Lantronix, Inc. Q2 FY2026 earnings call

• Disciplined execution led to revenue of $29.8 million and non-GAAP EPS of $0.04, within guidance. Profitability was strong due to gross margin expansion and cost optimization.
• Drone business momentum: Scaling faster than expected, with over 15 OEMs engaged, introduction of a drone reference kit at CES, partnerships with Red CAT, Flightwave, Trillium, Flock Safety, and Safeco Group, and revised fiscal 2026 drone revenue guidance to $8M-$12M.
• Critical infrastructure: Tier 1 MNO rollout progressing, debut of Smart Edge AI and Smart Switch AI at CES, with potential to expand into additional high-value applications within the tower and scale software-enabled recurring revenue.

Lantronix reported revenue of $29.8 million for the fiscal second quarter. Excluding Grid Expertise, there was year-over-year growth driven by embedded compute (including AMD and drone programs) and network infrastructure switch products. The drone segment saw meaningful growth from Q1 to Q2, with revised guidance for fiscal 2026 drone revenue to $8 million to $12 million (up from the prior range of $5 million to $10 million), and drones expected to be approximately 15% to 20% of total revenue in fiscal 2027. For critical infrastructure, the Tier 1 U.S. Mobile network operator rollout continued, with software and services accounting for about 6% of total revenue, and potential to double that mix mid-term through layering software analytics and AI pipeline orchestration into hardware deployments.

• FY2026 revenue expected to be in the range of $28.5 million to $32.5 million, with non-GAAP EPS in the range of $0.03 to $0.04 per share.
• Drone revenue for fiscal 2026 revised to $8 million to $12 million (up from prior $5M-$10M range), and drones expected to be 15%-20% of total revenue in fiscal 2027.

• Government shutdown last quarter caused a short-term slowdown in purchasing activity from certain federal agency customers.
• Memory shortage and supply chain pressures, with the company proactively working with customers to alleviate these issues.

Q: Hey, good afternoon. Thanks for taking my questions. Nice to see the drone momentum starting to accelerate a little earlier than expected. Maybe quick to kick off, so to calibrate on IoT systems and solutions, I think it was down sequentially. Can you just provide some commentary in terms of what happened on that front and kind of how we expect things to transition over the next couple of quarters going forward? And then on drones, I wonder if you could give us an idea about what the December quarter looked like in terms of contribution. And I want to clarify your comments in terms of fiscal 2027 raising the guidance for fiscal 2026, but in 2027 I thought you said 15% to 20% of the mix, which gets drones over $20 million in absolute dollars in fiscal 2027. So we want to make sure that that's in the ballpark. And then a lot of developments going on within the marketplace and specifically in the last day or so. I think there was commentary around the drone dominance program starting to kick into gear with awards starting in March. I'm wondering if you could provide some commentary about your participation in that. I think there are 25 entities involved and it sounds like you're working with 15 plus and just kind of give us an idea of how well you are positioned there and how defensible the opportunity is for you?

A: Scott, thanks for the questions. Let me start with the drone section first, because you've got a few things there, let me unpack all of that for you. So let's do revenue. On the revenue side, as I said, our prior expectation was about $5 to $10 million for fiscal 2026, which ends in June. We have now moved it up to $8 to $12 million in fiscal 2026. So it's a meaningful increase. We're seeing a lot of momentum in the business, so we feel good where we are at. Without getting into the details, Q1 to Q2, we saw a big bump up. So we are very happy, and that's why we believe we'll continue to increase every quarter into Q3 and Q4 as I look forward. For fiscal 2027, you've done the math right. It should be 15% to 20%, so it could be anywhere from, you know, $20 million to $30 million range give or take. So that's how big a part of our company's revenue it will become. The other question you had is about the differentiation and how we are winning. Let me spend some time on that. It's really a very important point, and let's spend a few minutes on it. So first, our differentiation starts with where we operate in the drone stack. We are at the intersection of payload integration, with our edge compute, and secure connectivity. So it all goes hand in hand. Second is our long-term relationship with Qualcomm, which is a real advantage because we are able to meet the requirements, which is known as SWaP—Size, Weight, Power—compared to what's in the market right now. So we are winning using that solution, making an on-module. At CES, as you know, we announced a drone platform in anticipation of the drone dominance program, and I'll come back to that in a minute. So we announced that. We started providing a full solution and a kit, so we're providing a system solution as opposed to just a module. And I've said this in the past, we win because embedding cameras into systems is in our DNA. We've done that for a long time. This is probably one of the more complex ones where they have six to eight cameras on each drone. We know how to integrate that into a solution that the customer can use and go to market. The other thing is the market is up and coming and new, and us making it easier for our customers to get to market fast is really a big differentiator now as we are able to go out and work with a lot of customers. And over time, I believe, this creates a lot of stickiness, all the things that I talked about, and the margins are going to improve. Out of the 25 vendors who won the Drone Dominance, this is the first one, by the way. It's going to be a multi-quarter program, and then it's going to be a total of, I believe, 300,000 drones over the lifetime, over the next eighteen months. So they only did 30k in the program, which is a start. We are working with a sizable amount of them, either directly or through some of our partners where we are in the gimbal. So the list was very exciting to see. I happen to know a lot of the folks on the list. So I hope I covered all the drones questions. I'm going to have Brent take the IoT systems a little bit into detail. But just want to remind everybody, we did have a bit of a shutdown last quarter where some of our IoT system products get sold. With that, Brent, go ahead.

Q: Yes. Congrats on the acceleration of the drone business. Can you explain or give us a little bit of color on, you know, what the ASP uptake would be moving from just providing modules to an entire system?

A: Thank you for that question, Christian. So as we stated pretty clearly, our ASP is in the $400 to $500 range today. And this is mainly in the Class Group 2 drones that we are in. As we go to a full turnkey kind of solution, it will move up, you know, quite nicely as we do more integration. The hundreds of dollars more. And if we go, and our plan is then also to go after the FPV drones, which will have a bit of a lower ASP. So it's going beyond one kind of price point where we're now having a portfolio that we're going after. So it's going to vary, but it's a healthy ASP that we are seeing and good margins in the business.

Q: Hey, guys. Thanks for taking my questions. Just curious if you could quantify what the government shutdown or that impact was in December, obviously, as you noted, causes cost and friction? And then relatedly, if you're seeing any supply constraints today, obviously, with the well-known memory shortage out there. Just curious if you're seeing any other dynamics.

A: What I want to leave you with is the government shutdown, and I think Brent talked a little bit about the IoT systems, which is our box products, which were a bit slower than we expected because of the shutdown. But the team executed so well that we were able to make up all of it, and I'm really happy with that. So think about that from that perspective. You know, the government is starting to normalize, so we hope, I expect and hope that things will improve on that side if you think about it. On the memories, great question on the memory shortage, the way, Jaeson. Everybody's talking about it. We do see pricing and supply pressures going on. We are proactively working with our customers to alleviate this. To ensure that we are supplying them enough product, especially in some of the new businesses like our drone stuff. So we have got the supply that we have prepared for them. They are working with us closely on that. And we don't see a big issue in the short term to even the midterm. And longer term, I mean, we gotta think about all of that. But we are able to work around most of the issues that we are having, and we're working with our customers very closely to ensure there is no supply disruptions.

Q: Hi, good afternoon. Nice quarter.

A: Thanks, Austin.

Q: Just my first question, now the defense budget is passed and the FCC has banned new Chinese drones. So how should we be thinking about how quickly we might see demand materialize into your backlog either from the 340,000 drone American Drone Dominance Initiative or on the commercial side for some?

A: Yes. So on the drone dominance and the FCC ruling on December 23, it is going to be helpful for all American manufacturers. And Austin, we are working with a slew of companies now to get them enabled and into the market faster. And, you know, I can go over the list. We've got Red CAT, multiple programs, multiple Red CAT companies. Trillium, which is big and it's in the large ecosystem there, Sightline, Grimsy. We worked with SafePro, and, you know, you're going to be seeing more announcements from us. So we are getting geared up to support this, and that's why we increased our, you know, expectations for next year to 15% to 20% of the company's revenue, which is very meaningful. The other little thing in my prepared remarks that you might have got, we got our first win in the drone as a first responder category. Which is if you would think about it as a commercial or a public safety area, now that's new and unique and because that was all held by the Chinese in the past. Now that's getting created in the United States, and we want to be a part of that also. So you know, great and exciting times ahead of us. And we are ready. We are ready.

Q: Okay. And how should we think about potential M&A that you might be eyeing to expand margins and drive ASPs beyond like the $400 to $500 range? For, like, broader systems or subsystems?

A: Yeah. We are looking at M&A really in two areas as I think about the company. Looking at subsystems like should we be now we're working with some companies that do a lot of the drone manufacturing already. But can we integrate more into our SOMs, we add a software layer around it? SPAR is a perfect example where we partnered with somebody who's putting their IP onto our SOM. So M&A is going to be an important feature that I think about the future as we create more of an ecosystem and a platform play, Austin. So you know, we're talking and talking to a bunch of folks in that. The other area we're also looking at M&A is around our critical infrastructure monitoring. Where we want ARR and software to be a larger portion of the company. So both of those areas are areas we're focused on. And that'll get this company to higher gross margins, higher software revenues, higher stability as I think about it.