Lantronix, Inc. (LTRX) Q2 2026 Earnings Call Transcript

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Overview

The earnings call presents a positive outlook with strong drone business growth, improved financial health, and optimistic guidance. Despite some challenges in IoT systems, the company is addressing supply constraints and expects demand to increase. Positive cash flow, reduced debt, and strategic M&A plans further bolster confidence. The Q&A section supports the positive sentiment, highlighting raised revenue guidance and opportunities in the Drone Dominance program. Overall, the positive financial performance and optimistic future prospects suggest a positive stock price movement.

Key Financial Performance

Revenue $29.8 million, experienced double-digit growth year-over-year when excluding EMEA smart grid customer, Gridspertise. Growth driven by strength in embedded compute, A&D and drone programs, and network infrastructure switch products.

Non-GAAP EPS $0.04, remained consistent year-over-year. Profitability supported by gross margin expansion and cost optimization initiatives.

GAAP Gross Margin 43.6%, up from 42.6% a year ago. Improvement due to a higher mix of premium products and disciplined cost management.

Non-GAAP Gross Margin 44%, up from 43.2% in the prior year quarter. Improvement attributed to premium product mix and cost management.

GAAP Operating Expenses $14 million, down approximately 9% from $15.4 million in the year-ago period. Reduction due to cost optimization actions taken last year.

GAAP Net Loss $1.3 million or $0.03 per share, improved from $2.4 million or $0.06 per share in the year-ago quarter. Improvement driven by cost optimization and revenue growth.

Non-GAAP Net Income $1.6 million or $0.04 per share, consistent with the prior quarter. Supported by revenue growth and cost management.

Net Inventories $27.1 million, decreased from $29.1 million in the year-ago quarter. Reflects inventory management improvements.

Cash and Cash Equivalents $23 million, increased by approximately $800,000 from the prior quarter. Increase supported by positive operating cash flow.

Operating Cash Flow Nearly $2.2 million, positive for the quarter. Reflects improved operational efficiency.

Outstanding Debt $9.7 million, reduced from $14.7 million a year ago. Reduction due to debt repayment efforts.

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Operating Highlights

Drone Reference Kit: Introduced at CES to accelerate time to market for defense and commercial UAV developers. Reinforces shift from component supplier to platform partner.

SmartEdge.ai and SmartSwitch.ai: Debuted at CES as new Edge AI gateway and AI-powered fiber switch. Enables real-time video analytics and intelligent connectivity, upgrading existing infrastructure without hardware replacement.

Drone Market: Increased fiscal 2026 drone revenue outlook to $8M-$12M, up from $5M-$10M. Drones expected to represent 15%-20% of total revenue in fiscal 2027.

Critical Infrastructure Monitoring: Rollout with Tier 1 U.S. mobile network operator progressing as expected. Expanding applications beyond monitoring generators to backup power bands and rectifiers.

Revenue and Profitability: Revenue of $29.8M in Q2, with non-GAAP EPS of $0.04. Gross margin expanded year-over-year to 44% on a non-GAAP basis.

Cost Optimization: Operating expenses reduced by 6% quarter-over-quarter and 9% year-over-year due to prior cost optimization initiatives.

Edge AI Strategy: Driving adoption across drones, critical infrastructure, and enterprise markets. Combining edge AI, embedded compute, and connectivity for scalable growth.

Recurring Revenue: Building recurring revenue through software and services, with a path to doubling the mix over the midterm.

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Risk or Challenges

Government Shutdown Impact: The government shutdown last quarter caused a short-term slowdown in purchasing activity from certain federal agency customers, disrupting revenue and operations.

Unreleased Defense Funding: Portions of the $13 billion U.S. defense budget allocated for unmanned systems and related programs have yet to be released, potentially delaying program execution and revenue realization.

Regulatory and Integration Complexity: The introduction of the drone reference kit aims to reduce integration complexity and development risk in regulated environments, indicating potential challenges in navigating regulatory requirements and ensuring seamless integration.

Dependency on Key Customers: The company’s reliance on key customers like Red Cat and Flightwave for drone-related revenues poses a risk if these relationships weaken or if customer demand fluctuates.

Inventory Management: Net inventories increased slightly to $27.1 million, which could indicate potential challenges in inventory turnover or demand forecasting.

Debt Levels: Although debt has been reduced to $9.7 million, it remains a factor that could impact financial flexibility.

Economic and Market Uncertainty: Broader economic uncertainties and market conditions could impact customer demand and the company’s ability to scale its operations effectively.

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Guidance & Outlook

Drone Revenue Outlook: Lantronix increased its fiscal 2026 drone revenue outlook to $8 million to $12 million, up from the previous range of $5 million to $10 million. Drones are expected to represent approximately 15% to 20% of total revenue in fiscal 2027.

Market Trends in Drones and Unmanned Systems: Calendar 2026 is expected to mark the start of an unmanned aerial systems super cycle, driven by accelerating adoption of autonomous platforms in defense and commercial applications. The U.S. defense budget includes over $13 billion in funding for unmanned systems, autonomy, ISR, and counter-UAS programs.

Critical Infrastructure Monitoring Expansion: Lantronix plans to expand beyond monitoring generators into additional high-value applications within cell towers, such as backup power bands and rectifiers. This program is expected to scale into a repeatable multiyear deployment model.

Recurring Revenue Growth: Lantronix aims to more than double its software and services revenue mix over the midterm by integrating software, analytics, and AI pipeline orchestration into existing hardware deployments.

New Product Launches: Lantronix introduced SmartEdge.ai and SmartSwitch.ai, which enable real-time video analytics and intelligent connectivity. These solutions are designed to upgrade existing infrastructure, expanding the addressable market and supporting scalable brownfield upgrade opportunities.

Third Quarter Fiscal 2026 Guidance: Lantronix expects revenue to be in the range of $28.5 million to $32.5 million, with non-GAAP EPS between $0.03 and $0.06 per share.

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Shareholder Return Plan

The selected topic was not discussed during the call.

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Key Q&A

Q:Can you provide commentary on the sequential decline in IoT systems & solutions and the expected transition over the next quarters?

A:The IoT systems & solutions segment experienced a sequential decline due to a shutdown last quarter and the end of a rollout program for a Tier 1 MNO customer. The prior quarter ending in September is traditionally heavier due to the Fed buying season. The December quarter saw the program nearing its endpoint, contributing to the decline.

Q:What was the December quarter's contribution to the drone business, and what is the fiscal '27 revenue guidance for drones?

A:The December quarter saw a significant increase in drone revenue, with fiscal '26 guidance raised to $8 million to $12 million. For fiscal '27, drones are expected to contribute 15% to 20% of the company's revenue, equating to $20 million to $30 million.

Q:Can you provide commentary on the company's participation in the Drone Dominance program and its defensibility?

A:The company is working with a significant number of the 25 entities involved in the Drone Dominance program, either directly or through partners. The program is expected to produce 300,000 drones over 18 months, starting with 30,000. The company’s differentiation lies in payload integration, edge compute, secure connectivity, and long-term relationships with Qualcomm.

Q:What is the ASP uptake when moving from providing modules to an entire system?

A:The current ASP is in the $400 to $500 range for Class Group 2 drones. Moving to a full turnkey solution will increase ASP by hundreds of dollars. The company is also targeting FPV drones, which will have a lower ASP but contribute to a diversified portfolio.

Q:What growth rate should be assumed for the core business or non-drone business in fiscal '27?

A:The company expects fiscal '27 to be a good year, with the core business growing alongside the drone business. While specific growth rates for the core business were not provided, the company highlighted double-digit growth in the drone segment and overall business growth in the December quarter.

Q:Will operating expenses materially change going forward?

A:Operating expenses are expected to remain in the range of $11.8 million to $12.3 million per quarter in the near term, consistent with recent quarters.

Q:What was the impact of the government shutdown in the December quarter, and are there any supply constraints?

A:The government shutdown caused some friction in the IoT systems segment, but the team managed to make up for the impact. The company is proactively addressing supply constraints, including memory shortages, and does not foresee significant issues in the short to mid-term.

Q:How should we think about the gross margin profile given the upward revision in drone revenue guidance and software growth?

A:Gross margins are near the corporate average and are expected to improve as software services grow. The company has seen consistent gross margin improvement year-over-year and quarter-over-quarter.

Q:How quickly might demand materialize into the backlog following the defense budget approval and FCC ban on Chinese drones?

A:The company is working with multiple partners and expects demand to materialize quickly, supported by the Drone Dominance initiative and the FCC ruling. The company has increased its revenue expectations for drones to 15% to 20% of total revenue for fiscal '27.

Q:What is the company's M&A strategy to expand margins and drive ASPs?

A:The company is exploring M&A opportunities in two areas: subsystems for drones to integrate more into SoMs and add software layers, and critical infrastructure monitoring to increase ARR and software revenue. These efforts aim to achieve higher gross margins and revenue stability.

Q:Review of Unclear Management Responses

A:Management avoided providing specific growth rates for the core business in fiscal '27, instead emphasizing overall business growth and double-digit growth in the drone segment. Additionally, while discussing gross margins, management did not provide detailed projections for the medium to long term, focusing instead on near-term trends and general improvement.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

LTRX Transcript

Lantronix, Inc. (LTRX) Q2 2026 Earnings Call Transcript

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The earnings call shows strong financial performance with increased net income and cash flow. There is positive momentum in the drone and AI sectors, with partnerships enhancing growth prospects. Despite some vague responses, the overall guidance is optimistic with expected revenue growth and stable margins. The partnership with a U.S. mobile carrier and the Kompress.ai initiative are significant positives. Given these factors, the stock is likely to experience a positive movement in the short term.

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The earnings call reflects positive sentiment due to strong cash flow, debt reduction, and inventory management. Despite margin pressures, guidance for fiscal '26 is optimistic with double-digit growth expectations. The Q&A revealed excitement about the drone market, with significant revenue potential and strategic partnerships. Although management was vague on some specifics, the overall outlook, including new product launches and expansion efforts, suggests a positive stock price movement in the short term.

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The earnings call presents a mixed outlook. While there are positives like margin expansion, cost reductions, and strategic partnerships, challenges such as revenue decline, economic uncertainty, and supply chain risks weigh heavily. The Q&A reveals cautious optimism but also highlights uncertainties, especially regarding Gridspertise revenue. The guidance suggests flat earnings with potential margin pressure. Debt reduction and cash position are positives, but the lack of strong catalysts or guidance revisions keeps the sentiment neutral. Without market cap data, it's difficult to predict strong market reactions.

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Frequently Asked Questions

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