Lantronix outlines potential for drones to reach 15% of revenue by fiscal 2027 while advancing recurring revenue platforms

Earnings Call Insights: Lantronix, Inc. (LTRX) Q1 2026

MANAGEMENT VIEW

* President and CEO Saleel Awsare reported "revenue of $29.8 million and non-GAAP EPS of $0.04, both at the high end of our guidance range," with revenues growing 3% sequentially and year-over-year, excluding Gridspertise. Awsare noted "non-GAAP EPS improved from $0.01 in Q4 to $0.04 in Q1, driven by gross margin expansion and the operating leverage created by last year's cost optimization initiatives."
* Awsare highlighted momentum in the drone business: "our OEM engagements grew from 10 last quarter to 17 today," and cited the launch of an "Edge AI drone solution" and the introduction of EdgeFabric.ai, a visual orchestration platform for Edge AI deployment.
* In asset monitoring, Awsare announced a partnership with Vodafone IoT to launch Kompress.ai by Lantronix, describing it as "a subscription-based SaaS platform targeting the $27 billion global industrial air compressor market."
* Awsare stated the strategy is to "scale high-growth verticals, expand software-enabled recurring revenue and drive operating leverage from a leaner cost structure."
* CFO Brent Stringham said, "In the first quarter, we delivered revenue of $29.8 million, an increase of 3% from the prior quarter and approximately 3% higher than the same period last year when excluding the impact of Gridspertise." Stringham added, "In the first quarter, GAAP gross margin was 44.8%, up from 40% last quarter and 42.1% a year ago."
* Stringham stated, "During the first quarter, we also generated positive operating cash flow of approximately $3.6 million."

OUTLOOK

* For Q2 fiscal 2026, Stringham announced, "We expect revenue to be in the range of $28 million to $32 million. Non-GAAP EPS is expected to be in the range of $0.02 to $0.04 per share."
* Awsare indicated, "At the midpoint, our Q2 guidance implies sequential revenue growth and nearly 20% year-over-year growth, excluding Gridspertise, together with another quarter of solid profitability."
* Management expects gross margin to "remain healthy and generally consistent with first half fiscal 2025 levels."

FINANCIAL RESULTS

* Revenue for Q1 2026 was $29.8 million, with non-GAAP net income of $1.5 million or $0.04 per share.
* GAAP operating expenses were $14.9 million. GAAP net loss for the quarter was $1.4 million or ($0.04) per share.
* Net inventories stood at $26.7 million. Cash and cash equivalents were $22.2 million, up over $2 million from the prior quarter.
* The company paid down $1 million in outstanding debt, leaving a balance of approximately $10.7 million.

Q&A

* Ryan Koontz, Needham & Company: Asked about drone adoption, design wins, and competitive landscape. Awsare responded, "we are now working with 17 OEMs...accelerating momentum in the drone business...while it's still early, we expect demand to accelerate throughout the fiscal year, presenting potential upside to what my current expectations are. And longer term...this opportunity could be 10% to 15% of the company's revenue."
* Koontz followed up on the generator win with a major service provider. Awsare said, "we have the generator win with a large MNO...progressing well, and we are now moving beyond the diesel generator to other equipment that needs to get tracked."
* Koontz inquired about Kompress.ai's sales model with Vodafone IoT. Awsare answered, "Kompress.ai is an AI-powered SaaS solution designed...to generate long-term high-margin recurring revenue...Vodafone has partnered with us. They will provide the connectivity...while we provide both the hardware and the SaaS deployment."
* Scott Searle, ROTH Capital: Asked about out-of-band management and drone impacts from the government shutdown. Awsare said, "Most of the defense drone in UAS are funded through multiyear contracts. So we are seeing minimal to no disruptions to our existing work."
* Searle asked about ARR opportunities. Awsare cited "Software and services is 5% to 7%...I expect that to keep on chugging along to 7% to 9% and 10% in the future."
* Christian Schwab, Craig-Hallum: Asked about timing for drone revenue hitting 10% to 15% of revenue. Awsare replied, "it's definitely on my radar for a fiscal year 2027 possibility."
* Jaeson Schmidt, Lake Street: Inquired about wireless operator opportunities and the impact of drones on gross margin. Awsare stated, "the opportunity, as we've said in the past, could be 3x the size...The good news with the drone opportunity right now, it's a decent gross margin for us right now."
* Searle clarified gross margin outlook and sequential growth. Stringham confirmed, "modeling at that level going forward in the near term is appropriate" and Awsare indicated, "we expect to staircase up...we feel good today."

SENTIMENT ANALYSIS

* Analysts raised detailed questions regarding the scale and timing of recurring revenue, drone market share, and margin sustainability, reflecting a slightly positive but probing tone, with interest in upside potential and execution risks.
* Management's tone was confident and assertive during both prepared remarks and Q&A, frequently referencing growth, recurring revenue, and market expansion. Awsare used phrases like "we are now working with 17 OEMs" and "we expect demand to accelerate," signaling optimism.
* Compared to the previous quarter, both analysts and management expressed increased confidence, with analysts more focused on trajectory and recurring revenue, and management highlighting improved operational leverage and strategic execution.

QUARTER-OVER-QUARTER COMPARISON

* Guidance for revenue and non-GAAP EPS was reiterated, with the midpoint for Q2 implying sequential growth and nearly 20% year-over-year growth, excluding Gridspertise, compared to last quarter's focus on stabilization.
* The number of drone OEM engagements grew from 10 to 17 quarter-over-quarter, and recurring revenue initiatives expanded with the launch of Kompress.ai.
* Gross margin improved from 40% GAAP last quarter to 44.8% this quarter, attributed to favorable product mix and cost controls.
* Management's tone shifted from emphasizing stabilization to projecting scalable growth and increased market penetration, especially in drones and SaaS platforms.
* Analyst questions in the current quarter focused more on the sustainability and long-term potential of new revenue streams, reflecting heightened interest in forecasted growth.

RISKS AND CONCERNS

* Management acknowledged a "dynamic trade environment" and stated, "we are closely monitoring evolving tariff and trade developments."
* Awsare addressed potential impacts from the government shutdown, noting "minimal to no disruptions to our existing work" due to multiyear contracts.
* Stringham cited proactive management of global footprint and adapting to changing cross-border requirements as key mitigation strategies.

FINAL TAKEAWAY

Lantronix leadership emphasized robust growth in high-potential verticals, including drones and asset monitoring, supported by a surge in new OEM engagements and the introduction of recurring revenue platforms like EdgeFabric.ai and Kompress.ai. Management highlighted continued improvements in gross margin and operating leverage, positioning the company for sequential revenue growth and solid profitability in the coming quarters. The outlook for fiscal 2026 remains strong, with the drone segment projected as a significant contributor and recurring revenue streams expected to expand, reinforcing Lantronix's confidence in its growth trajectory and diversified business model.

Read the full Earnings Call Transcript [https://seekingalpha.com/symbol/ltrx/earnings/transcripts]

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