Lantronix's Q1 2026 Earnings Call: Contradictions Emerge on Drone Revenue Impact, Out-of-Band Management Growth, and Recurring Revenue Prospects

Business Commentary:

* Strong Financial Performance: - Lantronix reported revenue of $29.8 million for Q1, at the high end of their guidance range, with sequential growth of 3% and 3% year-over-year (excluding GRIT's fatigues). - The growth was driven by gross margin expansion and last year's cost optimization initiatives, which improved non-GAAP EPS from $0.01 in Q4 to $0.04 in Q1.

• Drone Business Momentum:
• Lantronix expanded its presence in the drone market, with a significant increase in OEM engagements from 10 to 17 between Q4 and Q1.

• The growth was supported by successful partnerships like with Red Cat's Teal Drones and the introduction of edge AI drone solutions, which meet stringent NDAA and PAA requirements.

• Out-of-Band Management and IoT Growth:

• Lantronix reported growth in its out-of-band management segment and plans to introduce a new product to target new markets.

• This growth is attributed to increased deployments and a focus on expanding recurring revenue models, as seen in the compress.ai initiative.

• Gross Margin Improvement:

• Non-GAAP gross margin reached a record high of 45.3%, up from 40.6% in Q4 and 42.6% in the prior year quarter.

• The improvement reflects a more favorable product mix, lower inventory charges, and benefits from certain royalties, supporting disciplined cost management.

• Positive Cash Flow and Debt Reduction:

• Lantronix generated positive operating cash flow of approximately $3.6 million and paid down another $1 million of their outstanding debt, leaving a balance of $10.7 million.
• This positive financial performance is attributed to strong execution on cost management and operational efficiency.
  

Contradiction Point 1

Drone Market Revenue Impact

It involves conflicting statements regarding the impact of the drone market on overall revenue, which could influence investor expectations and strategic planning.

Can you outline the current stage of drone adoption and the competitive landscape? - Ryan Koontz (Needham & Co.)

2026Q1: Long-term opportunity could be 10-15% of revenue. - Saleel Awsare(CEO)

What is the revenue potential for the drone opportunity? - Christian David Schwab (Craig-Hallum Capital Group)

2025Q4: Opportunities range from $3 million to $5 million annually per customer. It could become 10% to 15% of Lantronix's revenue in fiscal 2027. - Saleel Awsare(CEO)

Contradiction Point 2

Out-of-Band Management Growth

It involves differing statements about the stability and growth trajectory of the out-of-band management segment, which is crucial for understanding the company's revenue and growth prospects.

Did you recognize revenue from the $8 million to $10 million win with a Tier 1 telecom provider? - Christian Swapp(Craig-Hallum)

2026Q1: Out-of-band management is part of a $5 billion market that we're just starting to tap into. - Saleel Awsare(CEO)

Are you seeing stability and recurring customers in the out-of-band business? - Scott Searle(ROTH Capital)

2025Q3: Out-of-band business is expected to stabilize, with some slowdown in federal spending impacting recent quarters. - Brent Stringham(CFO)

Contradiction Point 3

Recurring Revenue Model and Opportunities

It concerns the company's recurring revenue model and its potential for expansion into new markets, which affects revenue projections and strategic direction.

What are the opportunities with ARR and potential adjacent markets? - Scott Thirley(Ross Capital Partners)

2026Q1: Software and service revenue growing to 7-9% and 10%. Adjacent opportunities include robotics and security/surveillance. - Saleel Awsare(CEO)

What was NetComm's contribution in Q1? What is the growth outlook for NetComm? - Jaeson Schmidt(Lake Street)

2025Q3: Customers are engaged, with key accounts such as Vodafone and Coca-Cola. Additional opportunities are emerging from the integration of NetComm's portfolio with Lantronix's products. - Saleel Awsare(CEO)

Contradiction Point 4

Drone Opportunities and Revenue Expectations

It indicates differing expectations regarding the timeline and potential revenue impact of drone opportunities, which are crucial for assessing the company's growth prospects.

Can you outline the current adoption stage for drone opportunities and the competitive landscape? - Ryan Koontz(Needham & Co.)

2026Q1: We are working with 17 OEMs, with some already in design wins and shipping. Accelerating momentum expected; potential upside to expectations. Long-term opportunity could be 10-15% of revenue. - Saleel Awsare(CEO)

Can you update us on edge compute, including design activity pipeline, revenues, and market opportunity? - Scott Searle(ROTH Capital)

2025Q3: Edge AI initiatives are showing progress, with products integrating into drones, robotics, and security cameras. First design in for AI cameras, with volume shipments expected in this quarter. - Saleel Awsare(CEO)

Contradiction Point 5

Drone Opportunity Growth and Timing

It involves differing expectations on the timeline and potential impact of drone opportunities, which could significantly affect revenue projections and investor expectations.

Where are we in the current stage of drone adoption and what is the competitive landscape? - Ryan Koontz (Needham & Co.)

2026Q1: We are working with 17 OEMs, with some already in design wins and shipping. Accelerating momentum expected; potential upside to expectations. Long-term opportunity could be 10-15% of revenue. - Saleel Awsare(CEO)

What is the Edge AI opportunity and how will it scale in FY26? - Scott Searle (ROTH Capital)

2025Q2: We expect to include new products to enter commercial deployment by the end of fiscal '26. And these exciting new products will be supported by strong out-of-band management and Edge AI technology. - Saleel Awsare(CEO)