Jae Young Ju
Investment Thesis
Lantronix, Inc. (NASDAQ:LTRX) is an American IoT systems solution provider headquartered in Irvine, California. In this thesis, I will be analyzing its first quarter results and its future growth prospects. I will also be looking at its valuation at current price levels. LTRX is experiencing a surge in the demand for IoT system solutions, which could result in better-than-expected FY24 numbers for the company. Considering this and its valuation, I assign a Buy rating for LTRX.
Company Overview
LTRX is a leading provider of innovative connectivity solutions that enable businesses to securely connect, manage, and analyze their data, with a focus on the Internet of Things (IoT) and IT market. LTRX provides a range of products designed to connect and network a variety of devices, from legacy equipment to modern IoT devices. The company’s solutions extend to the edge of networks, enabling organizations to manage and monitor connected devices at the source of data generation. This is crucial for real-time decision-making and optimizing operational efficiency. It facilitates the integration of devices and data with cloud-based platforms, allowing organizations to leverage cloud computing for data storage, analysis, and remote management.
Q1 FY24 Results
LTRX beat the market EPS and revenue estimates by significant margins. Even though the company witnessed a marginal growth in revenues y-o-y, the IoT System Solutions segment proved to be the outperformer for the company, registering massive revenue growth. I believe this segment will continue to outperform throughout FY24, given the consistent innovation that the company is undertaking, and new designs being developed to cater to the industrial IoT clients.
It reported net revenue of $33 million, up 4% compared to $31.7 million in the same quarter last year. As per my analysis, the IoT systems products were the primary revenue driver. These products include QEDs and tracking solutions. The revenues from the IoT system solutions segment stood at $19 million, up a significant 30% compared to $14.6 million in the corresponding quarter last year. However, the revenues from the embedded solutions segments witnessed a fall of 24% to $11.4 million, compared to $15.1 million in the same quarter last year. The management clarified that due to a large base in last year’s Q1 owing to two major shipments, this led to this fall in Q1 FY24. I believe embedded solutions could prove to be a real revenue driver in the long term because they cater to the global electric vehicle industry with both hardware and design services. I think this fall in embedded solutions revenue is temporary and could grow significantly in the coming years. The gross margins for the quarter stood at 42.7%, down from 44.1% y-o-y. The higher cost of materials from China resulted in this fall, but I think it did a great job of keeping the overall material costs in control despite a secular rise in inflation in the industry. The company reported a GAAP loss per share of $0.05, flat compared to last year. The non-GAAP earnings stood at $0.07, flat compared to the same quarter last year. In the case of LTRX, the non-GAAP income excludes the cost of share-based compensation and amortization of intangible assets, as it doesn’t have any impact on the company’s cash flow.
Overall, the first quarter result was not very impressive, but I believe it is well-positioned in the industry to capitalize on the future demand. This is reflected in the FY24 guidance provided by the company. The management expects the FY24 revenues in the range of $175-$185 million and non-GAAP EPS between $0.50-$0.60. To put this in perspective, let us compare this to FY23 revenue of $131 million, reflecting a jump of 34%, considering FY24 revenue to be $175 million. I think the company should be able to achieve both the revenue and EPS targets considering the new product line that it has introduced in the market. Its partnership with Qualcomm to develop integrated System-in-Package (SIP) chipset modules could also boost revenues for the company.
Key Risk Factor
Third-party manufacturers: LTRX has contracted its manufacturing to third-party manufacturers, primarily based in China. Any supply chain issue or policy change in China could materially impact its ability to obtain products. For some products like integrated circuits, the company has a single contracted manufacturer; this makes it highly dependent on a single supplier. Not just the finished product but the raw materials for those products, like semiconductor chips, are sourced solely from Taiwan. I believe investors should consider this risk before investing in LTRX.
Valuation
LTRX is trading at a share price of $5.40, a YTD increase of 25%. It has a market cap of $201 million. It is trading at a forward non-GAAP P/E multiple of 9x, considering FY24 EPS of $0.60. I think the company is trading at a discount compared to the sector median P/E of 22x. Its stock price has been consolidating in the range of $3.70-$5.60 for the last year, and once the stock price crosses the $5.60 mark, it could witness a significant upside. I think investors should invest in LTRX at current price levels as a long-term investment for the next 3-5 years.
Conclusion
The strong performance of the IoT System Solutions segment and consistent product innovation in the embedded solutions products make me confident about the company’s future revenue growth. The strong guidance by the management, both in terms of revenue and income growth, is a positive for the company. It trades at a cheap valuation and could give good returns in the long term. Considering all the growth and risk factors, I assign a buy rating for LTRX.