Tech Earnings Roundup: eGain, Lantronix, and Yext Report Q4 Results

eGain Corporation (EGAN) Q4 2024 Earnings Call Transcript

Jeff Van Rhee - Craig-Hallum Capital Group LLC Richard Baldry - ROTH Capital Partners, LLC Good day, and welcome to the eGain Fiscal 2024 Fourth Quarter and Full-Year Financial Results Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Jim Byers, MKR Investor Relations. Please go ahead. Jim Byers Thank you, operator, and good afternoon, everyone. Welcome to eGain's fiscal 2024 fourth quarter and full-year financial results conference call. On the call today are eGain's Chief Executive Officer, Ashu Roy; and Chief Financial Officer, Eric Smit. Before we begin, I would like to remind everyone that during this conference call, management will make certain forward-looking statements, which convey management's expectations, beliefs, plans and objectives regarding future financial and operational performance. Forward-looking statements are generally preceded by words such as believe, plan, intend, expect, anticipate or similar expressions. Forward-looking statements are protected by safe harbor provisions contained in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to a wide range of risks and uncertainties that could cause actual results to differ in material respects. Information on various factors that could affect eGain's results are detailed in the Company's report filed with the Securities and Exchange Commission. eGain is making these statements as of today, September 5, 2024, and assumes no obligation to publicly update or revise any of the forward-looking information in this conference call. In addition to GAAP results, we will also discuss certain non-GAAP financial measures, such as non-GAAP operating income. The tables included with the earnings press release include a reconciliation of the historical non-GAAP financial measures to the most directly comparable GAAP financial measures. eGain's earnings press release can be found by clicking the press release's link on the Investor Relations page of eGain's website at egain.com. And along with the earnings release, we will post an updated Investor Presentation to the Investor Relations page of eGain's website. And lastly, a phone replay of this conference will be available for one week. And now, with that said, I'd like to turn the call over to eGain's CEO, Ashu Roy. Ashutosh Roy Thank you, Jim, and hello, everyone. We finished our fiscal year with revenue and profitability ahead of our projections. Total revenue for the year was $92.8 million and our non-GAAP net income was $12.3 million or $0.39 per diluted share. Looking at the fourth quarter specifically, we saw increased new logo momentum in our AI knowledge offering. This included some big brands, for example, a travel management subsidiary of a financial mega brand in the U.S. Our AI Knowledge Hub will replace their homegrown knowledge base. Next is a mobility division of a multinational conglomerate in Germany. Here, our AI Knowledge Hub will consolidate their knowledge across multiple silos, which include Salesforce and other internal knowledge bases. The third logo I want to point out is the global consumer brand based out of London to support their new product introductions across 84 countries, they have selected eGain's AI Knowledge Hub. And the last one I want to highlight is an industry leader for higher education savings in the U.S. Our AI Knowledge Hub will replace this client's legacy knowledge systems. Looking at our overall business and the market, we are seeing growing inbound interest in our knowledge AI offerings. In fiscal 2024, our new logo wins and RFPs for AI Knowledge were up 50% year-over-year. And our pipeline activity remains strong in July and August. In fact, this summer has been the strongest in four years, pretty much since COVID. To give you a good sense of the foundational role of knowledge in delivering value with AI in customer service specifically, let me share verbatim an excerpt from a Gartner report that was recently published in June this year. I quote, "By 2025, 100% of generative AI, virtual customer assistant, and virtual agent-assistant projects that lacks integration to modern knowledge management systems will fail to meet their customer experience and operational cost reduction goals." That's a very strong statement coming from Gartner. I'm sure many of you read Gartner reports over the years, you have read many. I cannot recall, and I've been doing this for many years, a prediction like this that has a 100% number on the predictor and a time frame, which is basically 12 months from now or a few months from now on an average 12 months. What that means, and we are seeing this, that every CEO of a large business is urgently demanding that their teams apply generative AI technology. And the key is application, apply generative AI technology to reduce operating cost and do it at scale. So they move the needle. As we know, customer service is one of the significant operating line item costs in business. Given that Gen AI needs a solid knowledge foundation to deliver that value, as Gartner points out, not surprising that we are seeing more and more businesses looking to centralize and modernize the knowledge platform. So as we've been saying for a few quarters, we are doubling down on this AI Knowledge market opportunity. Currently, half of our revenue comes from AI Knowledge offerings. Over the past year, we have increasingly rotated our R&D investments toward AI Knowledge products. As you may know, we launched AssistGPT, an eGain product, in February this year, a novel solution to automate and accelerate what are routine but time taking tasks for customer service agents and knowledge authors. This has been enthusiastically received in the market. Historically, knowledge centralization and creation at scale has been what you would call a proverbial Gordian Knot, and we are helping clients slash through it with the eGain AI Knowledge offerings. Before I ask Eric, our Chief Financial Officer, to add more color to our financial operations, I want to mention that our annual customer event, Solve 24, will be held in Chicago on October 29 and 30. At that event, we'll have many clients sharing success stories using our AI Knowledge Hub. And we'll also announce and demo new product capabilities. So we're very excited about that. Thanks, Ashu, and thanks, everyone, for joining us today. Let me provide more details about the financial results for the fourth quarter and full-year of fiscal 2024 before discussing our outlook and guidance for fiscal 2025. Looking at our revenue. Total revenue for the fourth quarter was $22.5 million, ahead of our guidance but down 9% year-over-year. The decline was primarily due to the impact of the two large client losses we had discussed on our Q2 call, and one of them is from our Conversation Hub and the other from our Analytics Hub. For the fourth year, total revenue was $92.8 million, down 5% year-over-year. And looking at our revenue by region for the full-year. North America accounted for 78% of total revenue, the same as in the prior year. Looking at our non-GAAP gross profits and gross margins. Gross profit for the fourth quarter was $15.9 million for a gross margin of 71% compared to a gross margin of 74% a year-ago and 71% last quarter. For fiscal 2024, gross profit was $66.4 million for a gross margin of 72% compared to 74% of the prior year. Now turning to our operations. Non-GAAP operating costs for the fourth quarter came in at $13.7 million, down 8% from $14.9 million in the year-ago quarter, reflecting the expense controls we implemented earlier in the year. Non-GAAP operating costs for the full fiscal year were $56 million, down 13% year-over-year. As we see increased momentum from our AI Knowledge offering, we plan to increase investments particularly in R&D and brand marketing to capitalize on this very exciting opportunity. Looking at our bottom line. For Q4, non-GAAP net income was $2.5 million or $0.08 per share compared to $3.6 million or $0.11 per share in the year-ago quarter. Adjusted EBITDA margin for the quarter was 11% compared to 16% in the year-ago quarter. For the full fiscal year, non-GAAP net income was $12.3 million or $0.40 per share on a basic and $0.39 per share on a diluted basis, up 47% on a dollar basis from non-GAAP net income of $8.4 million or $0.26 per share on a basic and $0.25 per share on a diluted basis in the prior fiscal year. Adjusted EBITDA margin for the fiscal year was 12% compared to 9% in the prior fiscal year. Turning to our balance sheet and cash flows. For the full fiscal year, cash flow from operations was $12.4 million or a 13% operating cash flow margin. During fiscal 2024, we repurchased approximately 2.8 million shares at an average price of $6.28 per share, totaling $17.3 million. Since inception, we have purchased 3.5 million shares or 12% of the shares outstanding when we began the buyback program. Of the $40 million authorized, $17 million remained available under the program at the end of the year. Our balance sheet remains very strong. Total cash and cash equivalents at the end of the year were $70 million compared to $73 million a year-ago. Now turning to our customer metrics. With our focus on AI Knowledge, I've broken out the knowledge metrics from the total metrics. As a reminder, total metrics were impacted by the two conversation and analytics customers' losses - I previously discussed. Outside of these losses, I'm pleased to report that all material customer renewals came in as planned during the quarter. Looking at LTM dollar-based SaaS net retention for knowledge customers, that came in at 97% while total net retention was 85%. LTM dollar-based SaaS net expansion rate for knowledge customers was 106%, while our total net expansion rate was 103%. Looking at total ARR. Total SaaS ARR for knowledge customers increased 8% year-over-year, while total SaaS ARR decreased 10% year-over-year. Looking at our remaining performance obligations. Total RPO decreased 19% year-over-year but was up 16% sequentially from last quarter as renewals came in, as I mentioned, and we also had strong new bookings in the quarter. Our short-term RPO was $60.4 million, down 9% year-over-year, but up 26% sequentially. Now on to our financial outlook and guidance. One item I'd like to call out before providing our guidance is the expected change in revenue forecasted from our Cisco OEM business. As I mentioned last quarter, we are seeing the shift to more ratable recognition, and we estimate this change will result in deferral of approximately $1.3 million of revenue that would have otherwise been recognized in fiscal 2025. Just to be clear, we are not - we don't expect to lose this revenue, but rather instead recognize it more ratably than upfront that we've done previously. And we see most of that impact taking place in Q1 of 2025. For the first - now into the guidance. For the first quarter of fiscal 2025, we expect total revenue of between $21.4 million to $21.8 million. Turning to the bottom line. For Q1, we expect net loss of $400,000 to $1.3 million or a net loss of $0.01 to $0.05 per share, which includes stock-based compensation expense of approximately $900,000 and depreciation and amortization of approximately $120,000. We expect non-GAAP net loss of $400,000 to net income of $500,000 or a loss of $0.01 to a gain of $0.02 per share for the quarter. Looking at fiscal 2025 full-year ending June 30, 2025. We expect total revenue of between $92 million to $93 million, non-GAAP net income of $5 million to $6 million or $0.17 to $0.20 per share, and GAAP net income of breakeven to $1 million or $0.00 to $0.03 per share. We estimate share-based compensation expense of approximately $5 million and depreciation and amortization expense of approximately $400,000. Looking at weighted average shares outstanding, we expect approximately 29.3 million shares for the first quarter and 29.7 million for the full-year. So in summary, we are seeing continued strong momentum with new customers for our AI Knowledge offering. And while we doubled down on the AI Knowledge market opportunity, we are remaining focused on ensuring high customer satisfaction and delivering full business value to our conversation and analytics customers. Lastly, we will be hosting an Investor and Analyst Day event in conjunction with our upcoming customer events in Chicago on October 29. This event is a great opportunity for prospective investors and analysts to meet with customers and learn more about our business. You can register for the event on our website. We hope you can join us. This concludes our prepared remarks. Operator, we'll now open the call for questions. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Jeff Van Rhee with Craig-Hallum. Please go ahead. Jeff Van Rhee Hey, guys. Great. Thanks for taking the questions. Real nice quarter. A handful of questions, if I could. I'm curious on the AI Knowledge wins. You talked about two or three specific customers, and would love to hear a bit about the competitive landscape. I think you said in one, you took out a homegrown solution. And in others, I don't recall. I think you might have had a sales force competitor in the second, if I recall. But just talking about the competitive landscape, what are you displacing and what are you competing with? Ashutosh Roy Yes. This is Ashu here, Jeff. Yes. So let me maybe take a few seconds to give you a sense of what both in terms of the customer profile we're going after as well as what we are seeing in terms of incumbency, replacement and competition, right? So who we are going after, as you know, are customers who have - at this point, we target companies with 5,000 employees or more. That's what we - that's our sweet spot is companies that are 5,000 employees or more. And so typically $1 billion plus in revenue. Now we do get customers who are below that. But when these large companies have complex content and compliance needs and where agent turnover is an issue, that's where we do well. So that's the need that we are targeting and the size of the companies. In terms of who we end up being - winning more and more is where there has been a failed knowledge project. And typically, that's getting more and more highlighted because people are recognizing that when they're doing these Gen AI investments in trying to automate customer service, they realize that trusted content and trusted knowledge needs to be fed into the Gen AI tools for them to do their job on the other end. So we are replacing - I would say, number one, replacement for us is SharePoint, homegrown essentially, that's what it means, right? Number two is Confluence replacement. Again, homegrown. Number three replacement is Salesforce. So people deploy Salesforce knowledge and it's not delivering the value as much as they want, right? And the pressure is on to do more. And the fourth one that we have been replacing is Genesis' knowledge. So - but Salesforce and Confluence are the dominant ones in terms of incumbency because they've been around for a while and people have built homegrown solutions. And the last part of these responses in terms of competitors, I would say broadly, those are the competitors that we are also working up against, right? The people who are trying to retain those knowledge setups, and we are in the replacement business. Jeff Van Rhee Okay. That's helpful. And in the presentation, you talk about the conversion of pilots to customers, I think you quote a 75% number in there. Obviously, a very, very good number. Give me a sense of sample size here. I mean, what's the quality of that indication and the ability to repeat that? Ashutosh Roy I would say, more than 10 in the last few - in the last couple of quarters. Jeff Van Rhee And is there anything about those that gives you doubt that you can retain that pace of conversion? Ashutosh Roy That's hard to say. I feel like we know how to qualify much better now, and that's probably what I would say. So we are - I think part of the reason for the conversion rate being that high is that we are qualifying things well before we put them through the innovation pilot. As long as we do that, I think we should be good. But if we expand that, and we are doing that with some partners we're developing, then I expect that some of those partner-led pilots might actually have perhaps a smaller conversion rate, lower conversion. Jeff Van Rhee On the sales front, I think you said you're going to spend a bit on sales, if I recall, around branding and then a bit on development. What about quota reps? Are you at the right headcount? Where are you quota rep wise? Where do you think you'll be in 12 months? Ashutosh Roy So we feel that the biggest opportunity right now is to drive more pipeline and generate more pipeline. And that's why we are focusing on the brand and sometimes sort of market demand investments. We feel that we are in a good place with our reps, especially because our deal sizes are reasonable. We are still talking about north of 200,000 ARR for new logos. So we feel like we can manage that reasonably well with all the growth expectation we have on the AI Knowledge bookings side. Jeff Van Rhee Okay. And one last, if I could squeak it in. Obviously, you've got a couple of things going on here, knowledge on one side, catching a tailwind and then conversation and in analytics. And obviously, your focus there is customer sat and keeping butts in seats, so to speak. You had the two big customers churn off a couple of quarters ago. I'm sure you've got your ears really tuned. I mean, how are you getting comfortable in the conversation and analytics hub base that you're not at risk with any of your other customers and avoiding future large churn? Ashutosh Roy Yes, that's a good point. We are - as you can only expect, we are hyper focused on that satisfaction, value delivery and continuing to work with these clients to find opportunities. And it happens with the sort of cycle time that every one of these customers have as they are investing on the knowledge and AI side, finding ways to get into that slip stream of knowledge and AI opportunity as well because then that creates a collective stickiness in these accounts. Jeff Van Rhee Got it. Okay, great. Thanks for taking my questions. Appreciate it. Our next question comes from Richard Baldry with ROTH Capital. Please go ahead. Richard Baldry Thanks. You guys have tended to be pretty conservative on the spending side. So I'm sort of curious that only a couple of quarters ago, we were talking about cost controls and now we're talking about investments. So could you maybe talk about what you're seeing that's changing there or whether that's top of the funnel, sales cycles, ARPUs? Sort of give us some backdrop for why that positive shift in sort of your stance looking forward? Ashutosh Roy Okay. So I'd say two things. One is that - three things, really. One is that with existing clients, we are seeing a consistent increase in interest in faster rollout of knowledge across other businesses or other functions like self-service or enterprise-facing. So for those where we are already with - we are in there with agent-facing knowledge solutions. So that's one, right? So that's our kind of the most reliable ear to the ground. And the next thing we are seeing is more inbound interest. And that has been consistently kind of edging up even in the summer months, as I mentioned. It's very unusual for us to be this busy in the summer months on that sort of sales side. This has been unusual. As Eric and I were talking, we felt like the last time we were this active and busy was summer of 2019, right? So it's been a while. So that's the second item. And then the third thing that has changed is I'm noticing this and our sales leadership is also pointing it out, that we are seeing more and more of these opportunities prosecute all the way to a decision much more predictably than before. So people when they come in, the amount of tire kicking is going down. People are executing RFPs, and they say they will execute. It's kind of happening around that time and eventually, they're deciding whether we win or not. So those are the three things we are seeing that's making us change our investment posture. And like Eric said, this is important, Richard. Right now, we are saying product investment and then brand marketing investment, right? Those are the two primary areas we're investing right now. And then as the pipeline gets to a point where it starts to become really - not something we can handle with our current sales capacity, we're going to lag with that investment platform. Richard Baldry Got it. And in the past quarter or two, you've gone through some pretty specifics about some of your larger trialers or how they fit into the Fortune 30, et cetera. Is there any update to that? Any changes, any new sort of larger scale pilots going on that are continuing sort of to fill that top of the funnel while others are working their way through? And I know it's hard because it's sort of lumpy, but I'm just curious if there's anything there. Ashutosh Roy A couple of things I'll say. I think the quality of companies we're engaging with in terms of size and brand continues to be very good, right? So for example, the mega brands, when I said the financial mega brand, I meant a mega brand in the U.S. on the financial side. When I said multinational conglomerate, where we have just got a foot in the door with a reasonably chunky ARR deal in Germany, specifically, this was in Europe, we're talking about our Global 100 company, right? So these are very large companies, even on the logos that we are acquiring. Then on the pilot side, I feel like if I look at it, the - there are many large companies. Now one of the things we do see, and this is a secular thing, we don't see as many multimillion-dollar ARR initial purchases anymore. We just don't see that. What we see is the average is pretty good. Like I said, it's north of 200,000, right, Eric? North of 200,000, initial ARR. But the quality of these companies is large, the potential is large. So I feel like that is a good trend for us. Richard Baldry And then last for me. You're still sitting on a pretty good amount of cash on the balance sheet even after doing some pretty meaningful buybacks. Is there anything interesting sort of on the technology side, whether it's to keep wrapping more product around the AI side of the table or do you think your capital allocation still remains sort of focused on the buybacks over the near term? Thanks. Ashutosh Roy So we are increasing investment R&D. I know it's not - it's a good thing that it's not burning a big hole in the balance sheet, but we are increasing our investment. And in terms of the rotation that we've done in new innovation. So we have a very chunky amount of money that we are putting in and the people and the capability around their knowledge. That is an area that we'll continue to invest in for some time because we think there's a lot of runway to differentiate as well as make an attempt to dominate the emerging market of the AI Knowledge systems. So I would say that's our primary focus right now. That concludes our question-and-answer session. I would like to turn the conference back over to eGain management for any closing remarks. Eric Smit Well, thanks, everybody, for taking the time today and look forward to hopefully seeing some of you at our Solve event in Chicago at the end of October. Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Earnings call: eGain reports momentum in AI knowledge, Q4 revenue dip By Investing.com

eGain (NASDAQ:EGAN) Corporation (NASDAQ: EGAN) has announced its fiscal 2024 fourth-quarter and full-year financial results, highlighting a mix of revenue declines and strong momentum in its AI knowledge offering. The company reported a total annual revenue of $92.8 million and a non-GAAP net income of $12.3 million, or $0.39 per diluted share. However, the fourth-quarter revenue saw a 9% year-over-year decrease to $22.5 million, with non-GAAP net income for the quarter at $2.5 million, or $0.08 per share. Looking ahead, eGain expects a total revenue between $92 million and $93 million for fiscal year 2025, with a non-GAAP net income projection of $5 million to $6 million. eGain's report underscores its strategic focus on expanding its AI knowledge offerings amid a challenging quarter of revenue decline. The company remains committed to innovation and customer satisfaction as it looks to the future with cautious optimism. The upcoming Investor and Analyst Day event will likely provide further insights into eGain's strategy and market positioning. eGain Corporation's (NASDAQ: EGAN) recent financial results reflect a company at a pivotal point. With a reported annual revenue of $92.8 million and a non-GAAP net income of $12.3 million, eGain is navigating through a challenging market environment. As investors look to understand the company's current standing and future potential, certain metrics and management actions stand out. InvestingPro Tips for eGain reveal that management has been aggressively buying back shares, signaling confidence in the company's value. Additionally, eGain holds more cash than debt on its balance sheet, which may provide some financial flexibility moving forward. These strategic choices could be crucial as the company aims to leverage its AI knowledge offerings and expand its market share. From a valuation perspective, eGain's market capitalization stands at $193.58 million, with a P/E ratio of 25.96, which adjusts to 24.88 based on last twelve months as of Q4 2024. The company's PEG ratio during the same period is notably low at 0.04, suggesting potential for growth when considering the earnings projections. Moreover, eGain's gross profit margin remains robust at 70.27%, underscoring the company's ability to retain a significant portion of its revenue after accounting for the cost of goods sold. Investors should note that while the stock has taken a hit over the last week with a price total return of -9.48%, analysts predict the company will be profitable this year. This is supported by the fact that eGain has been profitable over the last twelve months. In terms of liquidity, eGain's liquid assets exceed its short-term obligations, which could be a reassuring sign for investors concerned about the company's ability to meet its immediate financial liabilities. For those interested in a deeper dive, there are additional InvestingPro Tips available at https://www.investing.com/pro/EGAN, providing further analysis and insights that may help in making informed investment decisions. Operator: Good day, and welcome to the eGain Fiscal 2024 Fourth Quarter and Full-Year Financial Results Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Jim Byers, MKR Investor Relations. Please go ahead. Jim Byers: Thank you, operator, and good afternoon, everyone. Welcome to eGain's fiscal 2024 fourth quarter and full-year financial results conference call. On the call today are eGain's Chief Executive Officer, Ashu Roy; and Chief Financial Officer, Eric Smit. Before we begin, I would like to remind everyone that during this conference call, management will make certain forward-looking statements, which convey management's expectations, beliefs, plans and objectives regarding future financial and operational performance. Forward-looking statements are generally preceded by words such as believe, plan, intend, expect, anticipate or similar expressions. Forward-looking statements are protected by safe harbor provisions contained in the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to a wide range of risks and uncertainties that could cause actual results to differ in material respects. Information on various factors that could affect eGain's results are detailed in the Company's report filed with the Securities and Exchange Commission. eGain is making these statements as of today, September 5, 2024, and assumes no obligation to publicly update or revise any of the forward-looking information in this conference call. In addition to GAAP results, we will also discuss certain non-GAAP financial measures, such as non-GAAP operating income. The tables included with the earnings press release include a reconciliation of the historical non-GAAP financial measures to the most directly comparable GAAP financial measures. eGain's earnings press release can be found by clicking the press release's link on the Investor Relations page of eGain's website at egain.com. And along with the earnings release, we will post an updated Investor Presentation to the Investor Relations page of eGain's website. And lastly, a phone replay of this conference will be available for one week. And now, with that said, I'd like to turn the call over to eGain's CEO, Ashu Roy. Ashutosh Roy: Thank you, Jim, and hello, everyone. We finished our fiscal year with revenue and profitability ahead of our projections. Total revenue for the year was $92.8 million and our non-GAAP net income was $12.3 million or $0.39 per diluted share. Looking at the fourth quarter specifically, we saw increased new logo momentum in our AI knowledge offering. This included some big brands, for example, a travel management subsidiary of a financial mega brand in the U.S. Our AI Knowledge Hub will replace their homegrown knowledge base. Next is a mobility division of a multinational conglomerate in Germany. Here, our AI Knowledge Hub will consolidate their knowledge across multiple silos, which include Salesforce (NYSE:CRM) and other internal knowledge bases. The third logo I want to point out is the global consumer brand based out of London to support their new product introductions across 84 countries, they have selected eGain's AI Knowledge Hub. And the last one I want to highlight is an industry leader for higher education savings in the U.S. Our AI Knowledge Hub will replace this client's legacy knowledge systems. Looking at our overall business and the market, we are seeing growing inbound interest in our knowledge AI offerings. In fiscal 2024, our new logo wins and RFPs for AI Knowledge were up 50% year-over-year. And our pipeline activity remains strong in July and August. In fact, this summer has been the strongest in four years, pretty much since COVID. To give you a good sense of the foundational role of knowledge in delivering value with AI in customer service specifically, let me share verbatim an excerpt from a Gartner (NYSE:IT) report that was recently published in June this year. I quote, "By 2025, 100% of generative AI, virtual customer assistant, and virtual agent-assistant projects that lacks integration to modern knowledge management systems will fail to meet their customer experience and operational cost reduction goals." That's a very strong statement coming from Gartner. I'm sure many of you read Gartner reports over the years, you have read many. I cannot recall, and I've been doing this for many years, a prediction like this that has a 100% number on the predictor and a time frame, which is basically 12 months from now or a few months from now on an average 12 months. What that means, and we are seeing this, that every CEO of a large business is urgently demanding that their teams apply generative AI technology. And the key is application, apply generative AI technology to reduce operating cost and do it at scale. So they move the needle. As we know, customer service is one of the significant operating line item costs in business. Given that Gen AI needs a solid knowledge foundation to deliver that value, as Gartner points out, not surprising that we are seeing more and more businesses looking to centralize and modernize the knowledge platform. So as we've been saying for a few quarters, we are doubling down on this AI Knowledge market opportunity. Currently, half of our revenue comes from AI Knowledge offerings. Over the past year, we have increasingly rotated our R&D investments toward AI Knowledge products. As you may know, we launched AssistGPT, an eGain product, in February this year, a novel solution to automate and accelerate what are routine but time taking tasks for customer service agents and knowledge authors. This has been enthusiastically received in the market. Historically, knowledge centralization and creation at scale has been what you would call a proverbial Gordian Knot, and we are helping clients slash through it with the eGain AI Knowledge offerings. Before I ask Eric, our Chief Financial Officer, to add more color to our financial operations, I want to mention that our annual customer event, Solve 24, will be held in Chicago on October 29 and 30. At that event, we'll have many clients sharing success stories using our AI Knowledge Hub. And we'll also announce and demo new product capabilities. So we're very excited about that. And now over to Eric. Eric Smit: Thanks, Ashu, and thanks, everyone, for joining us today. Let me provide more details about the financial results for the fourth quarter and full-year of fiscal 2024 before discussing our outlook and guidance for fiscal 2025. Looking at our revenue. Total revenue for the fourth quarter was $22.5 million, ahead of our guidance but down 9% year-over-year. The decline was primarily due to the impact of the two large client losses we had discussed on our Q2 call, and one of them is from our Conversation Hub and the other from our Analytics Hub. For the fourth year, total revenue was $92.8 million, down 5% year-over-year. And looking at our revenue by region for the full-year. North America accounted for 78% of total revenue, the same as in the prior year. Looking at our non-GAAP gross profits and gross margins. Gross profit for the fourth quarter was $15.9 million for a gross margin of 71% compared to a gross margin of 74% a year-ago and 71% last quarter. For fiscal 2024, gross profit was $66.4 million for a gross margin of 72% compared to 74% of the prior year. Now turning to our operations. Non-GAAP operating costs for the fourth quarter came in at $13.7 million, down 8% from $14.9 million in the year-ago quarter, reflecting the expense controls we implemented earlier in the year. Non-GAAP operating costs for the full fiscal year were $56 million, down 13% year-over-year. As we see increased momentum from our AI Knowledge offering, we plan to increase investments particularly in R&D and brand marketing to capitalize on this very exciting opportunity. Looking at our bottom line. For Q4, non-GAAP net income was $2.5 million or $0.08 per share compared to $3.6 million or $0.11 per share in the year-ago quarter. Adjusted EBITDA margin for the quarter was 11% compared to 16% in the year-ago quarter. For the full fiscal year, non-GAAP net income was $12.3 million or $0.40 per share on a basic and $0.39 per share on a diluted basis, up 47% on a dollar basis from non-GAAP net income of $8.4 million or $0.26 per share on a basic and $0.25 per share on a diluted basis in the prior fiscal year. Adjusted EBITDA margin for the fiscal year was 12% compared to 9% in the prior fiscal year. Turning to our balance sheet and cash flows. For the full fiscal year, cash flow from operations was $12.4 million or a 13% operating cash flow margin. During fiscal 2024, we repurchased approximately 2.8 million shares at an average price of $6.28 per share, totaling $17.3 million. Since inception, we have purchased 3.5 million shares or 12% of the shares outstanding when we began the buyback program. Of the $40 million authorized, $17 million remained available under the program at the end of the year. Our balance sheet remains very strong. Total cash and cash equivalents at the end of the year were $70 million compared to $73 million a year-ago. Now turning to our customer metrics. With our focus on AI Knowledge, I've broken out the knowledge metrics from the total metrics. As a reminder, total metrics were impacted by the two conversation and analytics customers' losses - I previously discussed. Outside of these losses, I'm pleased to report that all material customer renewals came in as planned during the quarter. Looking at LTM dollar-based SaaS net retention for knowledge customers, that came in at 97% while total net retention was 85%. LTM dollar-based SaaS net expansion rate for knowledge customers was 106%, while our total net expansion rate was 103%. Looking at total ARR. Total SaaS ARR for knowledge customers increased 8% year-over-year, while total SaaS ARR decreased 10% year-over-year. Looking at our remaining performance obligations. Total RPO decreased 19% year-over-year but was up 16% sequentially from last quarter as renewals came in, as I mentioned, and we also had strong new bookings in the quarter. Our short-term RPO was $60.4 million, down 9% year-over-year, but up 26% sequentially. Now on to our financial outlook and guidance. One item I'd like to call out before providing our guidance is the expected change in revenue forecasted from our Cisco (NASDAQ:CSCO) OEM business. As I mentioned last quarter, we are seeing the shift to more ratable recognition, and we estimate this change will result in deferral of approximately $1.3 million of revenue that would have otherwise been recognized in fiscal 2025. Just to be clear, we are not - we don't expect to lose this revenue, but rather instead recognize it more ratably than upfront that we've done previously. And we see most of that impact taking place in Q1 of 2025. For the first - now into the guidance. For the first quarter of fiscal 2025, we expect total revenue of between $21.4 million to $21.8 million. Turning to the bottom line. For Q1, we expect net loss of $400,000 to $1.3 million or a net loss of $0.01 to $0.05 per share, which includes stock-based compensation expense of approximately $900,000 and depreciation and amortization of approximately $120,000. We expect non-GAAP net loss of $400,000 to net income of $500,000 or a loss of $0.01 to a gain of $0.02 per share for the quarter. Looking at fiscal 2025 full-year ending June 30, 2025. We expect total revenue of between $92 million to $93 million, non-GAAP net income of $5 million to $6 million or $0.17 to $0.20 per share, and GAAP net income of breakeven to $1 million or $0.00 to $0.03 per share. We estimate share-based compensation expense of approximately $5 million and depreciation and amortization expense of approximately $400,000. Looking at weighted average shares outstanding, we expect approximately 29.3 million shares for the first quarter and 29.7 million for the full-year. So in summary, we are seeing continued strong momentum with new customers for our AI Knowledge offering. And while we doubled down on the AI Knowledge market opportunity, we are remaining focused on ensuring high customer satisfaction and delivering full business value to our conversation and analytics customers. Lastly, we will be hosting an Investor and Analyst Day event in conjunction with our upcoming customer events in Chicago on October 29. This event is a great opportunity for prospective investors and analysts to meet with customers and learn more about our business. You can register for the event on our website. We hope you can join us. This concludes our prepared remarks. Operator, we'll now open the call for questions. Operator: We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Jeff Van Rhee with Craig-Hallum. Please go ahead. Jeff Van Rhee: Hey, guys. Great. Thanks for taking the questions. Real nice quarter. A handful of questions, if I could. I'm curious on the AI Knowledge wins. You talked about two or three specific customers, and would love to hear a bit about the competitive landscape. I think you said in one, you took out a homegrown solution. And in others, I don't recall. I think you might have had a sales force competitor in the second, if I recall. But just talking about the competitive landscape, what are you displacing and what are you competing with? Ashutosh Roy: Yes. This is Ashu here, Jeff. Yes. So let me maybe take a few seconds to give you a sense of what both in terms of the customer profile we're going after as well as what we are seeing in terms of incumbency, replacement and competition, right? So who we are going after, as you know, are customers who have - at this point, we target companies with 5,000 employees or more. That's what we - that's our sweet spot is companies that are 5,000 employees or more. And so typically $1 billion plus in revenue. Now we do get customers who are below that. But when these large companies have complex content and compliance needs and where agent turnover is an issue, that's where we do well. So that's the need that we are targeting and the size of the companies. In terms of who we end up being - winning more and more is where there has been a failed knowledge project. And typically, that's getting more and more highlighted because people are recognizing that when they're doing these Gen AI investments in trying to automate customer service, they realize that trusted content and trusted knowledge needs to be fed into the Gen AI tools for them to do their job on the other end. So we are replacing - I would say, number one, replacement for us is SharePoint, homegrown essentially, that's what it means, right? Number two is Confluence replacement. Again, homegrown. Number three replacement is Salesforce. So people deploy Salesforce knowledge and it's not delivering the value as much as they want, right? And the pressure is on to do more. And the fourth one that we have been replacing is Genesis' knowledge. So - but Salesforce and Confluence are the dominant ones in terms of incumbency because they've been around for a while and people have built homegrown solutions. And the last part of these responses in terms of competitors, I would say broadly, those are the competitors that we are also working up against, right? The people who are trying to retain those knowledge setups, and we are in the replacement business. Jeff Van Rhee: Okay. That's helpful. And in the presentation, you talk about the conversion of pilots to customers, I think you quote a 75% number in there. Obviously, a very, very good number. Give me a sense of sample size here. I mean, what's the quality of that indication and the ability to repeat that? Ashutosh Roy: I would say, more than 10 in the last few - in the last couple of quarters. Jeff Van Rhee: And is there anything about those that gives you doubt that you can retain that pace of conversion? Ashutosh Roy: That's hard to say. I feel like we know how to qualify much better now, and that's probably what I would say. So we are - I think part of the reason for the conversion rate being that high is that we are qualifying things well before we put them through the innovation pilot. As long as we do that, I think we should be good. But if we expand that, and we are doing that with some partners we're developing, then I expect that some of those partner-led pilots might actually have perhaps a smaller conversion rate, lower conversion. Jeff Van Rhee: On the sales front, I think you said you're going to spend a bit on sales, if I recall, around branding and then a bit on development. What about quota reps? Are you at the right headcount? Where are you quota rep wise? Where do you think you'll be in 12 months? Ashutosh Roy: So we feel that the biggest opportunity right now is to drive more pipeline and generate more pipeline. And that's why we are focusing on the brand and sometimes sort of market demand investments. We feel that we are in a good place with our reps, especially because our deal sizes are reasonable. We are still talking about north of 200,000 ARR for new logos. So we feel like we can manage that reasonably well with all the growth expectation we have on the AI Knowledge bookings side. Jeff Van Rhee: Okay. And one last, if I could squeak it in. Obviously, you've got a couple of things going on here, knowledge on one side, catching a tailwind and then conversation and in analytics. And obviously, your focus there is customer sat and keeping butts in seats, so to speak. You had the two big customers churn off a couple of quarters ago. I'm sure you've got your ears really tuned. I mean, how are you getting comfortable in the conversation and analytics hub base that you're not at risk with any of your other customers and avoiding future large churn? Ashutosh Roy: Yes, that's a good point. We are - as you can only expect, we are hyper focused on that satisfaction, value delivery and continuing to work with these clients to find opportunities. And it happens with the sort of cycle time that every one of these customers have as they are investing on the knowledge and AI side, finding ways to get into that slip stream of knowledge and AI opportunity as well because then that creates a collective stickiness in these accounts. Jeff Van Rhee: Got it. Okay, great. Thanks for taking my questions. Appreciate it. Operator: Our next question comes from Richard Baldry with ROTH Capital. Please go ahead. Richard Baldry: Thanks. You guys have tended to be pretty conservative on the spending side. So I'm sort of curious that only a couple of quarters ago, we were talking about cost controls and now we're talking about investments. So could you maybe talk about what you're seeing that's changing there or whether that's top of the funnel, sales cycles, ARPUs? Sort of give us some backdrop for why that positive shift in sort of your stance looking forward? Ashutosh Roy: Okay. So I'd say two things. One is that - three things, really. One is that with existing clients, we are seeing a consistent increase in interest in faster rollout of knowledge across other businesses or other functions like self-service or enterprise-facing. So for those where we are already with - we are in there with agent-facing knowledge solutions. So that's one, right? So that's our kind of the most reliable ear to the ground. And the next thing we are seeing is more inbound interest. And that has been consistently kind of edging up even in the summer months, as I mentioned. It's very unusual for us to be this busy in the summer months on that sort of sales side. This has been unusual. As Eric and I were talking, we felt like the last time we were this active and busy was summer of 2019, right? So it's been a while. So that's the second item. And then the third thing that has changed is I'm noticing this and our sales leadership is also pointing it out, that we are seeing more and more of these opportunities prosecute all the way to a decision much more predictably than before. So people when they come in, the amount of tire kicking is going down. People are executing RFPs, and they say they will execute. It's kind of happening around that time and eventually, they're deciding whether we win or not. So those are the three things we are seeing that's making us change our investment posture. And like Eric said, this is important, Richard. Right now, we are saying product investment and then brand marketing investment, right? Those are the two primary areas we're investing right now. And then as the pipeline gets to a point where it starts to become really - not something we can handle with our current sales capacity, we're going to lag with that investment platform. Richard Baldry: Got it. And in the past quarter or two, you've gone through some pretty specifics about some of your larger trialers or how they fit into the Fortune 30, et cetera. Is there any update to that? Any changes, any new sort of larger scale pilots going on that are continuing sort of to fill that top of the funnel while others are working their way through? And I know it's hard because it's sort of lumpy, but I'm just curious if there's anything there. Ashutosh Roy: A couple of things I'll say. I think the quality of companies we're engaging with in terms of size and brand continues to be very good, right? So for example, the mega brands, when I said the financial mega brand, I meant a mega brand in the U.S. on the financial side. When I said multinational conglomerate, where we have just got a foot in the door with a reasonably chunky ARR deal in Germany, specifically, this was in Europe, we're talking about our Global 100 company, right? So these are very large companies, even on the logos that we are acquiring. Then on the pilot side, I feel like if I look at it, the - there are many large companies. Now one of the things we do see, and this is a secular thing, we don't see as many multimillion-dollar ARR initial purchases anymore. We just don't see that. What we see is the average is pretty good. Like I said, it's north of 200,000, right, Eric? Ashutosh Roy: North of 200,000, initial ARR. But the quality of these companies is large, the potential is large. So I feel like that is a good trend for us. Richard Baldry: And then last for me. You're still sitting on a pretty good amount of cash on the balance sheet even after doing some pretty meaningful buybacks. Is there anything interesting sort of on the technology side, whether it's to keep wrapping more product around the AI side of the table or do you think your capital allocation still remains sort of focused on the buybacks over the near term? Thanks. Ashutosh Roy: So we are increasing investment R&D. I know it's not - it's a good thing that it's not burning a big hole in the balance sheet, but we are increasing our investment. And in terms of the rotation that we've done in new innovation. So we have a very chunky amount of money that we are putting in and the people and the capability around their knowledge. That is an area that we'll continue to invest in for some time because we think there's a lot of runway to differentiate as well as make an attempt to dominate the emerging market of the AI Knowledge systems. So I would say that's our primary focus right now. Operator: That concludes our question-and-answer session. I would like to turn the conference back over to eGain management for any closing remarks. Eric Smit: Well, thanks, everybody, for taking the time today and look forward to hopefully seeing some of you at our Solve event in Chicago at the end of October. Thank you. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Earnings call: Lantronix reports record revenue and EPS growth in Q4 By Investing.com

Lantronix , Inc. (NASDAQ:LTRX), a global provider of secure data access and management solutions for the Internet of Things (IoT), reported a significant increase in its fiscal year 2024 fourth-quarter revenue and earnings per share (EPS). The company announced record quarterly revenue of $49.1 million, marking a 41% year-over-year (YoY) increase and a 19% sequential rise. Non-GAAP EPS for the quarter grew by 150% compared to the same period last year. For the full fiscal year, Lantronix achieved a revenue of $160.3 million, a 22% growth YoY, and record non-GAAP earnings of $15.4 million, up 83% YoY. In light of these results, Lantronix is positioning itself for continued growth in its key vertical markets. The company's strategic partnerships, such as the one with Qualcomm, and its focus on Edge AI technology, are expected to play a crucial role in its expansion plans. With a robust pipeline of potential acquisitions and a commitment to operational efficiency, Lantronix is looking to build on its record-setting fiscal year and deliver even greater value to its shareholders and customers in the quarters to come. Lantronix, Inc. (LTRX) has demonstrated robust financial growth in its fiscal year 2024, with a notable 22% increase in annual revenue to $160.33 million. This performance is backed by a substantial quarterly revenue growth of 40.52%, aligning with the company's record figures reported in the article. The company's strategic initiatives in Smart Cities, Automotive, and Enterprise verticals have contributed to this impressive revenue uptick. InvestingPro Tips highlight that Lantronix is expected to see a growth in net income this year, which could further solidify its financial standing. Analysts are optimistic about the company's profitability prospects for the year, suggesting a positive outlook for investors. Additionally, Lantronix's valuation implies a strong free cash flow yield, an attractive feature for investors seeking companies with the potential to generate cash efficiently. InvestingPro Data indicates a market capitalization of $125.14 million, reflecting the company's size and market presence. Despite a negative P/E ratio of -27.57, which suggests that the company has not been profitable over the last twelve months, the company's gross profit margin stands at a healthy 40.14%. This margin underscores Lantronix's ability to retain a significant portion of its sales as gross profit, which is crucial for sustaining operations and funding growth initiatives. For investors seeking more in-depth analysis, there are additional InvestingPro Tips available, providing a comprehensive evaluation of Lantronix's financial health and growth prospects. These tips can be accessed through the InvestingPro platform for Lantronix at https://www.investing.com/pro/LTRX, offering valuable insights for making informed investment decisions. Operator: Good day, and welcome to the Lantronix Fourth Quarter 2024 Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Jeremy Whitaker, Chief Financial Officer. Please go ahead. Jeremy Whitaker: Good afternoon, everyone, and thank you for joining our quarterly earnings call. Joining me on the call today is our President and Chief Executive Officer, Saleel Awsare. A live and archived webcast of today's call will be available on the company's website. In addition, you can find the call and details for the phone replay in today's earnings release. During this call, management may make forward-looking statements, which involve risks and uncertainties that could cause our results to differ materially from management's current expectations. We encourage you to review the cautionary statements and risk factors contained in the earnings release, which was furnished to the SEC today and is available on our website and in the company's SEC filings, such as its 10-K and 10-Qs. Lantronix undertakes no obligation to revise or update publicly any forward-looking statements to reflect future events or circumstances. Please refer to the news release and the financial information in the Investor Relations section of our website for additional details that will supplement management's commentary. Furthermore, during the call, the company will discuss non-GAAP financial measures. Today's earnings release, which is posted in the Investor Relations section of our website, describes the differences between our non-GAAP and GAAP reporting and presents reconciliations for the non-GAAP financial measures that we use. With that, I'll now turn the call over to Saleel. Saleel Awsare: Thanks, Jeremy, and thank you, everyone, for joining us on the call today. I'm pleased to report record revenue of $49.1 million for the fourth quarter of fiscal year 2024, a year-over-year increase of 41% compared to the same period of 2023 and a sequential increase of 19% compared to the March quarter. Non-GAAP EPS in fiscal year Q4 grew 150% compared to the same period last year, demonstrating the leverage in our operating model as revenue grows. Jeremy will provide you with more details and analysis on fiscal year 2024 and the fourth quarter financial results shortly. At Lantronix, we enable Edge intelligence with our compute and connect solutions, allowing our customers to improve both the operational efficiency and real-time decision-making. We understand the complexity of Edge compute requirements, and we provide our customers with complete solutions, including hardware, software, device management and design services. Because our offerings are differentiated, sticky and help customers solve problems, we are able to achieve a relatively higher value for these solutions in the marketplace. We remain focused on three key vertical markets: Smart Cities, Automotive and Enterprise, that have double-digit growth rates, favorable secular trends and combined serviceable addressable market, of approximately $8.5 billion representing a tremendous opportunity for Lantronix. Today, let me start with the enterprise vertical market. Our out-of-band management solutions business is performing very well and grew more than 70% from fiscal year 2023 to fiscal year 2024. Our out-of-band management product portfolio makes it easier to securely manage distributed enterprise networks and devices by providing access, resiliency and tools for daily management tasks when a disruption occurs. For example, during the global CrowdStrike (NASDAQ:CRWD) outage that occurred last month, our out-of-band management products with remote access were likely used to reduce network downtime. Our solutions minimized mean time to recovery, allowing network administrators to restore the affected window devices and get businesses back up and running again. In addition to providing resiliency and recovery during emergency, our out-of-band management solutions make daily operational tasks easier, more efficient and highly secure. In fact, our LMCs products are a leader in the industry with patented automation that can greatly reduce time to recovery during network outage events, malicious or accidental. Our out-of-band management solutions have higher than our average corporate gross margins and are often combined with other Lantronix products such as IoT gateways, media converters and recurring services. Also in the enterprise vertical, we began shipping to our largest video conferencing customer that recently announced their next-generation product. In the automotive vertical, our relationship with Togg continues to progress. The Turkish automotive OEM looking at new software features that will require higher performance compute modules, and we are engaged with them on that. Togg is also continuing to focus on its goal of introducing its new vehicles to Germany next calendar year. With these developments, we expect continued growth with this customer into the future. Additionally, we recently secured a design services purchase order with a German OEM that is developing a new infotainment platform long and short haul trucks. We are pleased to have entered into this new relationship, and it shows great progress in our longer-term goal of winning new compute designs in our emerging automotive infotainment business. In the smart cities vertical, we continue to work closely with our lead smart grid customer. During the June quarter, we shipped over $21 million in product to them as we expected. And while we'll take them some time to digest and deploy this product with their customer, we believe that this can be an ongoing business for several years. In the current quarter, fiscal Q1 2025, we expect to deliver approximately $5 million in product to them. We believe that as the initial inventories consumed, this business is transitioning into a run rate business. We are also very pleased to be partnering with them on expanding into the North American market. They're currently working with a large U.S. energy company on a similar smart grid solution, and we'll be supplying demo units for a proof of concept. Many electrical grids are having to be upgraded significantly given the rise in energy demands and these networks are requiring real-time decision-making at the Edge, which this device provides. While it is still early days, we are pleased to be assisting our customers as they enter the large U.S. market. Lastly, we are very excited to be working on new projects with our key partner, Qualcomm related to Edge AI computing. In late June, we demonstrated our Percepxion Edge AI solution fully integrated with Qualcomm's AI Hub at Qualcomm's Industry Analyst Day. This platform enables deployment of Edge AI solutions for vertical markets such as smart cities and enterprise. Qualcomm's AI Hub when combined with our Percepxion platform reduces the complexity of Edge AI applications and simplifies the deployment of AI models. Building on our platform, we are closely collaborating with our compute partner, who we expect to deploy our software tools at scale to help their developers build leading-edge AI edge solutions. While it's still early days for us, the opportunity in Edge AI for Lantronix lies in providing integrated solutions using our compute modules and Edge AI gateways for customers looking to deploy solutions with compute power needed to drive AI models at the edge of the network. In support of this, we are pleased to see our Percepxion platform win the 2024 Product of the Year Award from the IoT Evolution World earlier this month. To conclude, I'm very optimistic about Lantronix future. Given our strong balance sheet, the momentum in our enterprise verticals, specifically videoconferencing and out-of-band solutions, new engagements in automotive infotainment, diversifying into additional geographic regions with our smart grid customer and our deepening relationship with Qualcomm enabling us to participate in the new megatrend of Edge AI. We are also mindful of inorganic accretive growth opportunities, and we will pursue those that fit within our portfolio and make economic sense. Our goal is to increase shareholder value through both organic and inorganic growth. With that, I will now hand the call back over to Jeremy. Jeremy Whitaker: Thank you, Saleel. Now I will provide the financial results and some business highlights for our fiscal year 2024 and fourth quarter before commenting on our financial outlook for the first quarter of fiscal 2025. I will start with a brief recap of our fiscal 2024. We reported record revenue of $160.3 million, representing 22% growth from the prior year. In addition, we reported record non-GAAP earnings of $15.4 million, representing 83% growth from the prior year. We also reported record non-GAAP EPS of $0.40 per share or 76% growth from the prior year. The significant growth in non-GAAP earnings demonstrates the leverage in our operating model and our commitment to maintain financial discipline while still delivering record revenue for the fiscal year. Not only did the team deliver record revenue and earnings, we also improved our balance sheet and liquidity from the prior year. We ended the year with cash of $26.2 million, up 95% from the prior year by generating $18.6 million in cash flow from operations. We reduced inventories from $49.7 million in the prior year to $27.7 million, a reduction of 44%. Furthermore, we increased our working capital to $59 million, an increase of 17% from the prior year. In addition, this week, we extended the maturity of our $16.2 million term loan by one year, further improving our short-term liquidity. With these balance sheet and working capital improvements, we remain well-positioned to drive our strategic growth plan. Now turning to the FQ4 2024 results. For FQ4 2024, we reported revenue of $49.1 million, slightly above the midpoint of our guide and an all-time record for Lantronix. Revenue was up 19% and 41% from the sequential and year-ago periods, respectively. IoT System Solutions increased by 33% and 156% from the sequential and year-ago periods, respectively. The increase was primarily driven by the continued ramp of production shipments for our lead smart grid customer. In addition, the year-over-year increase was impacted by strong sales of our out-of-band management products. Sequentially, embedded IoT solutions were down 9%, with continued contribution from our lead automotive customer. As expected, we experienced a year-on-year decline in embedded IoT solutions, as the year ago period included two large customer designs that ended in FQ4 2023. In FQ4 2024, software and services were down from the year-ago period, primarily a function of the completion of two large design services projects that transitioned into production during the first half of fiscal 2024. GAAP gross margin was 38.1% for FQ4 2024, compared to 40.1% in the prior quarter and 39.5% in the year ago quarter. Non-GAAP gross margin was 38.8% for FQ4 2024, compared to 41% in the prior quarter and 39.9% in the year-ago quarter. The decline in gross margin percent was primarily related to charges taken related to the buildup of excess inventory costs. We expect gross margin percent to improve to the low to mid-40s as we don't expect similar charges and an improvement in product mix in FQ1. GAAP SG&A expenses for FQ4 2024 were $11 million, compared with $8 million in the year ago quarter and $9.8 million in the prior quarter. GAAP R&D expenses for FQ4 2024 were $5.3 million, compared with $4.9 million in the year ago quarter and $5.2 million in the prior quarter. The increases in SG&A and R&D were driven by a record year for revenue and earnings, which resulted in higher share-based and variable compensation during fiscal 2024 as compared to fiscal 2023. In the upcoming quarter, we expect a sequential decrease in non-GAAP operating expenses related to continued cost containment and lower variable compensation. GAAP net income was $386,000 or $0.01 per share during FQ4 2024 compared to a GAAP net loss of $1.7 million or $0.05 per share in the year ago quarter. Non-GAAP net income increased by 160% from the year ago quarter, demonstrating leverage in our operating model and strong cost control. Non-GAAP net income was $5.8 million or $0.15 per share and came in at the midpoint of our guide for FQ4 2024 compared to non-GAAP net income of $2.2 million or $0.06 per share in the year ago quarter. Now turning to our outlook. For the first quarter of fiscal 2025, we expect revenue to be in the range of $34 million to $38 million. And non-GAAP EPS in a range of $0.07 to $0.11 per share. The sequential decline for FQ1 was anticipated due to the steep ramp of our Smart Grid customer in FQ4 2024, as discussed on our previous earnings calls. During FQ4 2024, we delivered a record $21.4 million to this customer. In addition, we have received a follow-on order from this customer and in FQ1 2025 and we expect to deliver them approximately $5 million of additional products. If we exclude this expected shipment from our FQ1 guidance, the balance of our revenue is expected to grow sequentially by approximately 10%. As we look forward, we are focused on continued improvement of financial performance by enhancing the operational leverage of the business. With that, we complete our prepared remarks for today. So I'll now turn it over to the operator to conduct our Q&A session. Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Scott Searle with ROTH Capital. Please go ahead. Scott Searle: Good afternoon. Thanks for taking my questions. Quick clarification, Jeremy. You mentioned charges impacting gross margins in the fourth quarter. Could you detail them a little bit what was the magnitude of the impact there? It sounds like they go away as we go into the September quarter. And given the favorable mix from the out-of-band management solutions that gross margin should come back a little bit. Jeremy Whitaker: Yes. It was several hundred basis points, probably 200 or 300 basis points, and it was primarily related to some charges for excess and obsolete inventory. And in addition to that, some costs that were accumulated with the growth of inventory during the pandemic. And as inventories have come down significantly, those costs also came off the books. Scott Searle: Okay. Very helpful. And Saleel, on the out-of-band management front, it's very exciting to hear the growth that's going on in that business. Could you size it a little bit or give us a range in terms of how big that business is right now? And maybe what the expected growth outlook would be as we look into fiscal 2025 and how and where that pipeline is shaping up? Saleel Awsare: Sure thing. Scott, we are very pleased with our out-of-band management growth. And as I mentioned, it grew 70% Y-o-Y. We wouldn't expect the same 70% growth, but it's got double-digit growth as we get into fiscal year 2025. And it's above average gross margins for the business. So the way the market has been sized is approximately all in with all vendors around $400 million to $500 million is our data shows in that area. So the market sizing. Now we don't, Scott, break out revenue by subsegments, so I won't go into that, but really exciting business for us. Jeremy Whitaker: And for clarification, the gross margins are on the upper end of our scale as well. So it's a nice high margin product. Scott Searle: Got you. And two more questions, if I could. The Qualcomm relationship has obviously been very favorable. And more and more, we're seeing edge AI pushing into the equation these days. I'm wondering, is there some way to help us better understand the design funnel, the opportunity funnel of what you're seeing out there on that front? And then coupling that with organic growth. You talked about 10% sequential growth from June to September, if we ex out Gridspertise. what is the normalized number we should be thinking out about taking Gridspertise out of the numbers of the organic growth we should be looking for over the next several quarters? Saleel Awsare: So let me take the edge AI first. And this one is really exciting as I think about it, right? And what would Lantronix offer? We will offer compute SOMs and a full Edge AI Box. And we demoed the Edge AI Box at the Industry Analyst Day in June at Qualcomm headquarters. As from a sizing, it's early for me to give you a revenue number for that, but we are very closely aligned with Qualcomm on this. Additionally, if you caught in my prepared remarks, you're building on the platform, we're working with our partner, who we expect to deploy our software tools into their tool chain to enable developers to rapidly build and deploy solutions. So that would make what they're doing a little bit more unique to us and we can be differentiated in the market. So that's specific to Qualcomm. So it's early days, as you know, for edge AI data centers already happened. So that's in the early days. On the market, we are doing - we're giving you quarterly guidance. Sequentially, as Jeremy mentioned, we grew 10%. The SAMs [ph] that we are addressing are - gives us a lot of headroom, so $8.5 billion plus, as I've said in the past, I'll say again, we expect to be growing at or better than the growth rate that we've said in that area. And the growth rate that we mentioned is about 12%. So we expect to be growing better than that in the longer term, Scott. Operator: The next question comes from Jaeson Schmidt with Lake Street. Please go ahead. Jaeson Schmidt: Yes, thanks for taking my questions. Just want to follow up on your comments on the North American smart grid opportunity. I know you mentioned demoing some units. How should we think about the potential timing of this opportunity contributing to the P&L? Saleel Awsare: Yes. As you know, the - we work with our partner there. And they have just started demoing with a pretty large North American utility, a proof-of-concept system that's going in there. It's early days to give you revenue ramps on that. But the key point is the system is very similar to what got deployed in Italy. So it's not like it's a brand-new system. Now it's going through lots of testing like it does. I expect it's 18 months to 24 months before you see a big ramp on that, but it's out there, but they've started the POCs with it already as I speak. And it's a proof of concept is what we are doing. Jaeson Schmidt: Okay. That's helpful. And then, Jeremy, just a clarification on gross margin in September. I know you mentioned low to mid-40%. Does that include any continued excess inventory charges though? Jeremy Whitaker: No, it doesn't. We currently don't anticipate meaningful charges going forward. We do forecast kind of a historical run rate as part of our modeling. But with the significant decline in revenue coming down nearly 50% from the year ago period and also at this point in time, having amortized off, pretty much all of the costs, like purchase price variances and capitalized overhead related to the buildup during the pandemic, we have some nice tailwinds there that should help drive that improvement. In addition to that, with a lower contribution anticipated from our smart grid customer in fiscal 2025, we'll also expect to see improvement from mix as well. Operator: [Operator Instructions] The next question comes from George Gianarikas with Canaccord Genuity. Please go ahead. The next question comes from George Gianarikas with Canaccord. Please go ahead. George Gianarikas: Hi. Good afternoon, everyone. Thank you for taking my questions. George Gianarikas: So maybe to start, can you just sort of give us a little more detail on this engagement that you have on the auto side? Any profile on the average selling price and margins there? Saleel Awsare: So let me give you a little bit more on the specific things that we're doing there. So we've signed a purchase order with a German truck OEM for software and services. They are developing a new infotainment platform focused on long- and short-haul trucks. We know the cycle is long for automotive customers, but it really adds to our customer diversification in this emerging automotive infotainment business. I expect the gross margins should be - what we have done in the automotive in the past. We haven't given a specific number out there, but I expect it to be around that area. And by the way, George, this is the key point here, what's really exciting, it's greenfield. Part of the story is to go beyond our one customer or a couple of customers that we have into many more, and this is really the start of that. And it shows that our technology is getting adapted. George Gianarikas: Okay. Thank you. And maybe just on the M&A side, the inorganic side, I'm sort of new, obviously, to the story. I'd love to understand a little bit about your philosophy around accretion, earnings accretion when you look at acquisitions in addition to strategic fit. Thank you. Jeremy Whitaker: Yes. So on the financial side, the type of things we've done in the past and that we look at doing on a go-forward basis are very focused on becoming accretive, straight out of the gate or at least having a very short time line to get there through synergy capture. So that's been a pretty significant focus for us in the past and I'd say all four of the last deals that we've done have met that criteria. And at this point that's also how we're evaluating deals on a go-forward basis. And I'll let Saleel comment on the strategic side of things. Saleel Awsare: Yes. So George, great question, right? We have three verticals we really like, smart cities, enterprise and automotive infotainment. We like compute, we like connect, and in those spaces where we are going to be looking at acquisitions, and we are seeing a pipeline now coming, so we're starting to look in that stuff. And I'll just add my own personal experience with acquisitions in my previous company, being accretive from day one is really important, and we're going to be focused on that for sure. Operator: The next question comes from Ryan Koontz with Needham & Co. Please go ahead. Ryan Koontz: Thanks for the question. Quick clarification on your autonomous truck; did you mention your time frame at all when you thought that might be able to move into first revenue? Jeremy Whitaker: We did not mention the timing of first revenue right now. What we said is we got our first pool - for working with them closely on software and services. The hardware revenue is going to be out a little bit. As you know, the cycles, Ryan, for automotive are longer, so we did not give you a schedule on the hardware revenue yet. But we said we did get RPO for software and service, which then in the future leads to hardware. Ryan Koontz: That's great. And Jeremy, quick housekeeping on - it looked like the inventory was down substantially Q-over-Q. Is that mostly related to your shipments to your large smart grid customer? Or was it a write-off high impact there or other things that are driving into your sale? Jeremy Whitaker: Yes. The biggest impact was the shipments to our smart grid customer. Then after that, we also brought down inventory levels in other areas. That's been a focus of ours. And then some of the write-downs were probably the smallest impact to the bringing down the inventory for the quarter. Ryan Koontz: Got it. So our lead times, I'm sure much more manageable now. Anything you can share there about your lead times you're seeing for kind of key component - strategic components? Saleel Awsare: No. The lead times are very manageable. And to what Jeremy said for the past three quarters, the two of us have been over focused on getting this inventory right sized. And I think we are sitting there now. We've made some tremendous progress. And the lead times, to your point, Ryan, we're okay now. Ryan Koontz: Great. And circling back to the Edge AI topic, it sounds really exciting. Anything more you can share there in terms of the architecture of what these sort of devices would do? Are they part of a larger AI cloud and this is kind of the edge cloud that you're involved in the inferencing from kind of a core or anything you can share there about the architecture on the AI cloud? Saleel Awsare: Yes. Great question, Ryan. So obviously, this is the Edge inferencing is what we are going to differentiate and win in. And let me give you like two examples. You can see where it really fits with what we do, right? In videoconferencing, AI tools are now being used to enhance both video and audio. And we've got some great video conferencing customers. So I'm talking about the future, right? Right now, we're already shipping to them. But in the future, with our SOMs, they will be able to have auto framing, tracking, gesture recognition, interesting things like that. We won't be making the models. The models are going to be what they have, but we will have the ability to run up. And we've actually created tools, as I mentioned, our partners going to embed it in their tool chain. So that's one example. In the smart grid, both the low voltage and medium voltage substations are going to allow inferencing of large set of variables. So the variables and the data are going to come from the energy companies. But our products in the future will be able to kind of understand the grid loading and steer energy in anticipation of loads. So it's really, it's early days because Edge AI is early days on the edge, but we're really working with a key partner, and you know who they are, Qualcomm, and we've indexed to them quite a bit, and they have some nice low-power chips and that's a great focus for them also. So good alignment on our side. Operator: This concludes the question-and-answer session and today's conference call. Thank you for attending today's presentation. You may now disconnect.

Lantronix, Inc (LTRX) Q4 2024 Earnings Call Transcript

Jeremy Whitaker - Chief Financial Officer Saleel Awsare - President and Chief Executive Officer Good day, and welcome to the Lantronix Fourth Quarter 2024 Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Jeremy Whitaker, Chief Financial Officer. Please go ahead. Jeremy Whitaker Good afternoon, everyone, and thank you for joining our quarterly earnings call. Joining me on the call today is our President and Chief Executive Officer, Saleel Awsare. A live and archived webcast of today's call will be available on the company's website. In addition, you can find the call and details for the phone replay in today's earnings release. During this call, management may make forward-looking statements, which involve risks and uncertainties that could cause our results to differ materially from management's current expectations. We encourage you to review the cautionary statements and risk factors contained in the earnings release, which was furnished to the SEC today and is available on our website and in the company's SEC filings, such as its 10-K and 10-Qs. Lantronix undertakes no obligation to revise or update publicly any forward-looking statements to reflect future events or circumstances. Please refer to the news release and the financial information in the Investor Relations section of our website for additional details that will supplement management's commentary. Furthermore, during the call, the company will discuss non-GAAP financial measures. Today's earnings release, which is posted in the Investor Relations section of our website, describes the differences between our non-GAAP and GAAP reporting and presents reconciliations for the non-GAAP financial measures that we use. Thanks, Jeremy, and thank you, everyone, for joining us on the call today. I'm pleased to report record revenue of $49.1 million for the fourth quarter of fiscal year 2024, a year-over-year increase of 41% compared to the same period of 2023 and a sequential increase of 19% compared to the March quarter. Non-GAAP EPS in fiscal year Q4 grew 150% compared to the same period last year, demonstrating the leverage in our operating model as revenue grows. Jeremy will provide you with more details and analysis on fiscal year 2024 and the fourth quarter financial results shortly. At Lantronix, we enable Edge intelligence with our compute and connect solutions, allowing our customers to improve both the operational efficiency and real-time decision-making. We understand the complexity of Edge compute requirements, and we provide our customers with complete solutions, including hardware, software, device management and design services. Because our offerings are differentiated, sticky and help customers solve problems, we are able to achieve a relatively higher value for these solutions in the marketplace. We remain focused on three key vertical markets: Smart Cities, Automotive and Enterprise, that have double-digit growth rates, favorable secular trends and combined serviceable addressable market, of approximately $8.5 billion representing a tremendous opportunity for Lantronix. Today, let me start with the enterprise vertical market. Our out-of-band management solutions business is performing very well and grew more than 70% from fiscal year 2023 to fiscal year 2024. Our out-of-band management product portfolio makes it easier to securely manage distributed enterprise networks and devices by providing access, resiliency and tools for daily management tasks when a disruption occurs. For example, during the global CrowdStrike outage that occurred last month, our out-of-band management products with remote access were likely used to reduce network downtime. Our solutions minimized mean time to recovery, allowing network administrators to restore the affected window devices and get businesses back up and running again. In addition to providing resiliency and recovery during emergency, our out-of-band management solutions make daily operational tasks easier, more efficient and highly secure. In fact, our LMCs products are a leader in the industry with patented automation that can greatly reduce time to recovery during network outage events, malicious or accidental. Our out-of-band management solutions have higher than our average corporate gross margins and are often combined with other Lantronix products such as IoT gateways, media converters and recurring services. Also in the enterprise vertical, we began shipping to our largest video conferencing customer that recently announced their next-generation product. In the automotive vertical, our relationship with Togg continues to progress. The Turkish automotive OEM looking at new software features that will require higher performance compute modules, and we are engaged with them on that. Togg is also continuing to focus on its goal of introducing its new vehicles to Germany next calendar year. With these developments, we expect continued growth with this customer into the future. Additionally, we recently secured a design services purchase order with a German OEM that is developing a new infotainment platform long and short haul trucks. We are pleased to have entered into this new relationship, and it shows great progress in our longer-term goal of winning new compute designs in our emerging automotive infotainment business. In the smart cities vertical, we continue to work closely with our lead smart grid customer. During the June quarter, we shipped over $21 million in product to them as we expected. And while we'll take them some time to digest and deploy this product with their customer, we believe that this can be an ongoing business for several years. In the current quarter, fiscal Q1 2025, we expect to deliver approximately $5 million in product to them. We believe that as the initial inventories consumed, this business is transitioning into a run rate business. We are also very pleased to be partnering with them on expanding into the North American market. They're currently working with a large U.S. energy company on a similar smart grid solution, and we'll be supplying demo units for a proof of concept. Many electrical grids are having to be upgraded significantly given the rise in energy demands and these networks are requiring real-time decision-making at the Edge, which this device provides. While it is still early days, we are pleased to be assisting our customers as they enter the large U.S. market. Lastly, we are very excited to be working on new projects with our key partner, Qualcomm related to Edge AI computing. In late June, we demonstrated our Percepxion Edge AI solution fully integrated with Qualcomm's AI Hub at Qualcomm's Industry Analyst Day. This platform enables deployment of Edge AI solutions for vertical markets such as smart cities and enterprise. Qualcomm's AI Hub when combined with our Percepxion platform reduces the complexity of Edge AI applications and simplifies the deployment of AI models. Building on our platform, we are closely collaborating with our compute partner, who we expect to deploy our software tools at scale to help their developers build leading-edge AI edge solutions. While it's still early days for us, the opportunity in Edge AI for Lantronix lies in providing integrated solutions using our compute modules and Edge AI gateways for customers looking to deploy solutions with compute power needed to drive AI models at the edge of the network. In support of this, we are pleased to see our Percepxion platform win the 2024 Product of the Year Award from the IoT Evolution World earlier this month. To conclude, I'm very optimistic about Lantronix future. Given our strong balance sheet, the momentum in our enterprise verticals, specifically videoconferencing and out-of-band solutions, new engagements in automotive infotainment, diversifying into additional geographic regions with our smart grid customer and our deepening relationship with Qualcomm enabling us to participate in the new megatrend of Edge AI. We are also mindful of inorganic accretive growth opportunities, and we will pursue those that fit within our portfolio and make economic sense. Our goal is to increase shareholder value through both organic and inorganic growth. With that, I will now hand the call back over to Jeremy. Jeremy Whitaker Thank you, Saleel. Now I will provide the financial results and some business highlights for our fiscal year 2024 and fourth quarter before commenting on our financial outlook for the first quarter of fiscal 2025. I will start with a brief recap of our fiscal 2024. We reported record revenue of $160.3 million, representing 22% growth from the prior year. In addition, we reported record non-GAAP earnings of $15.4 million, representing 83% growth from the prior year. We also reported record non-GAAP EPS of $0.40 per share or 76% growth from the prior year. The significant growth in non-GAAP earnings demonstrates the leverage in our operating model and our commitment to maintain financial discipline while still delivering record revenue for the fiscal year. Not only did the team deliver record revenue and earnings, we also improved our balance sheet and liquidity from the prior year. We ended the year with cash of $26.2 million, up 95% from the prior year by generating $18.6 million in cash flow from operations. We reduced inventories from $49.7 million in the prior year to $27.7 million, a reduction of 44%. Furthermore, we increased our working capital to $59 million, an increase of 17% from the prior year. In addition, this week, we extended the maturity of our $16.2 million term loan by one year, further improving our short-term liquidity. With these balance sheet and working capital improvements, we remain well-positioned to drive our strategic growth plan. Now turning to the FQ4 2024 results. For FQ4 2024, we reported revenue of $49.1 million, slightly above the midpoint of our guide and an all-time record for Lantronix. Revenue was up 19% and 41% from the sequential and year-ago periods, respectively. IoT System Solutions increased by 33% and 156% from the sequential and year-ago periods, respectively. The increase was primarily driven by the continued ramp of production shipments for our lead smart grid customer. In addition, the year-over-year increase was impacted by strong sales of our out-of-band management products. Sequentially, embedded IoT solutions were down 9%, with continued contribution from our lead automotive customer. As expected, we experienced a year-on-year decline in embedded IoT solutions, as the year ago period included two large customer designs that ended in FQ4 2023. In FQ4 2024, software and services were down from the year-ago period, primarily a function of the completion of two large design services projects that transitioned into production during the first half of fiscal 2024. GAAP gross margin was 38.1% for FQ4 2024, compared to 40.1% in the prior quarter and 39.5% in the year ago quarter. Non-GAAP gross margin was 38.8% for FQ4 2024, compared to 41% in the prior quarter and 39.9% in the year-ago quarter. The decline in gross margin percent was primarily related to charges taken related to the buildup of excess inventory costs. We expect gross margin percent to improve to the low to mid-40s as we don't expect similar charges and an improvement in product mix in FQ1. GAAP SG&A expenses for FQ4 2024 were $11 million, compared with $8 million in the year ago quarter and $9.8 million in the prior quarter. GAAP R&D expenses for FQ4 2024 were $5.3 million, compared with $4.9 million in the year ago quarter and $5.2 million in the prior quarter. The increases in SG&A and R&D were driven by a record year for revenue and earnings, which resulted in higher share-based and variable compensation during fiscal 2024 as compared to fiscal 2023. In the upcoming quarter, we expect a sequential decrease in non-GAAP operating expenses related to continued cost containment and lower variable compensation. GAAP net income was $386,000 or $0.01 per share during FQ4 2024 compared to a GAAP net loss of $1.7 million or $0.05 per share in the year ago quarter. Non-GAAP net income increased by 160% from the year ago quarter, demonstrating leverage in our operating model and strong cost control. Non-GAAP net income was $5.8 million or $0.15 per share and came in at the midpoint of our guide for FQ4 2024 compared to non-GAAP net income of $2.2 million or $0.06 per share in the year ago quarter. Now turning to our outlook. For the first quarter of fiscal 2025, we expect revenue to be in the range of $34 million to $38 million. And non-GAAP EPS in a range of $0.07 to $0.11 per share. The sequential decline for FQ1 was anticipated due to the steep ramp of our Smart Grid customer in FQ4 2024, as discussed on our previous earnings calls. During FQ4 2024, we delivered a record $21.4 million to this customer. In addition, we have received a follow-on order from this customer and in FQ1 2025 and we expect to deliver them approximately $5 million of additional products. If we exclude this expected shipment from our FQ1 guidance, the balance of our revenue is expected to grow sequentially by approximately 10%. As we look forward, we are focused on continued improvement of financial performance by enhancing the operational leverage of the business. With that, we complete our prepared remarks for today. So I'll now turn it over to the operator to conduct our Q&A session. Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Scott Searle with ROTH Capital. Please go ahead. Scott Searle Good afternoon. Thanks for taking my questions. Quick clarification, Jeremy. You mentioned charges impacting gross margins in the fourth quarter. Could you detail them a little bit what was the magnitude of the impact there? It sounds like they go away as we go into the September quarter. And given the favorable mix from the out-of-band management solutions that gross margin should come back a little bit. Jeremy Whitaker Yes. It was several hundred basis points, probably 200 or 300 basis points, and it was primarily related to some charges for excess and obsolete inventory. And in addition to that, some costs that were accumulated with the growth of inventory during the pandemic. And as inventories have come down significantly, those costs also came off the books. Scott Searle Okay. Very helpful. And Saleel, on the out-of-band management front, it's very exciting to hear the growth that's going on in that business. Could you size it a little bit or give us a range in terms of how big that business is right now? And maybe what the expected growth outlook would be as we look into fiscal 2025 and how and where that pipeline is shaping up? Saleel Awsare Sure thing. Scott, we are very pleased with our out-of-band management growth. And as I mentioned, it grew 70% Y-o-Y. We wouldn't expect the same 70% growth, but it's got double-digit growth as we get into fiscal year 2025. And it's above average gross margins for the business. So the way the market has been sized is approximately all in with all vendors around $400 million to $500 million is our data shows in that area. So the market sizing. Now we don't, Scott, break out revenue by subsegments, so I won't go into that, but really exciting business for us. And for clarification, the gross margins are on the upper end of our scale as well. So it's a nice high margin product. Scott Searle Got you. And two more questions, if I could. The Qualcomm relationship has obviously been very favorable. And more and more, we're seeing edge AI pushing into the equation these days. I'm wondering, is there some way to help us better understand the design funnel, the opportunity funnel of what you're seeing out there on that front? And then coupling that with organic growth. You talked about 10% sequential growth from June to September, if we ex out Gridspertise. what is the normalized number we should be thinking out about taking Gridspertise out of the numbers of the organic growth we should be looking for over the next several quarters? Saleel Awsare So let me take the edge AI first. And this one is really exciting as I think about it, right? And what would Lantronix offer? We will offer compute SOMs and a full Edge AI Box. And we demoed the Edge AI Box at the Industry Analyst Day in June at Qualcomm headquarters. As from a sizing, it's early for me to give you a revenue number for that, but we are very closely aligned with Qualcomm on this. Additionally, if you caught in my prepared remarks, you're building on the platform, we're working with our partner, who we expect to deploy our software tools into their tool chain to enable developers to rapidly build and deploy solutions. So that would make what they're doing a little bit more unique to us and we can be differentiated in the market. So that's specific to Qualcomm. So it's early days, as you know, for edge AI data centers already happened. So that's in the early days. On the market, we are doing - we're giving you quarterly guidance. Sequentially, as Jeremy mentioned, we grew 10%. The SAMs [ph] that we are addressing are - gives us a lot of headroom, so $8.5 billion plus, as I've said in the past, I'll say again, we expect to be growing at or better than the growth rate that we've said in that area. And the growth rate that we mentioned is about 12%. So we expect to be growing better than that in the longer term, Scott. The next question comes from Jaeson Schmidt with Lake Street. Please go ahead. Jaeson Schmidt Yes, thanks for taking my questions. Just want to follow up on your comments on the North American smart grid opportunity. I know you mentioned demoing some units. How should we think about the potential timing of this opportunity contributing to the P&L? Saleel Awsare Yes. As you know, the - we work with our partner there. And they have just started demoing with a pretty large North American utility, a proof-of-concept system that's going in there. It's early days to give you revenue ramps on that. But the key point is the system is very similar to what got deployed in Italy. So it's not like it's a brand-new system. Now it's going through lots of testing like it does. I expect it's 18 months to 24 months before you see a big ramp on that, but it's out there, but they've started the POCs with it already as I speak. And it's a proof of concept is what we are doing. Jaeson Schmidt Okay. That's helpful. And then, Jeremy, just a clarification on gross margin in September. I know you mentioned low to mid-40%. Does that include any continued excess inventory charges though? Jeremy Whitaker No, it doesn't. We currently don't anticipate meaningful charges going forward. We do forecast kind of a historical run rate as part of our modeling. But with the significant decline in revenue coming down nearly 50% from the year ago period and also at this point in time, having amortized off, pretty much all of the costs, like purchase price variances and capitalized overhead related to the buildup during the pandemic, we have some nice tailwinds there that should help drive that improvement. In addition to that, with a lower contribution anticipated from our smart grid customer in fiscal 2025, we'll also expect to see improvement from mix as well. [Operator Instructions] The next question comes from George Gianarikas with Canaccord Genuity. Please go ahead. The next question comes from George Gianarikas with Canaccord. Please go ahead. George Gianarikas Hi. Good afternoon, everyone. Thank you for taking my questions. So maybe to start, can you just sort of give us a little more detail on this engagement that you have on the auto side? Any profile on the average selling price and margins there? Saleel Awsare So let me give you a little bit more on the specific things that we're doing there. So we've signed a purchase order with a German truck OEM for software and services. They are developing a new infotainment platform focused on long- and short-haul trucks. We know the cycle is long for automotive customers, but it really adds to our customer diversification in this emerging automotive infotainment business. I expect the gross margins should be - what we have done in the automotive in the past. We haven't given a specific number out there, but I expect it to be around that area. And by the way, George, this is the key point here, what's really exciting, it's greenfield. Part of the story is to go beyond our one customer or a couple of customers that we have into many more, and this is really the start of that. And it shows that our technology is getting adapted. George Gianarikas Okay. Thank you. And maybe just on the M&A side, the inorganic side, I'm sort of new, obviously, to the story. I'd love to understand a little bit about your philosophy around accretion, earnings accretion when you look at acquisitions in addition to strategic fit. Thank you. Jeremy Whitaker Yes. So on the financial side, the type of things we've done in the past and that we look at doing on a go-forward basis are very focused on becoming accretive, straight out of the gate or at least having a very short time line to get there through synergy capture. So that's been a pretty significant focus for us in the past and I'd say all four of the last deals that we've done have met that criteria. And at this point that's also how we're evaluating deals on a go-forward basis. And I'll let Saleel comment on the strategic side of things. Saleel Awsare Yes. So George, great question, right? We have three verticals we really like, smart cities, enterprise and automotive infotainment. We like compute, we like connect, and in those spaces where we are going to be looking at acquisitions, and we are seeing a pipeline now coming, so we're starting to look in that stuff. And I'll just add my own personal experience with acquisitions in my previous company, being accretive from day one is really important, and we're going to be focused on that for sure. The next question comes from Ryan Koontz with Needham & Co. Please go ahead. Ryan Koontz Thanks for the question. Quick clarification on your autonomous truck; did you mention your time frame at all when you thought that might be able to move into first revenue? Jeremy Whitaker We did not mention the timing of first revenue right now. What we said is we got our first pool - for working with them closely on software and services. The hardware revenue is going to be out a little bit. As you know, the cycles, Ryan, for automotive are longer, so we did not give you a schedule on the hardware revenue yet. But we said we did get RPO for software and service, which then in the future leads to hardware. Ryan Koontz That's great. And Jeremy, quick housekeeping on - it looked like the inventory was down substantially Q-over-Q. Is that mostly related to your shipments to your large smart grid customer? Or was it a write-off high impact there or other things that are driving into your sale? Jeremy Whitaker Yes. The biggest impact was the shipments to our smart grid customer. Then after that, we also brought down inventory levels in other areas. That's been a focus of ours. And then some of the write-downs were probably the smallest impact to the bringing down the inventory for the quarter. Ryan Koontz Got it. So our lead times, I'm sure much more manageable now. Anything you can share there about your lead times you're seeing for kind of key component - strategic components? Saleel Awsare No. The lead times are very manageable. And to what Jeremy said for the past three quarters, the two of us have been over focused on getting this inventory right sized. And I think we are sitting there now. We've made some tremendous progress. And the lead times, to your point, Ryan, we're okay now. Ryan Koontz Great. And circling back to the Edge AI topic, it sounds really exciting. Anything more you can share there in terms of the architecture of what these sort of devices would do? Are they part of a larger AI cloud and this is kind of the edge cloud that you're involved in the inferencing from kind of a core or anything you can share there about the architecture on the AI cloud? Saleel Awsare Yes. Great question, Ryan. So obviously, this is the Edge inferencing is what we are going to differentiate and win in. And let me give you like two examples. You can see where it really fits with what we do, right? In videoconferencing, AI tools are now being used to enhance both video and audio. And we've got some great video conferencing customers. So I'm talking about the future, right? Right now, we're already shipping to them. But in the future, with our SOMs, they will be able to have auto framing, tracking, gesture recognition, interesting things like that. We won't be making the models. The models are going to be what they have, but we will have the ability to run up. And we've actually created tools, as I mentioned, our partners going to embed it in their tool chain. So that's one example. In the smart grid, both the low voltage and medium voltage substations are going to allow inferencing of large set of variables. So the variables and the data are going to come from the energy companies. But our products in the future will be able to kind of understand the grid loading and steer energy in anticipation of loads. So it's really, it's early days because Edge AI is early days on the edge, but we're really working with a key partner, and you know who they are, Qualcomm, and we've indexed to them quite a bit, and they have some nice low-power chips and that's a great focus for them also. So good alignment on our side. This concludes the question-and-answer session and today's conference call. Thank you for attending today's presentation. You may now disconnect.

Yext, Inc. (YEXT) Q2 2025 Earnings Call Transcript

Nils Erdmann - Senior Vice President, Investor Relations Mike Walrath - Chief Executive Officer and Chair of the Board Darryl Bond - Chief Financial Officer Good day, and welcome to the Yext, Inc. Second Quarter Fiscal 2025 Financial Results Call. All participants' will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Nils Erdmann. Please go ahead. Nils Erdmann Thank you, operator, and good afternoon, everyone. Welcome to Yext's Second Quarter Fiscal 2025 Earnings Conference Call. With me today are CEO and Chair of the Board, Mike Walrath and CFO, Darryl Bond. During this call, we will make forward-looking statements, including statements related to our future financial performance, statements regarding the expected effects of our acquisition and integration of Hearsay Systems, expectations regarding the growth of our business, our outlook for the third quarter and full fiscal year 2025, our strategy and estimates of financial and operating metrics, capital expenditures and other indications of future opportunities as further described in our second quarter shareholder letter. These forward-looking statements are subject to certain risks, uncertainties and assumptions, including those related to the Yext's growth, the evolution of our industry, our product development and success, our ability to integrate Hearsay Systems business with ours, our management performance, and general economic and business conditions. These forward-looking statements represent our beliefs and assumptions only as of the date made, and we undertake no obligation to revise or update any statements to reflect changes that occur after this call. Further information on factors and other risks that could cause actual results to materially differ from these forward-looking statements is included in our reports filed with the SEC, including in the section titled Special Note regarding forward-looking Statements and Risk Factors in our most recently filed quarterly report on Form 10-Q for the 3 and 6 months ended July 31, 2024, of our earnings release and our shareholder letter that were issued this afternoon. During the call, we also refer to certain metrics, including non-GAAP financial measures. Reconciliations with the most comparable historical GAAP measures are available in the shareholder letter, which is available at investors.yext.com. We also provide definitions of these metrics in the shareholder letter. Hi, everyone, thanks for joining us today. Hopefully, by now, you've had a chance to read our press release as well as our second quarter letter to shareholders, which was posted to our website after the close of the market. We'd like to jump right into your questions. We can go ahead and do that now. We will now begin the question-and-answer session. [Operator Instructions] And our first question today comes from Tom White with D.A. Davidson. Tom White Great. Thanks for taking my questions. Two, if I could. I guess, just first off, on the updated revenue guide. Is that all Hearsay contribution? Or is there a changed -- to kind of -- any change to the outlook in the core business? And I guess if the only change is related to Hearsay, my arithmetic says the new guide implies maybe a full-year revenue number for Hearsay of maybe around $51 million. I think you said it did $60 million in revenues last year. Can you just maybe help me square those two things? And then I've got a follow-up. Thanks. Darryl Bond Hey Tom, it's Darryl. Yes, since we closed the Hearsay acquisition on August 1, the Q3 and full year guide includes two full quarters of Hearsay revenue. Previously, we had said the Hearsay ARR was around $60 million. So you can kind of infer what the revenue is based off that. I'm not sure sort of how you got to your numbers. But when we look at the sort of balance of the year, adding in the Hearsay business for the second-half. We've talked about the top line synergies that we believe are available and we're starting the joint go-to-market motions to continue to accelerate both the legacy Hearsay business and our business. So all of that is contemplated in the guide. Tom White Okay. That's helpful. And then maybe just a higher level one, Mike. The last couple of quarters, you've talked a bit about kind of this broader theme of consolidation of software vendors when kind of the broader market slows and how that's driven by customers. Just hoping you could maybe just talk a little bit about what you're seeing or sort of where we are in kind of that general cycle right now? Do you think any signs that things are kind of loosening up a bit? Or if not, what's your sort of appetite for potentially looking to add other products to the portfolio if this consolidation kind of theme continues. Mike Walrath Yes. No, thanks for the question, Tom. So this has kind of been our thesis, and I think we're seeing what we would expect to see in this environment. So I've been spending a lot of time with our customers and particularly our joint customers with Hearsay over the last particularly the last five weeks since we've closed that acquisition. And we're hearing the same themes over and over again. They have too much vertical software. It's creating workload on their teams, which are smaller than they have been. It's really all the same themes. So too much software, too many platforms, data inconsistencies, the inability to run analytics across these vertical siloed technologies. This is why consolidation makes so much sense. And so it's also one of the reasons why we've seen such a strong positive reaction from our shared customers. With Hearsay, on the two companies coming together because of the promise of being able to deliver better analytics, better data platform, more efficient workflows. And all -- I talked a lot in the letter about how important all of those things are going to be in a generative AI experience world. So none of that has changed. I think if anything, what we've seen from customers is that with the amount of uncertainty that there is in the world; elections, interest rates, recessions, geopolitical risk. A lot of our customers are seeing this as a great time to think about their tech stack, think about their investment and really figure out how to get the most value from it. And so from our standpoint, we're fortunate in that sense that we -- I think we're going to participate in a lot of those conversations because we already have a much broader platform than any of our individual competitors, and we're really just getting started with the organic innovation piece of this. Certainly, we will continue to ask our customers where we should go next. I think this is a big part of the innovation reboot that we've been going through here is having the customers drive us to what's the next most important product, which had a lot to do with the strategic rationale behind a deal like Hearsay. So I think these -- personally, I love these conversations. I think we get into problem solving with customers. We get into where the puck is going, and that's going to help us build a road map of organic growth and inorganic growth opportunities. One of the things I did in the letter is really lay out how we think of that as a long-term value-driving framework, both from a investing in organic growth, expanding inorganically where those opportunities exist. And then obviously, the third pillar of that is the ability to buyback our shares and create a positive antidilution effect to our shareholders. Tom White Great. Thank you very much. I'll get back in the queue. Our next question comes from Rohit Kulkarni with ROTH Capital Partners. Please go ahead. Rohit Kulkarni Hey, thank you. A couple of questions. One is on kind of how do you think upsell into Hearsay or Hearsay's upsell into Yext's core customer base? How do you feel -- where is the greatest lowest hanging fruit in the next six, nine, 12 months. And I think you mentioned earlier that excluding the loss of a large customer, I think organic ARR growth could get to mid-single-digits by end of this year and high-single-digits in first-half of next year. Just wondering what are your latest thoughts on that organic growth based on -- and then perhaps you could update based on Hearsay. And then I have a couple of other Gen AI questions. Mike Walrath Sure. So thanks for the questions, Rohit. So on the first question, I think that there are several opportunities. Where we have joint relationships with customers who are customers of both Yext and Hearsay, there's an opportunity to create more value, as I mentioned by unifying the data platform, the analytics, the workflows over time, and that's something our customers are really excited about. Probably the most actionable opportunities for us are the ones -- are the opportunities where we may -- Yext may have a customer that Hearsay doesn't work with or vice versa. And this consolidation theme remains a -- becomes a tailwind in those discussions because the customers can look at ways to -- can we save money, can we save expense, operating expense. I mean, one of the things I think people overlook a lot is when we -- and we've done it at Yext too. When we overbuy software, it's not only the cost of the software and when we have all the -- when we have too much -- too many pieces of vertical software in the business, there's an operational load on that diversity of software as well, where the people running these systems are moving back and forth between different systems throughout the day, and that's just inefficient. So those are where we see the opportunities. And probably the most -- the best thing about the Hearsay acquisition so far is how quickly the conversations with customers have turned from being a Yext conversation or a Hearsay conversation or really about a partnership discussion. And so it's really remarkable and one of the things meeting with customers I've seen is -- there isn't a -- these businesses are merging together very quickly and it's almost immediately indistinguishable, is this a Yext opportunity or Hearsay opportunity. It's a, how do we create value for the customer opportunity. So that's really encouraging. I think your second question was on organic ARR growth. And one of the things that we talked about in the letter is that we're seeing a lot of stability overall in the ARR picture. And we're also accounting for a lot of risk. And I think we all entered this year, and I've talked to a lot of other software CEOs about this, entered this year thinking that this year was going to be an improvement in the environment. We haven't seen evidence of that. And as we look at the risk factors in the second-half of the year that I've laid out a couple of times already, we're just going to take a cautious approach on how we talk about expected ARR growth. So what I would say is we -- in total, we expect stable to modest growth in ARR this year. And maybe we'll be pleasantly surprised by an environment that helps us, but we're just going to be overall conservative in how we look at that. Rohit Kulkarni Okay. Great. I guess, I like the commentary around Gen AI and the fact that I'll take the glass half full interpretation that where you say that the wave is coming. So perhaps talk about how are you thinking from your conversations with decision-makers and enterprises around kind of puts and takes as to when or how Gen AI related tool that you provide would start to move the needle and would start to essentially be the driver in more and more deals and bookings? And over what period do you feel that's a reasonable assumption to make? Mike Walrath Yes. So as you know, I've been a little bit of a curmudgeon on this topic. And I think that's probably because I've been around too long and seen a few of these cycles before. And we get really excited and then we sort of entered this phase, which I think where we're living now, which is we're asking ourselves as an industry is this real beyond -- obviously, it's driving a ton of value for anyone producing hardware to support the AI infrastructure build-out, and it's driving a lot of workloads, but it's really, as I think has been broadly commented, it's not driving a lot of -- it's not -- certainly not driving the wave of bookings that I think we were hoping AI would drive. And so this reminds me of mobile and social and even the Internet in the late '90s when I was just kind of cutting my teeth, where it was happening right now and then -- then it wasn't happening right now, and then it took a long time, but it turns out when it did happen, it happened a lot bigger than even we could have expected. And so I draw on those experiences and what I see is, I see. I just don't think in a couple of years that we're going to two, three, four, five years, and it's hard to put a timeframe on it, that we're going to be talking about AI so much as we're going to be talking about the value that's being generated through the platform. And so foundational to that, we talk a lot inside Yext about your AI strategy is your data strategy. And so the more fragmentation that we see across the consumer experience, the more important it's going to be that you have a cohesive content and data strategy and that the applications that you're using to deliver that data to those consumer experiences, in particular, it has to be organized. It has to be authoritative, it has to be actionable. And when that happens, we expect this becomes an extraordinary tailwind. Now some of the risk factors, what I would call time-based risk factors are the compliance level for engaging through LLM and various other forms of AI with the consumer is going to be a very high bar, particularly inside large enterprises like financial services, institutions and health care. And so that is a -- the promise of the technology will -- and the ability of the technology will outrun the comfort level that large enterprises are going to have with using it. So now the flip side of that coin to try to give you a thorough answer to the question is, we're already seeing it benefit inside the platform. So when we talk about things like listings, recommendations like automated generated review response, we're beginning to see customers dip their toe in the water using these technologies in a very safe and very constrained way. And not everyone is a regulated industry. So hopefully, that doesn't sound too contradictory. This is going to take a while. When it happens, it will be bigger than people think. And the way we're going to deliver as an industry, the way we're going to deliver a lot of this AI innovation is through software platforms that have the right componentry around data, workflow, analytics, learning and things like that. Rohit Kulkarni Okay, fantastic answer, Mike. I'll go back in the queue. Our next question comes from Ryan MacDonald with Needham. Please go ahead. Ryan MacDonald Hi, Thanks for taking my questions. Mike, maybe the first one is now that you've got Hearsay closed and you're starting the integration work, how quickly can you start to maybe recognize some of those revenue synergies? And what are some of the processes or steps you're taking to be able to start to better go after the not shared customers and maybe some of your key verticals? And can you just remind us how Hearsay sales cycles compared to sort of core Yext. Mike Walrath Yes. So we think there's a -- it's kind of a layer cake of opportunity there. On the revenue side of things, I think we see a sales process and a customer support process that's very similar between Yext and Hearsay, I think the deal cycles are very similar. It's a lot of the same buyers and the same buying centers or at least similar within the organization. And so -- as I mentioned before, I think we really -- we do see an opportunity where -- anywhere where there is a Yext customer, who's not a Hearsay customer will have a, I think, an opportunity to have a discussion there around the benefits of a unified platform and data layer. And we also -- as you know, we've been probably the biggest investment we've made from a product standpoint over the last 12 months is in a nonfinancial services, social management and analytics platform, which I think we're talking about getting to GA within days in the letter. So that's coming. We're really excited about it. We've had a large customer beta going there, and we think there -- it's going to be a really nice addition to the portfolio. As we integrate the products, there are going to be many opportunities to take Hearsay functionality and extend it beyond the financial services vertical and also potentially bring Yext's core products to those core -- Hearsay financial services team. So all of that, I think we need a little bit of time to work through organizationally, how we're going to manage this. And obviously, there's a whole product road map element to this, too. And we're going to approach that patiently because fortunately, we have the time that we need to figure that out. There's obviously the other side of it as well, which is the cost synergies element, and there are clearly going to be opportunities for us to bring the teams together and drive both revenue upside and cost synergy, which is part of what you see us kind of alluding to in the outlook with a consolidated low single -- low-20s margin by the end of the year, but improving upon that next year. Ryan MacDonald Yes, appreciate the color there. I wanted to ask on that -- on the adjusted EBITDA margin. So is it right to assume as you talk about the low-20s consolidated adjusted EBITDA margin exiting the year that at that point, Hearsay is still a bit dilutive to EBITDA margin now and that much of the potential expansion or growth upon that in fiscal '26 is primarily synergy driven? Or are there -- is there incremental leverage you're kind of seeing in the core business as well? Thanks. Darryl Bond Yes. Ryan, it's Darryl. I think the first part of that is right. The consolidated margin that we guided to includes both businesses and the Hearsay component is a little bit dilutive to overall margins. I think as we get into next fiscal year, we'll continue to sort of run the business in an efficient way. And since we're integrating the businesses and putting things together, it's hard to say, do the efficiencies come from the legacy Yext business or the legacy Hearsay business because to us, it's really just one business at this point. And we're going to look at how are we allocating capital, how are we making decisions with respect to investments and efficiency that are going to throw off the best returns. So we don't necessarily think about it as two different pieces, it's really just one overall set of operations. Mike Walrath Yes, that's right. I would just add to that and just reinforce that point that Darryl just made, which is when we look at our capabilities as a combined company, we're going to look at all the opportunities within the portfolio to deliver innovation, to deliver growth opportunity and also to unify teams. And so it's been fantastic to see the teams come together. I think we're seeing -- and it's been part of a lot of acquisitions. I think what we're seeing is -- we're seeing the teams really immediately coming together. There's cultural alignment and it's really gratifying to see how well the teams are working together and just the energy and the level of effort across the whole organization. As we go into next year and as we think about sort of improving margins, there are obviously two elements to that. There's the opportunity to get the revenue growth going again and then there's also the opportunity to be more efficient and to determine how we allocate the portfolio of investments that we make. We do believe that there comes a point, and I'm not -- I'm going to stop short of predicting when this point is where we get through this kind of macro. And then the market gets really interesting because the consolidation opportunity will be a headwind for some companies and a tailwind for other companies and breadth will be a huge advantage. And that's really where I think we're setting ourselves up to make a lot of progress. Even as I think the operating environment gets easier, there's still going to be for quite some time, I think the digestion of 10, 12 years of what we would call like kind of the technology hyperbuying environment. And in those -- in that type of environment, we just feel we have some very strong value proposition and capabilities to unify platforms and make things work better. Ryan MacDonald Appreciate all the color there. I'll hop back into queue. [Operator Instructions] Our next question comes from Naved Khan with B. Riley Securities. Please go ahead. Naved Khan Great. Thank you. Thank you very much. So just the commentary on Boomerang customers and the fact that you managed to get 9 back in the last quarter, that's pretty encouraging. I'm curious if you're continuing to see these trends into the third quarter as well? And also about the terms on which these customers may be coming back, are they coming on similar terms and tiers as they used to be and what are the primary reasons for them coming back? Mike Walrath Yes. So thanks for the question, Naved. Yes, we're thrilled about this. I think, it's well-known that it has been a tough couple of years. There's been a tremendous amount of competitive pressure. I think a lot of promises made. And one of the things we're seeing is that those promises are not always delivered upon. And so when that happens, one of the things that we've, I think, done a better job over the last, particularly 12 months of doing is making it clear to our customers that we're ready to help them come back, right? And in this type of environment if the thing that you left for isn't working, the ROI implications of that can be enormous. Because what you look at is the -- if you're losing organic traffic, if you're less competitive in a rapidly fragmenting search channel world, it can be devastating for your business. And so we are -- just as we're taking a very partner -- long-term partnership mindset to the -- to our customer relationships and to the renewal cycles. We're also making it as easy as possible for companies who have left and feel that the value they've been promised hasn't been delivered to come back. And in a lot of cases, this is happening faster because we're able to revert back. We maintain a lot of the infrastructure to be able to quickly get them back up and running and solve the -- whether it's a listings or pages or reviews, challenges they're having. So this is a trend we think it's a credit to our teams staying close to the customers and really remaining partnership-minded even when the customers decide to go experiment with other solutions that we can get them back up and running really quickly. And this is -- I just want to credit the global team on this. It's a different mindset and it creates long-term partnership value that I think is hard to put a value on it, but it's a lot. Naved Khan That's great to hear. And then maybe a quick follow-up. So just on the guidance for the full year versus the third quarter. If I try to back into the EBITDA margin for the fourth quarter, it kind of implies mid-20s kind of range, just wondering if I'm off somewhere or just give us some color on how to think about that? Darryl Bond Hey Naved, it's Darryl. I think if you look at Q4 implied EBITDA margin, it's around 22%. When we talk about getting up into the mid-20s, I think the legacy X business is kind of there. And as we talked about a couple of minutes ago, Hearsay is a little bit dilutive to that. And I think as we get into next year, that's where we see the opportunity to continue to expand the margins, both, like Mike said, through finding efficiencies in the business, but also hopefully getting some benefit from [REV] (ph). Naved Khan Got it. And last question, if I may. So maybe just on this move from contractual ARR to usage-based on the third-party reseller side of things. Just kind of what kind of is driving that move? And if it really doesn't affect revenue, then just kind of what are the dynamics behind the scene to kind of lead to this change? Mike Walrath Yes. So this has always been part of that business, but I think it's -- I think, there's been an -- it's been an easy default to -- we want the committed revenue predictability and sometimes what -- I would file this under customer centricity. I would file this under -- in a lot of cases, what we've determined is that we might be missing opportunities, companies who don't want to commit to a certain level of spend, but have a set of customers who they want to deliver the platform to. And so what we're trying to do here is create a lot of flexibility for our customers in a lot of -- in many, many cases, they want to make a commitment and they want a lot of -- and I think it's fairly simple, like the more volume of products that someone -- that any customer commits to, the better the pricing is going to be. But I think we probably over-rotated to that type of a structure to the point where it probably felt like we were demanding commitments from customers whose business might be at a stage, it might be a smaller business, a growing business, who needed less commitment, who might have less of a predictability to their own business. And so really, it's just been a focus shift to meeting our customers where they are and making sure that there's always a trade. It might -- the unit pricing might not be as good for a deal that has less commitment or no commitment. So I think what we're trying to shine light on here is that as we do this, it can have a dampening effect on the reported ARR because conservatively, we only report contractually committed ARR. And so you'll have to -- as we move forward here, and we've kind of been signaling this for a couple of quarters, and we'll try to make this as clear as possible. We're not going to change the way that we report ARR, at least we don't have plans to right now. But we'll try to give you some indications around you'll be able to look at the revenue trend, but also the committed ARR number for the reseller business. And I think that will help you figure out what's going on there. So we wanted to call it out this quarter just because there was that kind of $2 million-ish, I think, drop in committed ARR for the reseller business. But if you look at the revenue and then you adjust for kind of the days in the quarter, thing what you get is there's basically flatness in that revenue. And obviously, as we go forward, we continue to kind of call that out. Hopefully that make some sense. Naved Khan It does. Appreciate the details. Thank you. Thank you guys. That concludes our question-and-answer session. I would like to turn the conference back over to Mike Walrath for any closing remarks. Mike Walrath I'd just like to thank everyone for joining us again today. And I just want to take a moment, one more time to thank our global team. I know many are listening to this, and the team is doing an amazing job delivering value for our customers and focusing on the long-term value creation. It would be remiss not to acknowledge at every possible moment. So I really appreciate everyone's time today and look forward to speaking with you next quarter. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

SecureWorks Corp. (SCWX) Q2 2025 Earnings Call Transcript

Hamza Fodderwala - Morgan Stanley Mike Cikos - Needham Saket Kalia - Barclays Madeline Brooks - Bank of America Securities Good morning, my name is Carly and I'll be the conference operator for today. At this time I'd like to welcome everyone to the SecureWorks Second Quarter Fiscal 2025 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. A supplemental slide presentation to accompany the prepared remarks can be found on the company's website. After the speaker's remarks, there'll be a question-and-answer session. [Operator Instructions] At this time, I would like to turn the call over to Kevin Toomey, SecureWorks Vice President of Investor Relations. Mr. Toomey, please begin. Kevin Toomey Thank you, operator. Good morning and welcome to SecureWorks' second quarter fiscal 2025 earnings call. Joining me today are Wendy Thomas, our Chief Executive Officer; and Alpana Wegner, our Chief Financial Officer. During this call, unless otherwise indicated, we will reference non-GAAP financial measures. You will find the reconciliations between these GAAP and non-GAAP measures in the press release and presentation posted on our website earlier today. Finally, I'd like to remind you that all statements made during this call that relate to future results and events are forward-looking statements based on current expectations. Actual results and events could differ materially from those projected due to a number of risks and uncertainties which are discussed in our press release, web deck, and SEC filings, which you can also find on the Investor Relations website at investors.secureworks.com. We assume no obligation to update our forward-looking statements. Thank you, Kevin, and welcome, everyone. Our business continued its strong momentum in the second quarter. Taegis revenue grew 7% year-over-year to $71 million, and we delivered on our Q2 total revenue commitment. Annual recurring revenue, or ARR, now stands at $290 million, driven by the strength in new customer acquisition and expansion. And our Taegis average revenue per customer, or ARPC, expanded to $150,000 per customer. Our non-GAAP Taegis gross margin of 74% remains strong, growing 360 basis points year-over-year. And we delivered positive adjusted EBITDA once again this quarter. We are demonstrating that the security outcomes delivered by our Taegis platform, the success of our partner ecosystem, and our advanced automation and AI capabilities are propelling the growth of our business profitably. And they give us ample runway to further benefit from the scale that our business model offers. And Taegis is increasingly receiving accolades from industry experts. SecureWorks was recently recognized as the gold winner in the Golden Bridge Awards in the category of AI and cybersecurity innovation. The only company out of more than 1,000 nominated to win this award. A testament to our commitment to excellence and innovation, helping organizations reduce cyber risk and prevent cyberattacks by harnessing the power of AI in managed detection and response. In the second quarter, we progressed our growth strategy in several key areas. Specifically, we launched Taegis IDR, our new identity threat detection and response solution, solving a threat vector that has plagued companies for years, and furthering the protection of our customers. We gained traction across our global partner ecosystem, adding new key partners, increasing momentum and sales productivity, and partner win rates. And we continue to increase the extensibility of our platform to enable customization of playbooks, integrations, and advanced detectors to drive scale in the platform and increasing margins for partners and for us. I'll turn to product innovation in the second quarter, starting with a significant product advancement in identity security. First, for background, as traditional cyber defenses have hardened, attackers are taking advantage of vulnerable user identity, with nearly 80% of breaches involving some form of identity compromise in the mix. And given that identity misconfigurations impact 95% of organizations, the risk here remains high. To put that risk into context, the average cost of a data breach reported last year was 4.5 million. In speaking with CISOs, this is often the number one fear that keeps them up at night, one that isn't covered by traditional controls such as Endpoint. This is why we built and launched Taegis IDR, our identity threat detection and response solution, to help security leaders detect, prioritize, and respond to identity-based threats across their organization's environment and on the dark web. Conventional identity and access management controls, like multi-factor authentication, are helpful but insufficient. Taegis IDR provides comprehensive attack surface coverage of credential access techniques, providing visibility into identities, monitoring for gaps in the environment, flagging risky user behaviors, alerting when credentials have been exposed on the dark web, and detecting and accelerating response to identity-based threats in lockstep with Taegis XDR. Like all threats, speed is of the essence, and these capabilities and a time to detect that's counted in seconds are superior to what we see in the market today. And these will make a meaningful difference in protecting our customers' environments from one of the most prevalent and lucrative attack vectors deployed by threat actors. I'm pleased with the feedback from our early adopters on Taegis IDR, and the results they are experiencing. Customers appreciate Taegis IDR's ability to rapidly detect gaps and other misconfigurations in their environment, particularly in areas of misconfiguration and vulnerable exposures across the Azure and Microsoft ecosystems. Taegis IDR ensures customers can close those gaps, while preventing threat actors from accessing and then moving laterally within their network. This quarter, we also launched a more personalized MDR offering with guidance on proactive security posture management and defense called Taegis ManagedXDR Plus. Many organizations struggle to find tailored cybersecurity solutions that fit their unique needs at an affordable price. They often have to settle for one-size-fits-all approaches that don't offer the proactive defenses they need for resilience. The Taegis Plus offering addresses this gap by providing a more targeted threat hunting experience, personalized security health guidance, and customized reporting to support compliance with a growing set of regulatory requirements. With this offering, we are making good on our commitment to help our customers mature their security posture over time with a clear return on their investment. This too grows our share of wallet, further propelling our industry leading ARPC. Shortly after we launched our Plus offering last quarter, we won a multi-year contract with a leading real estate development company in the Middle East. This company had a local MSSP relationship that was not providing the capabilities that they needed to address. Gaps and threat detection were falling on their lean team, which meant they had little to no time to proactively manage the security posture of their organization in the face of rising cyberattacks on their business. This customer chose ManagedXDR Plus for the personalized proactive approach to getting ahead of the risk, improving their security posture, addressing their regulatory compliance requirements, while scaling their security team, all at a meaningful return on investment. Our Tejas platform is also supporting our go-to-market momentum, but the industry is experiencing an inflection point in the approach to security resilience. We see this in the displacement not only of legacy security technologies, but also in the consolidation of spend on and the number of technology partners. Via our Taegis XDR platform, we are expanding to address a growing set of security use cases, such as identity and exposure management. Our open and integrated approach de-risks the consolidation of technologies with full visibility into the efficacy of Taegis and point controls, ensuring Taegis is well positioned as organizations re-evaluate their security investments and resilience strategies. Our support of choice means that customers can work within their own time constraints around their technology evolution with optionality to evolve their security controls to save vendor spend and management costs at a compelling per endpoint pricing model that has no surprise variable data charges. Last quarter, we won a consolidation opportunity with the leading multinational electronics company where the team had invested in multiple security products in recent years but were not seeing the results they had hoped for. Their team was even more overwhelmed with alerts from a variety of costly and unconnected security controls, while facing rising cyber risks to their business. This customer was seeking valid detections and the automation required to scale their existing SecOps team. By consolidating on Taegis, they immediately benefited from fewer, higher fidelity detections with full threat context and automated response capabilities. The ability to seamlessly manage security operations 24/7 with a predictable and compelling total cost of ownership led them to make SecureWorks their global security partner. We also saw great momentum across our global partner ecosystem this quarter with the addition of new key partners and acceleration in our deals won together. This quarter, we expanded the number of partners we have with global reach, while offering all of our partners strong operating margins, customized sales and technical enablement, and marketing collaboration. The broader channel increasingly appreciates the competitive advantages that Taegis and the SecureWorks suite of solutions offer, demonstrably reducing risk and supporting resilience, increasing the market's recognition that XDR represents the next era in security. Supported by the growing success and our partner first go-to-market, we saw increasing momentum in sales productivity with our Better Together go-to-market motion in Q2. And our partner win rate improved to the highest level since we launched our partner first go-to-market motion. In Q2, approximately 80% of global Taegis new logo sales closed were partner deals, reflecting the security value Taegis-based solutions bring to their customers. In second quarter we also continue to add to the more than 50 managed security services partners in our program. I'll highlight one MSSP partnership signed this quarter with a premier provider of IT and technology solutions. This partner is delivering managed detection and response services powered by the Taegis XDR platform to protect its elite clients across the financial services, life sciences, and professional services sectors. This partner made a seven-figure ARR commitment upfront, beginning with the transition of customers from its legacy SIEM technology onto the Taegis platform to drive higher retention and margin expansion for their business. Partnerships like this provide further validation of Taegis' ability to drive scale for large managed security services providers, empowering them to provide organizations of all sizes with access to enterprise-level security within an attractive business model. In conclusion, Taegis is defining the future of threat detection and response, driving superior sustainable growth and value creation, our agile expansion of features and capabilities to protect against threat actor access vectors, delivering organizations improved security risk postures and the best security outcomes, and our open without compromise approach. These, combined with our growing successful partnership ecosystem, put us at an advantage. In an environment where vendor consolidation and scaling spend on both security technology and talent are top priorities, demand for our Taegis security offerings remains strong. Taegis is the platform of choice for organizations to bolster their security posture at a proven return on investment, driving our growth now and into the future. I want to thank you for investing in our mission to secure human progress and thank you to our customers and partners for joining forces with us. With that, I'd like to hand the call over to Alpana to cover our financial results and guidance. Alpana Wegner Thanks, Wendy. Good morning, everyone. I will review our Q2 results before I provide expectations for Q3 in fiscal year 2025. We once again hit our financial commitments in Q2. We delivered total revenue exceeding $82 million, which was at the high end of our expectations, primarily on the strength of subscription deals closing earlier in the quarter. Year-over-year, total revenue growth was impacted by a $13 million decline in revenue from the wind down of our non-strategic legacy business. Taegis subscription revenue was $71 million, up 7% year-over-year. Total ARR increased 5% year-over-year to $290 million, in line with our expectations. Our ARPC was $150,000, up 14% year-over-year, and remains a premium to the industry average, underscoring the value that Taegis provides our customers. The growth in our ARPC was driven by strengths in new logo and existing customer expansion. We ended the quarter with 1,900 Taegis customers. We saw new customers added in the quarter at a higher ARPC than the customers that churned. As our Taegis pricing is largely on a per endpoint basis, growth in endpoints is another indicator of platform expansion. Our endpoint count grew more than 9% year-over-year in the second quarter. Our Q2 operating results are strong, reflecting our continued focus on operational efficiency, productivity improvements, and cost discipline. Q2 non-GAAP Taegis subscription gross margin of 74.3%, an improvement of 360 basis points versus second quarter a year ago, driven by automation, continued cloud architecture scaling, and by leveraging our AI and machine learning capabilities across the business. Total non-GAAP gross margin expanded by 680 basis points to approximately 69% in the quarter. Total non-GAAP gross margin expanded by 680 basis points to approximately 69% in the quarter. Total gross margins reflect the end of life of our other MSS business in Q1, resulting in revenue being nearly zero in Q2. Adjusted EBITDA was $1 million, in line with our guidance of $1 million to $3 million and an improvement from a loss of $10 million in Q2 of the prior year. EBITDA was impacted with more than $1.3 million of redundant or transitional costs associated with the end of life of our other MSS business. GAAP net loss was $15 million for the second quarter or $0.17 per share compared with GAAP net loss of $32 million or $0.38 per share in the same period last year. Non-GAAP net income was break even or $0.00 cents per share compared with non-GAAP net loss of $9 million or $0.10 per share in the same period last year. Turning to the balance sheet and capital allocation, we ended Q2 with a strong balance sheet with $48 million in cash, no debt, and an undrawn $50 million credit facility. Our cash flow from operations was $4 million in the quarter, compared with $27 million used in the prior year period. The decreased use of our operating cash is driven by our focus on cost discipline, reduction in duplicative costs, and increase in operational efficiencies. As a reminder, our cash flow can fluctuate from quarter-to-quarter, with the first half seasonally being a use of cash primarily due to the timing of annual incentive payouts, and the second half typically generating cash from operations. Now turning to third quarter and full year fiscal 2025 guidance. For Q3 fiscal year 2025, we expect total revenue of $80 million to $82 million, adjusted EBITDA to be between breakeven and $2 million, and we expect a range of non-GAAP net loss per share of $0.01 to non-GAAP net income per share of $0.01. For the full year fiscal 2025, we now expect total ARR to be $300 million or greater, total revenue of $328 million to $335 million, total non-GAAP gross margins to be 68%, inclusive of Taegis gross margins to be 74%. Adjusted EBITDA to be between $6 million and $12 million, non-GAAP net income per share to be between $0.03 and $0.09. Cash flow from operations to be between cash used of $2 million and cash generated of $8 million. And we expect CapEx to be in line with fiscal year 2024. In closing, our Q2 results give us confidence in our ability to meet our 2025 outlook. We are executing on our growth strategy and will continue to deliver additional value to our customers and partners by opportunistically investing in sales and marketing to accelerate our partner momentum and in product development on new and innovative capabilities both across add-on and native security products. We remain committed to EBITDA profitability as we continue to drive scale in our business. Thank you for joining us on the call today. Wendy will now rejoin us as we begin Q&A. Operator, can you please introduce the first question? Thank you. [Operator Instructions] Our first question comes from Hamza Fodderwala of Morgan Stanley. Hamza, your line is now open. Hamza Fodderwala Hi. Good morning. Thank you for taking my question. Maybe, Wendy, I'll start with you. Obviously, a lot of macro uncertainty out there, but a very intense threat environment at the same time. I'm wondering, going into your new fiscal year, how are you feeling about the overall macro and spending environment? And then, maybe Alpana for you, how are you feeling about your position from an investment and a sales capacity standpoint to really drive that top-line growth sustainably going forward? Thank you. Wendy Thomas Good morning. Thanks, Hamza, for the questions. When we look at the marketplace right now, we see continued good demand for cybersecurity in general and then specifically for Taegis, the acceleration in our opportunity around kind of legacy technology displacement, vendor consolidation, particularly SIEM replacements. When we look at the sort of macro factors for us, our sales cycles were stable, if not slightly better, kind of within the range of recent times. So we haven't seen a big shift there. And frankly, just given where we are in terms of about a little over 18 months into our partner first strategy, we saw a really good performance in terms of those relationships this quarter, highest win rates, 80% of new sales, increasing mix of deals coming from those partners. So from our position in terms of market tailwinds as well as our execution around our partner first strategy, we continue to see good demand going into the second half of our fiscal year. Alpana Wegner And then to -- good morning. This is Alpana to address the second question that you had. Just from an investment and sales capacity standpoint, I'd say a couple things there. One is, we have done some -- as you know, from last year, done some restructuring within our go to market organization. And we do feel like we've got the right seller profile today, as well as the right capacity to be able to deliver on the top line. Our partner ecosystem, and as Wendy just said, the positive momentum that we're seeing there is a more efficient go-to-market, and we do see that that is generating the capability for us to deliver greater sales productivity. That being said, I do expect that, and you saw a little bit of that in Q2, that we'll continue to invest in the go-to-market as well as product. Those are two fundamental areas to ensure that we can hit what we want to do from a top-line perspective. And from an overall perspective, I'd say sales and marketing, where it came in on Q2 as a percentage of revenue is where we expect it to trend for the rest of the year. Thank you very much. Our next question comes from Mike Cikos of Needham. Mike, your line is now open. Mike Cikos Hey, guys. Thanks for taking the questions here. I just wanted to cycle back to the prepared remarks. I think there was a comment that some deals had closed earlier in the quarter which benefited subscription revenues. It doesn't sound like it from a macro standpoint, but just wanted to see like that the positive from that would be, hey, linearity in the quarter improved to a certain degree. If someone was to read that negatively, they would say, hey, maybe there was something macro-related that may have weighed on demand in the back half of the quarter. Can you just clarify that dynamic to make sure that we're all being thoughtful here on that? Wendy Thomas Yes. No, it is. It was a positive dynamic from our perspective, which is just typically we see more deals come in at the end of the quarter than at the beginning of the quarter. This is just unusual. And that we had some larger deals come through at the earlier part of the quarter. So definitely a positive from our perspective and did not necessarily pull away from what we saw towards the end of the quarter. Mike Cikos And anything to read as far as potential sustainability for that improved linearity? Or was this quarter maybe too early to call a trend just yet? Wendy Thomas Yes. I don't see it as a trend at this point. I would say that it was just a bit of anomaly for Q2. Look, as most CFOs would, I would love to see it happen every quarter on a repetitive basis, but it's a little early to call that a trend. Mike Cikos Terrific. And then just a quick follow-up, if I could. I know that we were saying how EBITDA this quarter was impacted by those redundant costs. I believe it was $1.3 million is what you guys had cited. Just as a reminder for the audience, can you help us think about what are the remaining transitional costs from that end of life of other MSS that still need to flush out and how should we think about that over the rest of the year? Wendy Thomas Yes, I am happy to say that we've got those costs behind us at this point. As you look at the second half of the year, you will see that we've got no remaining costs from a legacy business, the other MSS. And as you saw in Q2, the revenue had already come down to a very de minimis amount. So that goes to zero as well as the cost. We're at a point where we've transitioned and completed the wind down completely at the end of Q2, which, as you know is a pretty significant milestone for us and really enables the team to be focused on purely to go forward which is very exciting for us. Alpana Wegner Yes. And you did ask, but I mean pretty tremendous execution by the team to complete that transition. This is what opens it up for us as a business to grow in total revenue and sustain profitability with a business that now is turned towards building go-to-market momentum and investing in that, as well as new product innovation as we've been able to leverage the platform we've built to take on more security use cases with a lot of investment that's already been made. So great incremental growth opportunities for us. Mike Cikos Totally understand and excited to see that next chapter for SecureWorks. Thank you guys. Thank you. Our next question comes from Saket Kalia of Barclays. Saket, your line is now open. Unidentified Analyst Hi, thank you. You have Carly on for Saket today. Thank you so much for taking my question. I think really I want to focus on some of the trends that we're seeing in the industry right now. So first, given the consolidation that we've seen in the SIEM market recently, how are you and the team thinking about the velocity of SIEM displacements in the industry right now? And is this disruption creating opportunity for your broader Taegis platform? And I'd also love to just touch a little bit on that trend that you've been talking about consolidation spend in the industry, especially on the number of technology partners from customers, how secure is kind of positioned in that trend, especially now with some of your newer products to really benefit from that trend of consolidation? Thank you. Wendy Thomas Thanks, Carly. It's Wendy. Glad to take that. So I'll speak to the SIEM particularly first, which is that, that has been an opportunity where we've increasingly seen customers more than ready to move away from noisy, hard and expensive to maintain SIEMs to an XDR approach to detection and response. So that trend is only accelerating, players forging together to try to fight that trend or get scale to invest. We started building this platform nearly seven years ago now. That is a very difficult thing to replicate in terms of the capabilities that we bring to bear to detection and automated response. So that is a trend that for us, we will continue to see more and more deals that I believe moving to Taegis as a result. When I think about the consolidation trend, the way we designed the platform was also keeping in mind that essentially niche security products would become features of the platform over time. And they would be able -- we would be able to address with this holistic approach to shielding a customer's entire technology estate with an XDR platform. And our IDR launch is a great example of that. Exposure management, our EDR launch, and sort of 2.0 launch of that last quarter. They're all examples of the ability for an integrated platform to provide complete protection, but at a really compelling return on investment for customers. So in both the consolidation conversation with native controls, as well as the core detection response capabilities to replace SIEMs, we like where we're positioned in the market in terms of those tailwinds. Thank you. [Operator Instructions] Our next question comes from Madeline Brooks with Bank of America. Madeline, your line is now open. Perfect. Good morning. Wendy, this question is for you. There's a lot of positive signals from the quarter, like endpoint growth, which is up more than 9%. ARPC is up 14%. But then we're seeing ARR, which, correct me if I'm wrong, is majority Taegis is up only 5% for the degradation from last quarter. So I guess, can you just help us understand the dynamics of bridging the gap between these really good positive points, like the Endpoint growth and ARPC growth, but kind of why we're not seeing that reflect in revenue right now? And maybe talk through some net retention or return dynamics that could be impacting that? Thank you. Wendy Thomas So, good morning and thanks for the question. We absolutely see some sort of leading and lagging indicators in terms of different growth vectors, and that's why we look across all of them. Endpoint growth is clearly important given the growth in our managed services partner business model, which, if you recall, is when we really count those as one end customer, but continue to grow revenue, which drives our ARPC and our endpoint count according to those relationships. Then that's why we continue to kind of break those apart to just give you visibility into the different routes to market that we have. When I think about our ARR growth, we're very confident around the turn we're seeing in getting traction in our partner first model, both in terms of the partners we continue to sign with global reach, really high quality, scaled global reach type of partners. And our investments have increasingly turned towards the enablement and support of those customers. And as we exit 2Q and see the kind of growing pipeline as we head into the second half, that definitely underpins our confidence in our ability to see ARR endpoint and expansion in our ARPC continue. Madeline Brooks Maybe just one follow-up question there, too, is have the dynamics you turn changed as you've gotten to the end of sunsetting your legacy business? Because I think if I recall correctly, there were a lot of customers who were able to transition over to the Taegis platform that was giving a nice boost to growth. So is that maybe weighing a little bit on [indiscernible] as well, just being naturally at the end of that transition period? Alpana Wegner Yes. Maybe Madeline, this is Alpana. I'll maybe share a little bit there on what we're seeing from a churn perspective and where our focus is, just from our overall retention. To your point, I would say the preponderance of any sort of carryover from the transition and the legacy customer base is for the most part behind us at this point. We do see just as any normal business would, we do see some levels of attrition across the customer base. From an ARPC standpoint, we did see some variability in what we add from a new customer base being at a higher ARPC and the ones that are churning being at a lower ARPC. There could be some connectivity there that you could make, which is the lower ARPC from a FIT perspective isn't really the sort of market segment that is looking for our type of MDR services. And those oftentimes can be a nice opportunity for us to share and to transfer those over to our MSSP partners, because they are better suited for what they're offering. So there might be a little bit of overhang there, but we would say that the preponderance is sort of behind us. And really for us, the focus from a retention standpoint is around -- what we see is, where we get good retention across our customer base is when we've got good strong deep relationships. We've got the additional ROI and value that we can add to them through our product portfolio, which is very much centered on, as Wendy shared in her prepared remarks, the product portfolio expansion that we are investing in and focused on. And then I would say, at the core is just the constant continuous improvement that we see across with our platform and our delivery from a SecOps perspective in detection response. And that's really underpinned by the automation that you see that we're investing in and seeing some of the benefits of that not only from what we can do with our customer base in terms of retentiveness, but also get a little bit of that benefit, obviously, from a gross margin perspective as well. Madeline Brooks Got it. That makes sense. And maybe just one more ending comment for me here is, competitors in your space disclose the number of modules and other products that their customers are adopting across the base, right? So some disclosed three plus modules, other are disclosing eight plus modules. Any qualitative discussions around more product adoption would be helpful and maybe going forward would be helpful too to see some disclosures as the platform story takes place around number of products that your customers are adopting. That's it for me. Thanks. Wendy Thomas Yes, thank you for that. And certainly as we think more about the number of products that we're launching. We're in that early stages of that this year. It's definitely on our radar to be able to share that information, because I think it will be, to your point, meaningful for analysts and investors. Thank you. There are currently no further questions at this time. Mr. Toomey, I'd like to turn the call back over to you. Kevin Toomey Great, thank you. That wraps the Q&A and today's call. A replay of this webcast will be available on our investor relations page at secureworks.com along with our supplemental web deck and additional financial tables. Thanks for joining us today. This concludes today's conference call. You may now disconnect your lines.

ChargePoint Holdings, Inc. (CHPT) Q2 2025 Earnings Call Transcript

Colin Rusch - Oppenheimer Stephen Gengaro - Stifel William Peterson - JPMorgan Steven Fox - Fox Advisors LLC Mark Delaney - Goldman Sachs Christopher Dendrinos - RBC Capital Markets Ladies and gentlemen, good afternoon. My name is Abby and I'll be your conference operator for today's call. At this time, I would like to welcome everyone to the ChargePoint Second Quarter Fiscal 2025 Earnings Conference Call and Webcast. All participants' lines have been placed in a listen-only mode to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. And I would now like to turn the call over to Patrick Hamer, ChargePoint's Vice President of Capital Markets and Investor Relations. Patrick, please go ahead. Patrick Hamer Good afternoon and thank you for joining us on today's conference call to discuss ChargePoint's second quarter fiscal 2025 earnings results. This call is being webcast and can be accessed on the Investors section of our website at investors.ChargePoint.com. With me on today's call are Rick Wilmer, our Chief Executive Officer, and Mansi Khetani, our Chief Financial Officer. This afternoon, we issued our press release announcing results for the quarter ended July 31, 2024, which can also be found on our website. We'd like to remind you that during the conference call, management will be making forward-looking statements, including our outlook for our second quarter of fiscal 2025. These forward-looking statements involve risks and uncertainties, many of which are beyond our control and could cause actual results to differ materially from our expectations. These forward-looking statements apply as of today, and we undertake no obligation to update these statements after the call. For a more detailed description of certain factors that could cause actual results to differ, please refer to our Form 10-Q filed with the SEC on June 6, 2024 and our earnings release posted today on our website and filed with the SEC on Form 8-K. Also, please note that we use certain non-GAAP financial measures on this call, which we reconcile to GAAP in our earnings release and for certain historical periods in the investor presentation posted on the Investors section of our website. And finally, we'll be posting the transcript of this call to our investor relations website under the quarterly results section. Hello everyone, and welcome to ChargePoint's second quarter fiscal 2025 earnings call. Today, I will provide business and market updates, walk through key financial results for the quarter, and share the progress we have made across the four areas of focus. I will then give a chronological overview of our plan and we'll begin with some news. To improve our operational efficiency and right size our business for market conditions, we have reduced our non-GAAP operating expense by an estimated $38 million on an annualized basis. We are reducing our headcount by approximately 15% and trimming non-personnel expenses in all areas of the company, with the majority of reductions in sales and marketing. This is an offensive move, these reductions will enable us to move faster by streamlining operations. For example, we are flattening the sales and marketing organization, increasing speed and focus, and maximizing resources directly related to revenue generation. We have done this successfully in the past, cutting almost $90 million of annualized non-GAAP OpEx from a high point of $89 million in Q2 of last year to $66 million in Q2 of this year, streamlining our resources while accelerating our product roadmap. All these changes enhance our core go to market and innovation capabilities to keep us dominant when the market returns. We are seeing green shoots already. Sales of passenger EV's have settled into a stable, predictable growth path, a clear sign of sustainable adoption. In Q2, OEM slashed US lease prices to clear the way for 2025 models. These aggressive price cuts triggered a surge, with sales jumping 23% over Q1 and climbing 11% year-over-year, putting many drivers behind the wheel of an electric vehicle for the first time. When the 2025 models hit the market in the coming months, boasting superior specs and broader selection, EV momentum is only going to accelerate. So, EV Power's latest data says that 24% of shoppers now are very likely to go electric for their next vehicle. Plug-in hybrid sales were up 59% in the first half of the year, underscoring the critical role of charging infrastructure, which is a huge win for ChargePoint. Transitioning to the second quarter, we delivered as promised. Q2 revenue was $109 million within our stated guidance range. Non-GAAP gross margins continued to improve for the third consecutive quarter, coming in at 26% for Q2. This is the highest our gross margin has been in nearly three years, and we expect continued improvement as we transition manufacturing to lower cost locations. What kept us from the high side of Q2 guidance was fleet, where a number of large deals pushed due to external factors including delayed permitting, construction and switchgear delivery. However, we do expect improvement in this area as we are on pace to double our fleet opportunities this year. ChargePoint remains the platform of choice for all types of customers to build their businesses, including auto OEMs. Recent customer wins include our work with Porsche, who are building the Porsche charging services owner app on ChargePoint's platform. Our successful partnership with the Hyundai Motor Group has expanded from its namesake to the Genesis brand. They join our roster of more than a dozen auto OEMs who have selected ChargePoint as the platform of choice to build their charging businesses. In municipal transit, we now partner with Daimler Bus, who will integrate our software and telematics directly into Mercedes-Benz and Setra branded buses. This many vehicle manufacturers choosing ChargePoint is a testament to our software platform leadership. A particular bright spot is municipal transit fleets. Both the OEMs and the fleet operators of these vehicles are customers, building our business at multiple points in the ecosystem. Lastly, here are a few non-financial metrics of note. Our managed port count continues to grow now at approximately 315,000. DC port growth was nearly 10% for the quarter, up to nearly 30,000. With roaming, we offer more than 1.1 million places to charge worldwide, up more than 10% in the last quarter, thanks to great partnership work. Driver growth is critical to our growth and we now have 1.2 million quarterly active users of 20% from our one million milestone late last year. We now count 76% of the Fortune 50 companies as customers. Now let me turn to our strategic cornerstones, which are our open modular software platform, our innovative approach to hardware development, our commitment to world class driver experiences, and operational excellence. In software, ChargePoint is at the forefront of EV charging innovation. We recently partnered with LG, a leader in technology, to bring their hardware onto our charging platform. This partnership aims to expand our reach into smart-home solutions, solar integration and battery storage, areas where LG excels. By working together, we will not only strengthen our technology, but also boost sales for both companies, submitting ChargePoint as a key player in the growing EV market. In hardware, this August, we introduced Omniport, a game changing connector solution that works with both NACS and CCS charging ports, essential for millions of EV's that need a CCS port and the increasing number switching over to NACS, Omniport is designed for simplicity. It automatically selects the right connector for your car through our app or lets you choose on screen when paying by card. Available for both AC and DC chargers, Omniport, developed in collaboration with our co-development partners, will begin shipping later this year. It ends the connector confusion for all who choose ChargePoint, making Omniport the go to choice for station owners. In Q2, we launched Europe's first payment terminal to meet the latest OCPI industry standards and comply with the recently instated EU regulations. This terminal leverages an Open Software Architecture, enabling it to work with over 50 makes of charging hardware. Both our co-development partners WNC and AcBel, are actively working on products that we expect will launch next year. Supporting the second phase of our strategic plan, exciting is the only word I can use to describe these future innovations. Driver experience remains central to our strategy. We're focused on making the charging experience as smooth as possible for drivers. We have recently deployed AI technology to quickly diagnose and fix station issues. If the driver reports a hardware problem with our app, AI analyzes images to identify the issue, often without needing a site visit. This approach reduces downtime and ensures our stations are reliable, solving one of the biggest challenges in our industry. Touching on the last area of strategic focus, operational excellence continues to deliver consistent and impactful improvements for ChargePoint. Proof points can be found in the Q2 results, such as our gross margin which delivered a third straight quarter of improvement. The margin growth has been consistent and healthy, thanks to our relentless focus on operational excellence, with the adjustments to the business bearing fruit across Operations, R&D and Product. We tie all these pillars into our 3-year plan. Phase 1, wrapping up by January 31, 2025, is all about laying the foundation. We're finalizing our leadership team, revising our product road map rightsizing and ensuring operational excellence. We are planning to hire a CRO with the search nearly complete, and we will be fully prepared to scale. In fiscal 2026, we shift to focusing on aggressive growth, driven by the launch of Next-Gen software and hardware. Success here means steadily improving our adjusted EBITDA each quarter with refinements along the way. We anticipate becoming adjusted EBITDA positive during the next fiscal year. In fiscal 2027, we're focused on maximizing the benefits of our operational excellence and innovative product portfolio. The results, significant cash flow. The plan is designed for scalable growth and long-term profitability. When the market conditions improve, we will be ready to scale and despite market conditions, we will continue to improve in the interim. We remain the leader in EV charging. Last, but certainly not least, I would like to offer my thanks to our employees, both current and former that helped us to get where we're at today. Without them, neither ChargePoint nor our industry would be poised for the future success we expect. Thank you for your time, and I will now hand over the call to our CFO, Mansi. Mansi Khetani Thanks, Rick. As a reminder, the numbers I will cover today are non-GAAP. So please see our earnings release where we reconcile our non-GAAP results to GAAP. Revenue for the quarter was $109 million, consistent with our guidance range of $108 million to $118 million. This was 1% higher sequentially and 28% lower year-on-year due to lower hardware revenue. Network charging systems at $64 million accounted for 59% of second quarter revenue. This was down 2% sequentially and down 44% year-on-year. Subscription revenue at $36 million was 33% of total revenue, up 8% sequentially and up 21% year-on-year. Other revenue at $8 million was 8% of total revenue, flat sequentially and up 39% year-on-year. Turning to verticals, we report verticals from a billings perspective. Second quarter billings percentages were: commercial, 72%; fleet 14%; residential, 10% and other 4%. Commercial benefited from increased EV-related shipments of our Express Plus DC fast charging products. Fleet saw continued pushout of large deals due to construction delays. As a reminder, this is a delayed business that we will be able to capture in future quarters. Our highly rated home products continued to be a bestseller even though Q2 saw a seasonal dip in billings. From geographic perspective, North America made up 80% of second Gross margin was up 23 percentage points as compared to Q2 last year, a quarter that was impacted by the inventory impairment charge. The sequential improvement was largely due to improved hardware margins resulting from ongoing reduction in replacement part costs lowering warranty expenses and improved subscription margins resulting from continued optimization of support costs as well as a larger mix of higher-margin subscription revenue with an overall revenue. Non-GAAP operating expenses for Q2 were $66 million, a decrease of 25% and from $89 million in Q2 last year and flat sequentially. Non-GAAP adjusted EBITDA loss for the second quarter was $34 million, a continued improvement as compared to a loss of $36 million in Q1 and a loss of $81 million in Q2 of last year, which included the inventory impairment charge. Stock-based compensation in the second quarter was $19 million, down from $22 million in the first quarter and down from $35 million year-on-year. In prior years, the second quarter has shown a step-up in stock-based comp due to an annual refresh of employee grants. This quarter's net decrease represents the impact of prior restructuring events. Inventory balance increased slightly in the quarter as expected. Our inventory is primarily made up of finished goods and products that we are actively selling. We now expect this to decrease next year as we sell through the finished goods on hand. This will release a significant amount of working capital and free approach. Looking at cash, we ended the quarter with $244 million, significantly better than our internal plan due to continued focus on cash management. Our $150 million revolving credit facility remains undrawn. We have no debt maturities until 2028, and we have existing capacity on our ATM. Turning to guidance. For the third quarter of fiscal 2025, we expect revenue to be $85 million to $95 million. Given current industry headwinds, we are being prudent in our guidance. While Q2 revenue was down 28% compared to prior year, Q3 is expected to be 18% lower at the midpoint of our guidance range as compared to Q3 of last year. Looking ahead, we expect Q2 to be the bottom of the trough in terms of year-over-year growth, barring seasonality. Though we don't typically guide on operating expenses, given the reorganization announced today, we wanted to help reset everyone to a new level for the remainder of this year with an annualized reduction of approximately $38 million of non-GAAP operating expenses, we expect non-GAAP operating expenses to be in the low $60 million in Q3 and to reduce further in Q4 when we will see the full quarter impact of the reductions. About 50% of the reductions are in sales and marketing, with the remainder split between R&D and G&A. We are streamlining functions and becoming more efficient across the company. We are focusing on leveraging the channel eliminating redundancies with fewer people touching every deal while increasing the mix of quota bearing reps. We are committed to being adjusted EBITDA positive. The fourth quarter target previously laid out was dependent on modest revenue growth in a better macro backdrop. Despite the tough external environment, the steps we have taken to improve operational efficiencies will enable us to continue on the path to profitability by reducing our adjusted EBITDA loss sequentially, except for seasonally impacted quarters as we reach adjusted EBITDA positive during fiscal year 2026. In summary, we believe Q2 was the bottom for revenue growth and EBITDA loss, and we have guided prudently to Q3. We continue to invest in all the right areas of the business. And operationally, we put ourselves in a position to execute better and faster as the macro turns. With that, I will turn the call back to the operator for questions. Thank you and we will now begin the question-and-answer session. [Operator Instructions] And your first question comes from the line of Colin Rusch with Oppenheimer. Your line is open. Colin Rusch Thanks so much, guys, and I appreciate the incremental detail you're offering here. Can you talk a little bit about the target revenue level to reach that EBITDA breakeven and how you see the existing inventory working off and your ability to reduce working capital along the way towards that breakeven level? Mansi Khetani Yes. Colin, I'll take that question. So I'll start with the second part, which is the inventory level. So, based on our guide for Q3 based on the macro conditions that we were expecting to be a lot better in the second half, which we're clearly not seeing now. We believe that inventory levels will stay high for the rest of the year, basically around the same as we are right now. This is kind of the peak, but it should -- I don't see it coming down this year. I believe that we should see some inventory balance coming down around Q1, Q2 around middle of next year as we sell through the inventory on hand. On the second part of your question, which was related to the revenue level needed for adjusted EBITDA breakeven, which we've now guided or targeting to get to next year, so a few thoughts here. So this year, as we mentioned, was about focusing on improving efficiency and operational excellence. And next year, we're focusing on returning to revenue growth. So we've made significant changes to our cost structure, as you saw today, and we will continue to look for efficiencies to continue to bring OpEx down. That's one part. On the margins, we expect margin improvements to be realized next year as we start seeing the benefit of Asia manufacturing and improved subscription margins and as inventory will come down around the middle of next year. Now that said, we obviously need to see a moderate amount of revenue growth next year, which we think could be possible from a number of things, right? First, the deals pushing out from this year will materialize next year, and in many cases, they're even expanding. Second, we see increase in opportunities, some of which are pretty large on the fleet side. Again, something that Rick had mentioned which typically take longer to close. And the third would be we are seeing signs of gradual improvement in the overall macro, where we're seeing some green shoots. And overall, subscription revenue will also continue to grow due to our larger installed base. So based on these, we are targeting to see breakeven sometime during next year, but the exact timing of it will depend on actual revenue growth. Colin Rusch Okay. I'll take a follow-up offline. But then while I have you, on the technology side, obviously, there's an awful lot happening in terms of incremental improvement on batteries move toward higher voltage and higher wattage on the chargers. Can you talk a little bit about key areas of investment around the development you mentioned AI and your ability to optimize routes and a variety of other things. But how should we be thinking about the kind of key priorities for you guys from a technology investment perspective? Richard Wilmer Yes. Colin, this is Rick. Good to talk to you. We've got two major areas of focus simply put software and hardware. As we announced a couple of months ago, we hired a new Chief Development Officer for software. And he's really now coming up to speed and starting to refine our go-forward road map for software, and I really expect a lot of exciting innovation in that area. And then on the hardware side, as we mentioned in the prepared remarks, we continue to work with our code development partners, WNC and AcBel. And as I again said in the prepared remarks, we've got some really exciting new hardware products coming out in the future. I can't wait to get those in the market. So those are the two big areas of focus for us. And our next question comes from the line of Stephen Gengaro with Stifel. Your line is open. Stephen Gengaro Thanks. Good afternoon, everybody. I guess two for me. But what I'd start with is, Rick, you were pretty -- you had some optimism around some green shoots in your prepared remarks. And I'm just curious when you sort of -- when you think about what you're seeing in the market right now and you think about kind of your expectations on the EBITDA side next year. When do you think we start to see kind of a revenue inflection point based on some of the positives you're seeing in the market right now? Richard Wilmer Hard to predict. Again, the green shoots, I think, are very specific. And one is we've seen a number of current customers significantly expand their deployment plans by -- in some cases, in order of magnitude. In other cases, specifically in fleet, which we've talked about, we've seen the pipeline and the opportunities that are coming our way in fleet expand very significantly, doubled over last year. So that, again, feels like a pretty strong green shoot. Third, we're seeing a trend now where we've got a number of deals. This is by far more than one that were lost on an RFP six months, 12 months ago where the competition has not been successful executing on their commitments and those deals have now come back to us. So those are good examples of the green shoots we're seeing. I guess the fourth one would be -- we continue to see the dislocation and workplace between the correlation of EV sales and charger adoption. We've had specific examples of large workplace customers, for example, talking about very aggressive growth in the employees at their workplaces that are subscribing to their EV charging programs. And it appears to be growing faster. Again, it's indicated through our utilization data specifically in workplace that also looks like a green shoot. So we are seeing some positive signs in these areas. Stephen Gengaro Great. And then the other question was on the gross margin side. I think you mentioned, Mansi mentioned the Asian manufacturing and I guess, on the product side, but then also better subscription margins. What a couple of -- you want to think about to quantify the impact that could have on the gross margins and even if we assume just kind of modest revenue growth like what the manufacturing side, how that helps the gross margin on the products and where should subscription revenue margins get to in the next four to six quarters? Mansi Khetani Yes. So specifically from the Asian manufacturing side, there is significant benefit to the hardware margins. We're not able to quantify exactly because will be selling through existing inventory, which is at different levels for different products. And so we'll be introducing the Asian manufacturing product for the same difference over at different times. So that is a blend. So I would think that we would see a gradual improvement in gross margin through each of the quarters next year as we start leading through the inventory that we currently have. And on the subscription side, you've seen us improved subscription margins pretty nicely over the last few quarters. This quarter on a non-GAAP basis were above 50%. So we're very excited about that. Most of that is coming from improvements in our support costs, which we have been able to get to by outsourcing to India, most of our software team is now -- our support team, sorry, is now based out of our India offices. And as we continue to see economies of scale, the top line on the subscription side increasing with costs remaining relatively flat that should improve margins as well. Richard Wilmer The other comment I'll add to that is innovation continues to play a role in this as well. The AI technology we recently released, we call this picture to resolution has been having a surprising, very quick impact on station repair costs that are under warranty. This reduces the need to do multiple truck rolls, one, to go diagnose a problem and a second to go repair problem. We've been very pleased with the early results. And innovation like that continues to drive down cost of operations around the services side. And your next question comes from the line of Bill Peterson with JPMorgan. Your line is open. William Peterson Hi, good afternoon and thanks for taking the questions and the details thus far on the call. Wanted to double click on the third quarter guidance. Can you provide some additional context on the quarter-on-quarter decline? How much is this related to competitive dynamics or pricing units, product mix, maybe policy uncertainty in the U.S. and Europe. You also talked about pushouts. I think you even talked about that last quarter on the order of eight digits. Is that just further pushouts? Or is this something new? And maybe other things like related to product changeover or maybe focus on software. Anything to help us understand the quarter-on-quarter and year-on-year decline? Richard Wilmer Yes, Bill, let me make a couple of comments, and then I'll hand it over to Mansi to add to it. The one thing I'll tell you on the guide for this quarter is that we've really made a significant change to our sales and marketing organization that was part of this restructuring we announced today. We have flattened that organization increased the ratio of sellers to nonquota-carrying people. As we mentioned, we're expecting to close our CRO search here shortly. So with this much disruption in the go-to-market organization, we are cautious about Q3, and that was one of the reasons we gave a more conservative guide. I'll let Mansi add some more color from a financial perspective. Mansi Khetani Yes. And just generally, as I've mentioned before, guidance methodology does take into consideration the push-out of deals, the large deals. We've seen it happen many times before. So we do take it into consideration. However, this quarter, we saw a higher magnitude of deals getting pushed out because of the uncertainty in the macro, there are multiple reasons, delayed permitting, extended construction time lines or just delayed buying decisions. So we saw fleet revenue come in lower than we had expected. And obviously, we're factoring in all of this information and knowledge that we've gained from Q2 into our Q3 guidance, which we believe is prudent given the uncertainty in the market. But I would like to point out all of this is about timing of deals, meaning deals getting pushed out, it's not the size of the quantity of deals. William Peterson Okay. I wanted to kind of also ask about margins, but on the equipment side. Obviously, you're improving margins. Some of this is related to mix. But how should we think about now you're one quarter on about the targets you have when the new charges from Asia are really sold in volume next year. Is there a way you can kind of help quantify the margin uplift for both sort of Level two and DC fast for these products? Richard Wilmer Yes. I think it's going to be fairly significant. Just the cost reduction we have on the existing product portfolio -- but the other thing that will begin to contribute next year and then in full force in fiscal '27 or new product introductions. And when I get the question, Rick, what's a good charger. It's a very simple answer. It's very reliable, very durable and low cost, and we are focused on improvements on all of those areas with our next-gen products. And those, again, we'll start to see the beginning of that impact next year and then really in full force in fiscal '27. And your next question comes from the line of Steven Fox with Fox Advisors. Your line is open. Steven Fox Hi. A couple of questions, if I could. Just to understand the backdrop in which you guys think you're now operating. So first of all, in terms of any kind of revenue recovery, it seems a lot of it is hinging on fleet, but that's only 14% of billings today. Like can you give us a perspective on how big fleet can get to over the next couple of years? And then secondly, when you say that EVs have sort of stabilized at predictable growth rates. Is there any kind of sense for what that growth rate you think will be over the next couple of years hit all these objectives? Mansi Khetani Yes, I can take the first part, which is where we expect fleet business to go. It's definitely going to be a pretty significant portion of our overall revenue and don't know the exact timing, but it could -- we expect it to be about a third over a period of time. We're seeing that based on the number of opportunities that are in the system right now, Rick alluded to this earlier, we're already seeing twice the number of opportunities that we were seeing last year. These just take a little bit longer to close. So the business is there. The vehicles are coming -- and so it will be a pretty significant portion of our overall revenue. Richard Wilmer In terms of passenger vehicles, again, I think we're starting to see positive signs from the market, mixed in with concerns from the auto OEMs as they evaluate their transition to full BEV and how the plug-in hybrids in the mix I think it varies from auto OEM to auto OEM. But as we mentioned in the prepared remarks, we've seen lease prices and pricing go down to clear out this model year and prepare for the next model year. The other thing that I believe, particularly is that improved selection and reduced cost of a vehicle and hopefully, with reduced interest rates and the affordability of car loans will all be a positive contribution to passenger EV adoption. I think the J.D. Power statistic we mentioned is pretty meaningful, where 24% of car buyers are now very likely to consider an EV for their next vehicle. So -- again, we see those positive pieces of news mixed in with other news from auto OEMs where they're evaluating their transition to full BEV. Your next question comes from the line of Mark Delaney with Goldman Sachs. Your line is open. Mark Delaney Yes. Good afternoon. Thank you very much for taking my questions. First, hoping you could provide an update on customers looking to source charging hardware for multiple providers in North America? And to what extent you're seeing that influence revenue this fiscal year. Could you speak about that both as a potential headwind to your hardware revenue but also as an opportunity to sell more software revenue? Richard Wilmer Yes, that's a good question. I think we're in the early stages of this, but it's clearly going to happen. I think in North America, you've seen an indication from the largest of the large customers to want a multisource hardware. That's largely brand and intent so far as opposed to actual action -- but one thing I will tell you is that our investments in our support organization, all the innovation we've done around network uptime has really created some differentiation for us. And we're seeing some of those customers, while they may express an intent to multisource still gravitate towards our solution just because of the reliability we've been able to provide in their networks In Europe, it's different where the market is much further ahead in Europe, what we're seeing is a lot of brownfield opportunities now, which really drive software. So we've got multiple examples of customers that have a large installed base of non-ChargePoint hardware. They want to standardize on a software platform to manage that entire infrastructure of both our existing hardware and new. And in those cases, we're obviously selling software without hardware for the installed brownfield and then having the opportunity to also sell new hardware as they expand their networks. Mark Delaney That's helpful, Rick. My other question was around utilization rates. Last quarter, the company mentioned that utilization rates were rising with the continued growth in the number of EVs on the road as well as the lower shipments, the company in the second half of this fiscal year. I would think those utilization rates are rising further. Maybe you can give more color around where utilization rates stand? And is there any specific level you think would trigger additional charging investments from customers? Richard Wilmer Yes, they're still continuing to increase, and it's now at least, again, back to the green shoot starting to pull through some demand. Again, I've had specific customer conversations where they have told me that their employees can't find a place to charge at work, and they're starting to, again, invest in expanding their network. So -- that number goes up, and it now looks like it's hit a point where at least it's beginning to start to pull through demand for expansion opportunities with our -- especially our existing workplace customers. The other trend we're beginning to see is in hospitality, where it looks to me like some of the larger brands are starting to get serious about a brand standard for their entire chain as opposed to letting their franchise owners do what they want to do with charging in their individual hotels. So again, I think utilization pressure is starting to show some green shoots of pull-through demand for expansion business, again, with some, I think, maturity in the hospitality market that can pull through some demand as well. [Operator Instructions] And your next question comes from the line of Chris Dendrinos with RBC Capital Markets. Your line is open. Christopher Dendrinos Yeah. Good evening and thank you. Apologizing, sitting in the airport. So no announcements come in, but just one for me. You mentioned competition and you saw, I guess, maybe one of your competitors unable to deliver and then the customers coming back to you I guess maybe can you just expand on the competitive landscape right now? I'm curious how it's evolved over the past year if you've seen competitors exit the market? Obviously, we've seen Tesla change some things up. But -- any kind of color, I guess, maybe across home fleet and general commercial, how that's kind of evolved? Richard Wilmer Yes. Chris, good to hear your voice. It hasn't changed a lot in terms of the level of competition we're facing. The factor I mentioned earlier where we're seeing deals come back to us that we had lost on RFP. That's more than one example. There are a number of examples where that has happened, and there are fairly significant opportunities in all cases. By vertical, I think you're seeing companies come and go in all three areas, whether it's home, workplace or commercial or fleet. And -- but again, the overall level of competition as appears to be fairly consistent, but some of the names are changing. And ladies and gentlemen, this concludes our question-and-answer session as well as today's conference call. We thank you for your participation, and you may now disconnect.

DZS Inc (DZSI) Q2 2024 Earnings Call Transcript

Geoff Burke - SVP, Marketing and Investor Relations Charles Vogt - President, CEO & Director Misty Kawecki - Chief Financial Officer Good day, ladies and gentlemen, and thank you for standing by. Welcome to the DZS Q2 2024 Financial Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Geoff Burke, SVP, Marketing and Investor Relations. Sir, please begin. Geoff Burke Thank you, Denny, and welcome to the DZS conference call to discuss Q2 2024 financial results. Joining me today are DZS President and CEO, Charlie Vogt; and CFO, Misty Kawecki. During our call, we will provide projections and other forward-looking statements based on our current expectations regarding future events or the future financial performance of the company. Such statements are subject to risks and uncertainties, and actual events or results may differ materially. Please refer to documents that the company files with the SEC, including the most recent 10-Q and 10-K reports and the forward-looking statements section of our Tuesday, September 3 press release. These documents identify important risk factors, what can be cause actual results to differ materially from those contained in our projections or forward-looking statements. Please note that unless otherwise indicated, the financial metrics we provide to you in this call will include those determined on a non-GAAP basis. These metrics, together with corresponding GAAP numbers and a reconciliation to GAAP were contained in the press release issued on Tuesday, September 3, which we have posted to our website and filed with the SEC on Form 8-K. We will also discuss historical, financial and other statistical information regarding our business and operation, and some of this information is included in the press release. Thank you, Jeff. Good morning, and thank you for joining us today. I'm pleased to share that we have now filed our restated and delayed periodic reports, including NetComm's 2-year audited financials and the DZS and NetComm pro forma financial analysis as of June 30, 2024. This means that we are now current with our required SEC periodic report filings. We understand that many customers, suppliers and shareholders are disappointed with how long the restatement process has taken. The restatement process required all parties involved to be thorough, definitive and complete. As a multinational global business with tens of thousands of orders, shipments and revenue transactions, our finance and external independent audit firm took the necessary steps and time required to ensure this process was thorough and complete. To provide a more detailed time line, our finance leadership team self-discovered a revenue recognition matter in June of 2023, associated with two customers for which we recorded revenue in Q1 of 2023. The main portion of the Audit Committee's independent investigation in connection with the restatement was substantially complete in early 2024. We then began a thorough independent auditor RFP process and ultimately selected BDO as our new independent auditor in March of 2024. Over the next 5 months, our finance team, Audit Committee and independent audit partner worked diligently and collaboratively to complete 2022, 2023 and the first half of 2024's quarterly and annual reports, including the divestiture of ASSIA and our recently acquired NetComm. As a result of the various financial work streams and a compressed time line, we were unable to file the required filings by the NASDAQ required date. Appreciating that our number one priority from the beginning of this process was to ensure that we followed a thorough and appropriate process. With our SEC periodic reports complete and current, and while it's our goal to relist on the NASDAQ, our number one priority remains delivering for customers, gaining the synergies from our newly acquired NetComm business and converting $75 million of paid inventory to cash. Throughout this process, our customers, systems integrators, suppliers and manufacturing partners have been incredibly supportive. We value our partner alignment and support and together, we are focused on creating incremental momentum with the innovation that spans our networking and connectivity solutions. Following Misty's remarks regarding our financials, I will share more specifics about the investments and advancements we have made over the past 18 months, including the divestiture of our former ASSIA business and most recently, our acquisition of NetComm. I will also provide our insights on the broader market and our outlook for the second half of 2024. Thank you, Charlie. We are pleased that we are now current with our SEC periodic reports and can once again resume sharing our earnings and financial details. I would like to first review how the restatement unfolded and then discuss our recent financial performance. On June 1, 2023, we issued a press release indicating we would have to restate prior period financial results for the first quarter of 2023. Shortly thereafter, our Audit Committee engaged with our external audit and legal teams to undergo a very thorough investigation. While the investigation was still going by November of 2023, we determined that we would also restate our financial statements for 2022 and for each quarter therein. We received a readout of investigation findings in early 2024. We hired BDO, our independent auditor, in March of 2024. As you can see from our filings and to summarize the impact of the restatement on our revenue, on an annualized net basis, $17 million revenue previously recorded in 2022 was deferred and not recognized in 2022. In 2023, on an annualized net basis, $200,000 of previously deferred revenue was recognized, which is the result of $3 million in net recognized revenue for the Americas and EMEA and a net $2.7 million in net deferred revenue for ASSIA. A net total of $1.8 million as previously deferred revenue was recognized in Q1 2024, and a remaining $15 million of deferred revenue, which represents the amount of ASSIA revenue still deferred at the time of the divestiture of the ASSIA business will not be recognized by the company. As we reflect on our revised financial results, please keep in mind that the divestiture of the ASSIA business in April 2024 was approximately 50% of the consolidated business and reflected in our results from continuing operations beginning in Q1 2024. Further, in 2023, industry revenue associated with shipments of access equipment declined over 25% relative to 2022 due to a telecom service provider spending pause, resulting from excess inventory at customer locations. This inventory buildup was caused by a surge in lead times to 52 weeks or longer during the pandemic that resulted in panic buying, delayed deployment and trial time lines, and the higher cost of capital due to the rapid increase of interest rates in '22 and '23. Accordingly, we experienced an increase in inventory in the second half of 2023. As a result, gross margins for 2023 included a charge for excess inventory of $25 million. Further, in response to the reduction in industry-wide top line declines, the company reduced operating expenses by approximately 29% during the second half of 2023. Turning to our first half 2024 performance, our first half results from continuing operations reflect a reduction in top line, but an improvement in profitability as a result of lower revenue conversion, including backlog and bookings and government delays, offset by improved margins and reduced operating expenses. Revenue in the first half of 2024 was $58.7 million, including only 1 month of NetComm, compared to $74.9 million in the first half 2023, a decline of 21% year-over-year. Software as a percentage of revenue from continuing operations was 17% in the first half of 2024 and 14% in the same period of prior year. Adjusted gross margin from continuing operations in the first half of 2024 were 39.8%, compared to 38.1% in the first half of 2023. Adjusted operating expenses declined by $14 million, down 29% in the first half of 2024 compared to first half 2023 as a result of cost-reduction efforts in the second half of 2023. Adjusted EBITDA in the first half was a loss of $11 million compared to a loss of $20 million in the first half of 2023, an improvement of $9 million. During Q2, we divested the ASSIA business recording a $2.8 million loss on sale net of transaction fees. Additionally, in June 2024, we acquired NetComm for $8.2 million of total consideration without any accounts receivable or accounts payable, recording an estimated bargain purchase gain of $41.5 million, resulting in positive GAAP EPS of $0.61 per share for the quarter. Turning to the balance sheet. As of June 30, 2024, we had approximately $128 million of working capital on the balance sheet between cash, accounts receivable and inventory, including acquired NetComm inventory, offset with approximately $49 million of accounts payable. As previously mentioned, at the end of 2023, we undertook a thorough evaluation of our inventory, recording excess reserves of approximately $25 million, providing confidence in the value of the remaining inventory, resulting in a stronger balance sheet. Second half 2024 and full year 2025 focus will be achieving NetComm synergies, drawing down inventory levels and converting this inventory to cash, converting active trials, profitability and strengthening the balance sheet. Further, now that we are current on our SEC periodic reports, we have more options to address working capital requirements to align with and fuel our growth as we enter 2025. We are working closely with existing as well as other potential financial sponsors to optimize our current 3-year term note of $30 million and upsize our working capital aligned with our anticipated growth during the second half of 2024 and into 2025. We believe that the addition of NetComm was very strategic to the business from both a product and business perspective. The acquisition DZS, not only complementary and leading-edge new technology in the fixed wireless access, fiber extension and home broadband connectivity domain, but it also brought a number of marquee Tier 1 customers. Financially, we believe the acquisition will be accretive, adding significant scale and new revenues to our connectivity products. In the second half of 2024, we expect improved performance in the form of higher orders and revenue compared with the first half due to the inclusion of NetComm and the timing of fiber-to-the-home and enterprise projects that are expected to accelerate and convert during the second half of the year. With the addition of NetComm's leading-edge products and the divestiture of our lower-margin ASSIA business, our gross margins are expected to improve compared to 2023, but slightly lower than first half performance from continuing operations. With our spending optimized over the 12 months, the divestiture of our ASSIA business, and with our acquisition of NetComm, we expect operating expenses to be in the $15 million to $17 million range exiting 2024. Our interest payments on our term debt annualized is approximately $4 million, and we expect a 21% non-GAAP tax rate going forward. As Charlie mentioned, it is our goal to be relisted on the NASDAQ, especially as we expect the market and our business to stabilize during the second half of 2024 and into 2025. Our numbr one priority is delivering for customers, becoming current with our supplier ecosystem and generating positive cash flow during the second half of 2024. Thanks, Misty. Period from 2020 through the first half of 2023 represented an industry-wide acceleration of high-speed broadband access, fueled by the COVID pandemic. At the same time, broader silicon chips and component supplier market was challenged in responding and delivering to meet these unprecedented demands. The work and learn from home phenomena fueled by COVID prompted service providers to accelerate their deployment plans of high-speed fiber, fixed wireless and 5G mobile broadband services, responding to consumer and business requirements. The inability for critical and essential employees within the supplier ecosystem disrupted the timeliness and the availability of silicon chips and system components, resulted in unprecedented 52-week lead times and created an increase of cost of goods sold as well as freight and logistics costs. In the early days of COVID, DZS embarked on a company-wide transformation. We began with a vision and mission to differentiate our broadband access portfolio from a design architecture, performance and scale perspective, aligned with service providers, emerging technology and business models. During this period, we also advanced our IT systems, outsourced two manufacturing facilities, acquired 3 companies, divested our ASSIA business and most recently acquired NetComm. Over the past few years, we have invested approximately $130 million in advancing and differentiating our broadband access, optical connectivity and cloud software portfolios. From 2020 to 2022, and prior to divesting our ASSIA business, top line revenue grew from $300 million to $358 million, and backlog grew from $80 million to approximately $300 million. As we enter 2023 with optimism, based on a robust backlog, government stimulus programs that were forecasted to begin and with numerous technology trials and RFPs that were underway. During the second half of 2023 and into the first half of 2024, our industry in DZS experienced a pause in capital spending due to an over rotation of inventory consumption that occurred in 2022 in the first half of 2023 and combined with lower-than-expected disbursements of pandemic-inspired government stimulus funds. Pause and time line shifted by service providers led to delays in backlog consumption and pushouts with anticipated new orders and shipments. The contributing near-term results have shifted more of our working capital to invested inventory, which remains aligned with backlog and anticipated new orders. As of the end of June, we had approximately $75 million of paid for finished goods and raw materials on the balance sheet. We expect Q3 in the second half of 2024 to experience double-digit growth in orders and revenue compared to Q1 and the first half of 2024, as service providers continue to deplete excess inventory and with the inclusion of our recently acquired connectivity portfolio. As we look forward to 2025, we anticipate a recovery to a more normal pre-COVID investment cycle. Broadband connectivity portfolio we acquired from NetComm includes category defining, fixed wireless access, fiber extension, home broadband and IoT solutions. We believe the secular demand drivers for high-speed fiber and fixed wireless broadband services remain intact and ultimately will benefit from government stimulus programs, including the United States, build and by America, stimulus program that we expect to begin in 2025. DZS has been manufacturing broadband solutions in the United States for more than 20 years. As of today, DZS has certified with the NTIA that we believe to be the industry's broadest range of Build and Buy America ready OLT systems and fiber terminating ONTs with integrated WiFi routing capabilities. As service providers continue to invest in their fiber and fixed wireless networks to deliver multi-gigabit services, they are being architecturally thoughtful with their network design, ensuring that the technology investments they're making today will allow them to position their networks to be future ready. As technology shifts to the network edge, DZS is capitalizing on new opportunities fueled by the demands of emerging applications to which we are responding with embedded software-defined elements, including AI and machine learning. With consumers and businesses fueling fixed and mobile broadband with intelligence and security at the network edge, DZS is better positioned than ever before to capitalize on opportunities created by this transformation due to the investments we have embarked on over the past several years. Our acquisition of Optelian added 100 and 400 gigabit optical transport expertise, complementing our broadband access portfolio. In Q4 of 2023, we began shipping our flagship Saber-4400, optical edge hardened ROADM platform, and today have a growing number of customers that are leveraging Saber's modular form factor and economic cost structure. During the first half of 2024, we also began shipping our Velocity V6 OLT systems, which delivers 800 gigabits of nonblocking capacity per slot in a compact 6-slot chassis design, making it the industry's most advanced OLT and architecturally designed to support 50 gigabits and beyond. Our network assurance and WiFi software management solutions support more than 100 unique WiFi devices, spanning third-party connectivity vendors and support more than 50 million subscribers. We expect that our former ASSIA business divested in April will lessen the competitive exposure to markets that continue to deploy high security risk equipment vendors and will allow us to focus our go-to-market strategy on markets that are adopting open and standard-based platforms. We also expect the divestiture of ASSIA will improve our gross margins and reduce our exposure to foreign exchange volatility. Most recently, in June of this year, we acquired NetComm, underscoring our commitment to innovation at the network edge and amplifying a broader connectivity portfolio, which now include fiber extension, fixed wireless and IoT solutions. The acquisition of NetComm accelerates our WiFi 7 time to market and uniquely extends the reach of high-speed broadband access with differentiated fiber extension and fixed wireless access solutions. These newly acquired connectivity solutions have been standardized and deployed by some of the world's largest service providers, including U.S. Cellular, Bright Speed and Lumin. The NetComm acquisition also expands our customer footprint across North America and Europe and creates a new customer footprint within Australia and New Zealand. Our technology investments over the past few years have delivered on the vision, strategy and playbook we outlined in early 2021 and aligns with what service providers around the world require to differentiate their fiber and fixed wireless offerings. As we look ahead to the immediate and midterm future, our sales pipeline and technology trials are expected to result in growth during the second half of 2024 and into 2025, especially as service providers navigate through excess inventory resulting from elongated lead times caused by the COVID impacted supply chain challenges. With approximately $150 million of backlog, $75 million of paid inventory as of June and the first half 2024 operating expenses lower by $14 million compared to the first half of 2023, we anticipate our balance sheet to improve over the next 6 to 12 months. In conclusion, we anticipate an improved demand environment during the second half of 2024 and into 2025. We expect to deliver incremental sales synergies in conjunction with our acquisition of NetComm, and we remain focused on converting active technology trials into new design wins. I want to thank our employees and Board of Directors for their commitment, resilience and perseverance over the past year. Furthermore, I want to thank our committed customers who have seen past the external noise related to our restatement matters and self-serving competitor commentary. Finally, I want to thank our technology manufacturing and broader supplier ecosystem who remain committed to our next chapter together. Following this call, we expect to post an updated investor presentation. We plan to share our Q3 2024 business and financial results in early November. Until then, thank you for your time today. With that, I'll now turn the call back over to the operator to facilitate questions. Thank you. [Operator Instructions] Your first question comes from the line of Ryan Koontz with Needham & Company. Your line is open. Ryan Koontz Charlie, it looks like Europe is showing some resilience here in first half '24, a nice uptick in 2Q, while the Americas business is down, just maybe a little bit more than the broader market. Maybe -- can you shed some light on your thoughts about your fiber -- your core fiber opportunities across those 2 markets, where you're most excited about? I know you had some Tier 1 traction going in Europe, last we heard from you, maybe give us an update on some of the fiber opportunities as you see it, that could impact, say, the next few quarters? Charles Vogt Sure, sure. It was good to hear from you, Ryan. First, I think the most important thing for everybody to appreciate is just the dynamics that happened in 2023. As I sort of highlighted in my scripted remarks, the first half of 2023, we had a lot of backlog that we were aligned to, and we obviously went into 2023 with an outlook that a lot of the pacing of a lot of the trials that we were involved with would convert during the second half. That didn't happen, I think, frankly, for a lot of reasons. I think one was just where a lot of service providers were in the management of the inventory that they had acquired over the previous, let's call it, 12 months. And so there was, in our view, a different sort of pacing in the second half of '23 and maybe into the first half of this year with the general sort of grouping of at least our customers. As it relates to a lot of the new trials that we've invested a lot of time and energy into over the last 18 months, we're still very optimistic about the outcome of those. I would say that a lot of those in '23 got pushed out just because they were prioritizing their core business and just deploying as much inventory as they had before they brought on a new technology supplier like us. We certainly feel like getting through this restatement, which was obviously very unfortunate and disappointing for all of us, has created, I guess, a bit more resilience in everything that we're doing. But at the same time, we feel like a lot of the larger scale Tier 1 and Tier 2 trials that we talked about back in late '22 and early '23 are still very much intact. And we believe that a lot of those will convert in the second half of this year, giving us an opportunity to deploy and ship in 2025. As it relates to the comment that you had around just the mix, I would say that it was our goal in the second half of '23, in the first half of this year, to ship as much as we could to those who had the ability to take products and that still had a very active deployment schedule that wasn't dependent on and reliant on the inventory that they already had. So I think a lot of the sort of regional mix and the product mix that you saw, I think, from us, at least in the second half of last year and first half of this year, had a lot to do with that. I think as we go forward in the second half of this year, things seem to be a bit more clear. I think most of our customers have worked through the bulk of the excess inventory that they took on in the previous 12 months. So we feel like the second half of this year will begin to look a bit more traditional. And certainly, as we go into next year, we think that next year becomes a much more normalized year for the space and for us. Ryan Koontz And on the Middle Mile opportunity with Saber, how are you feeling about that, product has been shipping for a little while now. Have you kind of narrowed in your key niche that you're looking to enter that market because I'm sure the product is not featured to do everything for everybody. So do you have a good feel for where the opportunities are and what the competitive landscape is there for the new Saber-4400? Charles Vogt Yes. No, I mean, a great question, and I appreciate the question. Look, we -- we launched Saber to really ledge our way between the gap that we saw in Last Mile and were the high dense DWDM optical transport, metro and long-haul market was. And so what we were beginning to see over the, let's call it 2 years, as more and more XGS-PON was being deployed. And as more service providers and technology companies were talking about 25 and 50 gig became very evident to us that there was going to be a bottleneck issue at the access edge and that it was a great opportunity for us, especially with the acquisition of Optelian to turn a lot of the resources to building a next-gen access optical transport product that would sit, co-located right at the OLT and more economically aggregate Last Mile fiber and hand that off to the CNS and the [30:54] and the [ Nokias ] of the world that are driving higher DWDM bandwidth. So we think that, that's a big market opportunity for us. I would tell you we were probably 6 months late in getting that product to market. And with most new products, you're looking for 2 or 3 new customers to really help validate the product to work out some of the early kinks and issues that don't get determined until you're first deploying. And I'd say we're in -- we're sort of past that window right now, and we're now into that reference cycle where we now have a couple of customers that are very happy and that we believe will become the references that we need for that. But as it relates to the actual application and the design, we think that the market opportunity for Saber is very encouraging for us. Next question comes from the line of Tim Savageaux with Northland Capital Markets. Your line is open. Tim Savageaux I wanted to drill down a bit on the second half guidance. Clearly, you're going to include a full quarter of NetComm here in Q3. I don't know if that gets you an incremental $10 million or so. And I guess the question is, in terms of the growth commentary, to what extent do you expect the kind of organic DZS business to grow in the second half and kind of what order of magnitude? And if you add all that up, along with your OpEx commentary, and again, I imagine gross margins will -- might come down a bit with a full quarter of NetComm in Q3. But it seems like you could have a reasonable shot at breakeven exiting the year. Be interested in your comments on that. Charles Vogt Good to hear your voice, Tim. I think you got it right. Obviously, we're purposely being thoughtful about what we're going to guide to, especially coming out of a pretty challenging, let's call it, 12 months. And so our thought process right now is that we would soft guide in the second half of this year and hopefully get to a more formalized guidance profiling starting in 2025. I think if you're us and having endured what we just did, there's not a lot of upside for us right now to be overly ambitious with investors and analysts. And so I mean, look, I mean, you're absolutely right. I mean we've -- we've now provided pro forma financials for anyone to look at as it relates to the business that we acquired, I mean, acquiring NetComm, the way we were able to acquire it, for the price that we were able to pay, was extremely favorable for us. And we certainly see a lot of favorability from the customers that we acquired. There seems to be a lot of continuity. There's certainly a lot of sales synergies, where the former Costa team wasn't very focused on a lot of the products, especially in North America and EMEA. They had a very, I'd say, robust business in Australia and New Zealand. But as it relates to accelerating things in North America and Europe, they just didn't have the sales focus and the customers to really take advantage of the technology, which -- that was a big part of our investment thesis was looking at our customers, looking at their technology and how we could gain the sales synergies just within our own customer base, not to mention their run rate business. So I think you're looking at it right. There's no reason why we can't exit 2024 as a breakeven business and really position ourselves to be better positioned in '25. Tim Savageaux And then I wanted to ask a question about the kind of U.S. rural fiber market. What we've seen this year is kind of the -- at least initial approvals piling up in the BEAD process. I wonder if you can give us an update on the opportunities you're seeing develop there, understanding that probably don't get any big flow of funding until next year, but I'd be curious as to the kind of activity pipeline that you're seeing across that part of your business? Charles Vogt Yes. I would say that and it's probably the same with our peers. What we're what we're seeing is, for the first time, and maybe that's a really good indication, progress is being made with the local state broadband offices and the allocation of funds is just the application formality and process and helping at least our core customers who are planning on using our products to apply for and ensure that we qualify. And I think that was one of the reasons why we wanted to go out of our way in my script to highlight the fact that we have most recently certified with the NTIA our products that would align with our customers that would qualify for BEAD funds, which is a big deal. I mean that is one thing, Tim, I'd say, that is really now starting to be scrutinized, is what vendors are certain service providers planning on using? And are they truly certified, and there is a process to qualify and certify and we've done that with our OLTs and ONTs. And so that, I think, is a leading indicator, at least for us with our customers that the process is working. And I think you're right. I think we don't expect to see meaningful dollars really show up on our doorstep until probably the second half of next year. I mean, I think the way the funds are going to ultimately work is on the precursor side before electronics are being purchased and installed. There's, as you know, a lot of phases in the construction process and the deployment process. But I do think that we're seeing progress, and I do think funds are going to roll into our segment with us and our peers, I think, by the second half of next year for sure. [Operator Instructions] There are no questions at this time. Mr. Geoff Burke, I'll turn the call back over to you. Geoff Burke Thank you, Denny, and thank you for participating to everyone on today's call. We look forward to seeing you on our Q3 2024 financial results call in early November. Thanks again. Goodbye. This concludes today's conference call. You may now disconnect.