three quarters, the two of us have been over focused on getting this inventory right sized. And I think we are sitting there now. We’ve made some tremendous progress. And the lead times, to your point, Ryan, we’re okay now.

Great. And circling back to the Edge AI topic, it sounds really exciting. Anything more you can share there in terms of the architecture of what these sort of devices would do? Are they part of a larger AI cloud and this is kind of the edge cloud that you’re involved in the inferencing from kind of a core or anything you can share there about the architecture on the AI cloud?

Yes. Great question, Ryan. So obviously, this is the Edge inferencing is what we are going to differentiate and win in. And let me give you like two examples. You can see where it really fits with what we do, right? In videoconferencing, AI tools are now being used to enhance both video and audio. And we’ve got some great video conferencing customers. So I’m talking about the future, right? Right now, we’re already shipping to them. But in the future, with our SOMs, they will be able to have auto framing, tracking, gesture recognition, interesting things like that. We won’t be making the models. The models are going to be what they have, but we will have the ability to run up. And we’ve actually created tools, as I mentioned, our partners going to embed it in their tool chain. So that’s one example. In the smart grid, both the low voltage and medium voltage substations are going to allow inferencing of large set of variables. So the variables and the data are going to come from the energy companies. But our products in the future will be able to kind of understand the grid loading and steer energy in anticipation of loads. So it’s really, it’s early days because Edge AI is early days on the edge, but we’re really working with a key partner, and you know who they are, Qualcomm, and we’ve indexed to them quite a bit, and they have some nice low-power chips and that’s a great focus for them also. So good alignment on our side.

Great. That’s all I’ve got. Thanks for the questions.

Thank you.

This concludes the question-and-answer session and today’s conference call. Thank you for attending today’s presentation. You may now disconnect.