Lantronix, Inc. Aktie

Good day, and welcome to the Lantronix 2026 Fourth Quarter Results Conference Call. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Mr. Brent Stringham, Chief Financial Officer. Please go ahead.

Good afternoon, everyone, and thank you for joining our fiscal fourth quarter earnings call. Joining me 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-in details for the phone replay in today's earnings release.

During this call, we may make forward-looking statements, which involve risks and uncertainties that could cause our results to differ materially from current expectations. We encourage you to review the cautionary statements and risk factors contained in today's earnings release, which was furnished to the SEC and is available on our website and other SEC filings such as our 10-K and 10-Qs.

Lantronix undertakes no obligation to revise or update publicly any forward-looking statements to reflect future events or circumstances. Additionally, during the call, we 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 will now turn the call over to Saleel.

Thanks, Brent, and thank you, everyone, for joining today's call. The fourth quarter marked a strong finish to fiscal 2026. Over the course of the year, we transformed our operating model, strengthened our balance sheet and built the foundation for profitable growth. We are now seeing the tangible results of that work.

Our continued strong execution drove 8% year-over-year revenue growth to $31.2 million and a 300% increase in non-GAAP EPS to $0.04. Both metrics were within our guidance range. Importantly, our embedded IoT solutions, which includes our drone business, grew 34% year-over-year.

Gross margins remained strong at above 44%, reflecting our team's disciplined execution as we accelerate momentum across the business.

Turning to the broader operating environment, starting with Unmanned Systems. Fiscal 2026 was the year our drone opportunity progressed from early validation to a meaningful growth engine for Lantronix. We set the foundation in Q4 last year when we secured our first drone win with Red Cat powering Teal Drones' Black Widow platform for the U.S. Army's short-range reconnaissance program. As a Blue UAS approved platform, this was a rigorous qualification process, and we believe we won the program because of our deep camera expertise and years of experience in camera tuning, sensor fusion, and the complex software integration required for military-grade imaging.

Our status as a North American supplier was also a key factor. With NDAA and TAA compliance now table stakes for defense programs, a trusted domestic supply chain mattered as much as our deep technical capabilities. That win came against a backdrop of record defense funding with the U.S. Department of War earmarking over $13 billion for autonomous systems in 2026 alone, alongside a clear and growing requirements for secure U.S.-made technology. From there, we built on the early momentum, adding several customers, including Sightline, Trillium Engineering, and others to our drone roster.

Over the course of the fiscal year, we scaled our broader unmanned systems engagements from roughly 10 in Q1 to over 30 today. That growth accelerated following a major regulatory shift in December 2025 when the FCC restricted China-based DJI, historically the dominant drone supplier from introducing new products into the U.S. market. The move created a significant tailwind for domestic trusted supplier platforms, like ours and was soon followed by meaningful U.S. government funding to accelerate the deployment of domestic drone technologies.

And just a couple of weeks ago, that regulatory momentum was further reinforced by the action from Washington, the President signed a Section 232 proclamation imposing new tariffs on foreign-made drones and components aimed at reducing reliance on foreign suppliers and building out domestic manufacturing capacity.

While the FCC's action in December focused on restricting new foreign-made drones and components from entering the market, this latest action is broader, directly targeting the economics of importing drones and related components across the existing market. This is another clear tailwind for domestic NDA compliant suppliers like Lantronix, and we expect it to accelerate the shift towards domestically manufactured alternatives.

Just as important, we are seeing the industry focus shift from simply building more drones to making drones increasingly autonomous. At the scale governments and commercial operators envision, there simply won't be enough trained pilots to operate every drone and training new operators takes time. This makes autonomy essential and autonomy requires powerful AI compute at the edge, what we call physical AI, and that's exactly where Lantronix fits.

Our edge compute platform enables the onboard intelligence that allows drones to perceive, navigate and execute missions autonomously in GPS-denied environments, positioning us at the center of this long-term transition.

Against this backdrop, we delivered $12.6 million in unmanned systems revenue in fiscal 2026, above the midpoint of our most recent guidance range. Importantly, this momentum extends beyond defense. We are also seeing growing adoption across commercial, industrial, agricultural, drone as a first responder and counter-UAS applications, reinforcing the breadth of our unmanned systems opportunity.

Our international expansion is also progressing well, including 2 recent partnerships we formed in the unmanned systems market. The first is with DoD Solution, an Estonian Ukrainian developer of onboard autonomy technology for drones and other unmanned systems. By combining Lantronix' edge compute solutions and engineering expertise with DoD Solutions' AURA Autonomy platform, we are supporting a range of demanding applications. This partnership also strengthens our presence in Europe and Ukraine, where demand for our solutions continue to grow.

Our second partnership is with AVT Australia, a CACI company that develops gimbal camera payloads for drone manufacturers. AVT has designed its payload around our system on module platform, which is purpose-built for high-performance AI and robotics applications. Together, these partnerships demonstrate Lantronix' growing presence across the global unmanned systems ecosystem.

Additionally, we recently announced a collaboration with Swarmer, a U.S.-based drone autonomy software company. Together, we are developing a production-ready compute platform that combines Swarmer's combat proven software with roughly 4x the onboard processing power focused on Group 1 unmanned aerial systems. This collaboration highlights the strength of our hardware, software integration and engineering services, while creating a path to long-term production revenue as Swarmer scales across U.S. and allied defense programs.

With that, let me turn to our IoT System Solutions business. After navigating several quarters of federal government shutdowns, which created extended procurement cycles, we are beginning to see conditions improve. Q4 revenue grew 16% sequentially, driven by a recovery in our out-of-band management portfolio, strength in network switches and early signs of stabilization in our federal business.

Within out-of-band management, we are seeing growing traction in the data center space as edge compute and AI infrastructure deployments accelerate the need for remote monitoring and control of critical IT and data center equipment.

One proof point of this is SambaNova Systems, where our out-of-band solution is deployed as a part of their DataScale platform, a purpose-built AI infrastructure rack for large-scale inference and training workloads. We provide dedicated remote access to the critical networking and compute infrastructure within that platform.

Moving to our critical infrastructure monitoring vertical, just over a month ago, we took another step forward in our platform strategy by acquiring Vecima Networks' Industrial IoT business, including its Nero Global Tracking platform for $11.7 million, which closed this month. The tuck-in acquisition adds approximately $5 million in annual revenue, with the majority coming from ARR and gross margin in the mid to high 60s range.

Based on the purchase price relative to the asset's financial profile, view this as a highly favorable transaction and one that is immediately accretive to earnings. Just as important, it advances a strategy we've been executing deliberately over the past several quarters, layering more software onto our hardware base to expand recurring revenue. That strategy is increasingly visible in our revenue mix.

Our software and services mix has steadily increased throughout the year, moving from 5% to 6% of revenue and then to 7% to 8%. With this acquisition, on a pro forma basis, our software and services revenue mix increases about 10% of total company revenue. This represents a meaningful step towards a more predictable, higher-margin business model.

Beyond the immediate financial benefits, we see meaningful cross-sell potential. Nero brings an installed base of roughly 125,000 device tags across fleet, municipal, restoration and industrial asset tracking markets, creating a natural opportunity to deploy our cellular gateways, modems, edge compute products and connectivity solutions. Together, Nero's software and our hardware provide customers with a more vertically integrated end-to-end asset monitoring solution.

In summary, I am encouraged by our performance in fiscal 2026 and the significant progress we achieved. Our focused execution, disciplined operating approach, and strengthened organization are providing tangible results. We are meaningfully scaling our presence in high-growth verticals, increasing the contribution of software-enabled recurring revenue, and continuing to realize operating leverage from a more efficient cost structure.

As we enter fiscal 2027, we believe Lantronix is better positioned than ever to benefit from long-term growth trends reshaping Edge Compute and connectivity. With strong momentum, a differentiated portfolio, and a clear strategic roadmap, we are excited about the opportunities ahead and remain committed to creating long-term shareholder value.

With that, I turn the call back to Brent to cover financial results. Brent?

Thanks, Saleel. I'll begin with our fourth quarter and fiscal 2026 financial results and some of the key drivers behind our performance, after which I'll provide our outlook for our first fiscal quarter ending September 30, 2026.

For fiscal 2026, revenue was nearly $121 million, representing 8% growth over fiscal 2025 revenue of just over $111 million, excluding Gridspertise. Our growth was driven by more than 15% annual growth in embedded IoT solutions, led by Unmanned Systems. As Saleel mentioned, Unmanned Systems revenue reached $12.6 million, above the midpoint of the $10 million to $14 million range we provided last quarter.

Revenue for the fourth quarter was $31.2 million, representing both sequential and year-over-year growth. Our IoT systems solutions rebounded in the quarter, contributing more than $15 million of revenue after slower ordering patterns in the prior 2 quarters related to the government shutdowns in late calendar 2025 and early 2026.

As we've said over the past several quarters, we viewed those federal headwinds as timing related rather than reflective of underlying demand. The 16% sequential growth we delivered in the fourth quarter reinforces that view.

Turning to our gross margins. In the fourth quarter, GAAP gross margin was 43.7%, up from 43.1% in the prior quarter and 40% a year ago. On a non-GAAP basis, gross margin was 44.1% compared with 43.6% in the prior quarter and 40.6% a year ago. The year ago period was impacted by aged inventory charges and higher duties and tariffs.

The sequential improvement reflects a combination of favorable revenue mix, including stronger performance in system solutions and the continued focus of our operations team on supply chain efficiency and execution.

Looking ahead, we believe these efforts, together with our disciplined approach to cost management, should support gross margins at or near current levels in fiscal 2027. Let me also briefly address the broader supply environment, which we continue to monitor closely. Memory availability has tightened and prices have increased as AI infrastructure and hyperscaler data centers consume a growing share of industry supply. This is an industry-wide dynamic affecting the embedded compute market broadly and is not unique to Lantronix.

We believe our early preparation has positioned us well in this constrained environment. By leveraging our fabless operating model and diversified manufacturing partners, we identified these trends early and proactively secured supply.

Looking at our expenses and profitability. GAAP operating expenses in the fourth quarter of fiscal 2026 were $14 million, slightly down from the $14.1 million in the prior quarter and down approximately 5% from $14.7 million in the year ago period. We continue to observe the leverage in our OpEx model based on the actions we took last year and the ongoing cost discipline that we are executing on.

GAAP net loss for the fourth quarter of fiscal 2026 improved to $269,000 or $0.01 per share compared to GAAP net loss of $2.6 million or $0.07 per share in the year ago quarter. On a non-GAAP basis, net income of $1.8 million or $0.04 per share compares to $1.5 million or $0.04 per share in the prior quarter and was an improvement from the $0.01 per share in the year ago quarter.

Moving to the balance sheet. We raised just over $44 million in net proceeds during the quarter through our public and ATM offerings, bringing our year-end cash balance to more than $60 million. We also repaid the remaining $8.7 million of debt and ended the fiscal year debt-free.

Our strong balance sheet gives us the flexibility to execute our growth strategy while remaining disciplined and opportunistic in allocating capital to the highest return opportunities across R&D, go-to-market initiatives and strategic M&A.

During the current quarter and full fiscal year, we generated positive operating cash flow of approximately $1.9 million and $9.9 million, respectively. Net inventories were $25.8 million as of June 30, 2026, compared to $26.4 million last quarter and $26.4 million in the year ago quarter.

Lastly, our outlook for the first quarter of our fiscal 2027, which ends September 30, 2026, is as follows: we expect revenue to be in the range of $31 million to $33 million. Non-GAAP EPS is expected to be in the range of $0.04 to $0.06 per share.

With that, I'll turn the call back to Saleel for closing remarks.

Thanks, Brent. Fiscal 2026 was a year of measurable progress. We returned the core business to growth, established unmanned systems as a meaningful contributor, expanded recurring revenue and significantly strengthened our financial position.

Along the way, we continue transforming Lantronix from a broad-based hardware provider into a focused solutions platform, combining compute, connectivity, physical AI, software and services at the intelligent edge. Unmanned Systems is the clearest proof point. From minimal revenue contribution a year ago, we delivered $12.6 million in fiscal 2026 after raising our outlook 3x.

We tripled our active engagements, expanded our global customer and partner base and moved further up the technology stack. In fiscal 2027, we expect unmanned systems to represent 15% to 20% of total revenue, with continued growth beyond these levels in subsequent years.

We enter fiscal 2027 with multiple engines of profitable growth, the strongest financial position in our history and confidence in our ability to deliver double-digit revenue growth. As we continue to move further up the technology stack and expand our role across the broader autonomy ecosystem, we believe Lantronix is becoming the go-to edge compute company for unmanned systems.

And with that, operator, we will now open the call for questions.

[Operator Instructions] The first question will come from Austin Bohlig with Needham.

Congrats on the strong results and really strong traction in the unmanned business. And so guys, just maybe just to dive in a little bit into your guys' newest fiscal '27 drone guide. Just would love to get a sense of like what your visibility looks like into this number? And does this largely just assume the engagements that you have today?

Thank you for the question, Austin. And specifically to the guide, it does have into the visibility we have today and the engagements. And what I want to clarify is we are working with over 30 vendors now. We've shipped to over a dozen already. And not only are we doing unmanned systems, specifically drones, but we're also in the counter UAS area. We actually shipped to a couple of customers in the last quarter. So the breadth of the opportunity is there. We've seen decent visibility as we started fiscal '27, and the numbers are based on where we see it today.

Okay. Perfect. And maybe just to kind of get a little bit more color on this 15% to 20% of revenues. Is it fair to assume that like from an absolute dollar perspective, you guys did almost $13 million in fiscal '26. Like should we be assuming this could be at least maybe $25 million in '27?

Yes. Yes, we should be there around the $25 million-plus range for fiscal '27.

Awesome. And then just one last quick one here. Just would love to know, is there any big impact to you guys, both positively and negatively related to the new drone tariffs that were announced a couple of weeks ago?

Yes. I think, Austin, I'll take that one. It's definitely a structural tailwind for our drone business. Being an NDAA and TAA compliant solutions provider, we believe that this tariff policy could support additional design win opportunities for us.

On the actual tariff side of things, we don't see a meaningful impact based on the way some of our components are imported today as more general purpose modules as opposed to specific drone components. So the things that we import from Taiwan and other areas we're not anticipating a meaningful impact at this time.

Yes. Austin, let me add one more thing. As you're well aware, we've got a big facility in Plymouth, Minnesota, and we are ramping up there to provide our drone customers with products with a TAA NDAA certified and in the midterm country of origin, United States of America. So I feel this is going to be helpful for Lantronix.

The next question will come from Scott Buck with Titan Partners.

I am curious, between Swarmer and the DoD Solution and I guess all the Ukraine link programs, what percentage of unmanned revenue is tied to Ukraine and demand? And how do you think about that revenue in a ceasefire scenario?

So Scott, thank you for that question. Our drone revenue for the last 12 months of fiscal '26 and fiscal '27, for fiscal '26, it's mainly U.S.-based, big majority of it. Fiscal '27, the Ukraine portion is not a meaningful portion specifically with the one customer that we talked about and we mentioned. So I don't see a measurable concern for a cease fire or what have you because the growth, we have just changed how war is conducted, and this requires the ability to have unmanned systems, more specifically unmanned systems with autonomy. And that is where we fit. So I don't anticipate any big issues with specifically if that cease fire happens in Ukraine.

Great. That's helpful color. And then my second question, just on gross margin. As unmanned scales, do you start to see some mix pressure there? Or does the progress or kind of growth in the software and services offset that?

Yes. Thanks, Scott. I'll take that one. You're right. With the growth -- expected growth of our module business related to unmanned and drones, there is natural pressure. Those -- the margins in that business are slightly below kind of our corporate average in the low to mid-40s there. So we do see potential pressure.

But as you mentioned, we expect to continue to grow some of the higher-margin sides of our business, including the ARR, which Saleel talked about with the acquisition and seeing a return to growth in some of our other businesses that carry higher margins, some of the network infrastructure and other products that might have had some headwinds against them earlier in the fiscal '26 with government shutdowns and things like that. So we think the offset between those 2 kind of keeps us in a similar range to where we've been company-wide.

Scott, let me just add a little bit more color to your question about specifically in Ukraine. I think the message I want to make sure comes through, we have expanded our reach. We talked about a Ukrainian customer. We talked about a big win in Australia with CACI, which is a big company, U.S. headquartered. We're talking about -- and you're going to hear more in the next call about international expansion beyond North America. So I want to be clear, we are going global, and we're seeing traction globally.

Congrats on the strong results, guys.

The next question will come from Josh Sullivan with JonesTrading.

Just a follow-up on the 232 decision. Have you seen any change in behavior or activity from customers since the announcement?

Yes. So Josh, thank you for that question. This is Saleel. It's pretty fresh, but we have had a few customers come to us pretty quickly to make sure that we are NDAA and TAA certified. And then when I mentioned to them, we are going to start obviously doing more manufacturing out of our testing area in Plymouth, Minnesota, they were very happy to hear that. So as I said earlier in my prepared remarks and even what Brent said, we believe this is a good tailwind for us, especially with our solutions. So interest in us being U.S. headquartered and delivering solutions here. So I think it's a big plus for us.

Got it. And then on the Nero acquisition, now that you're a software, hardware end-to-end solution, what other markets might that take you into? Or what does that capability allow you to do?

Yes. So if you think about Nero asset tracking, we've got -- they already have 125,000 tags out there. So 2 things as you think about the markets. They have been very focused on restoration and fleet tracking. Lantronix has been very focused on managing diesel power generators at cell sites with the big MNOs. Think about how we can start putting that together. That was a part of our overarching strategy that we did this deal for. They bring a strong software backbone to us. It ties in with our perception software that we have, and really goes after new markets that we are going after, and they will be able to get us there faster.

Secondly, we have hardware, right. Nero Global Tracking did not have their own hardware. They were buying hardware from other companies. Our cellular modems and gateways are a perfect fit into that, so we are going to see an upsell from our side, from our hardware business that we have. It is a great fit, gross margins in the 60% plus. We really like it, and it helps the company overall. More importantly, it takes our software and services business that I have been saying was 5% to 6%, we took it to 7% to 8%, I want it to be over 10%. Guess what, guys? We took it to over 10%.

And then I guess on the SLC 9000, what does the rollout of that product look like? What's the TAM there? Obviously, a huge market, but curious what you think you can access there over kind of what time frame?

Yes. Thanks for the SLC 9000. For those on the call, it is our out-of-band product, and I mentioned in my prepared remarks that we won a design with a company called SambaNova Systems out of Silicon Valley. Heavily funded by Intel.

In that one, we are sitting in their rack. I think it is called the DataScale Rack that they have, and we are sitting in that rack. So we are excited about as they go deploy their racks, and each rack has accelerated nodes, host servers, and our box on the top. So it gives you remote access to it. We believe the TAM in this market could be over $500 million, and we are just getting started with this. SambaNova is one proof point of our SLC 9000, and the product is ready and it has already started to ship.

I will add to it, SambaNova picked us because of our ease of use, our reliability, and our zero-touch provisioning that we have designed in. Additionally, our API is integrated with their tools, so this is a long-term business for us as I think about it.

The next question will come from Jaeson Schmidt with Lake Street.

Just first starting on the drone market. a little, given your comments about the traction you're seeing globally, are you continuing to expand the sales team and infrastructure focused on this market?

Jaeson, thank you for that question. And yes, we are expanding the go-to-market as we think about the future. As a matter of fact, we kicked off the fiscal year with having a drone summit with all the stakeholders at Lantronix meeting for literally a week going through all the opportunities, how do we need to go tackle them. So we've added resources in North America. We've added resources in Europe. We're also going to be adding some resources in advocacy in Washington, D.C. So we're really all a big effort going on to do this. And I really feel this is going to pay really well for us. The ROI is going to be wonderful for it.

Okay. That's really helpful. And then just as a follow-up, obviously, the memory availability remains tight, and there's some pricing pressure out there. are you guys going to pass through some of these prices as part of your price mitigation strategy?

Yes. Jaeson, we're working closely with customers on the memory issues that everybody seems to be facing right now. So from a cost pass-through standpoint, we're obviously trying to be careful, but working with customers on what's most reasonable for both parties. And I think in general, most parties out there kind of expect those costs to be passed through. And so that's kind of the direction we're seeing others heading so.

The next question will come from Christian Schwab with Craig-Hallum Capital Group.

Great. Good quarter, good outlook, guys. I just want to -- one quick question and another follow-up. The cash at quarter end that you highlighted, did that take into account the recent tuck-in acquisition -- or should that be reduced?

Yes. So our cash at June 30, our fiscal year-end that we reported, we had not closed the acquisition yet, Christian. So no disbursements of any cash proceeds that had taken place as of the year-end.

Okay. I just wanted to get that quick math. And as we look at your outlook for next fiscal year, excluding the unmanned systems, which you've given great clarity on, we ran into multiple headwinds that we've addressed over the last few quarters in the remaining part of the business, let's just lump it and call it all IoT systems. Given the strong sequential growth in the quarter and new opportunities, for example, in the out-of-band product that you highlighted, would you expect that portion of the business to be like a 5% to 10% growth business or maybe even better than that in fiscal year '27? How should we think about that?

Yes. So Christian, thank you for that question. So we had a 16% growth quarter-over-quarter. The first half of the fiscal year of '26, as you remember, we had government shutdowns. And some of that business is our federal business. So that was affected by that. I'm just being careful as I give you guides and we want to be intelligent about how we go about doing it. We believe that business should grow. And we are -- with that mindset that we are seeing design and activity, one piece of data is something called quote activity for this business, and that is doing really well.

So as I said, we expect the company to grow double digit, and we are confident we can deliver that. I believe we can deliver that. So stay tuned as we move forward, but we grew 16% quarter-over-quarter.

Great. And then my last question, just as it relates to gross margins. As we layer in and expand our ARR and higher gross margin portions of the business, potentially helping to offset any type of pressure you may have as far as component costs. Do you think gross margins could improve throughout the course of the year? Or do you expect them to be relatively stable?

Yes. Christian, we do think there's opportunity to grow the gross margin throughout fiscal '27, especially as we see, as I mentioned earlier, an uptick in some of these other businesses that do carry higher gross margins as compared to what we -- how we performed in fiscal '26. And certainly, the ARR that comes along with the acquisition and to the extent we can continue to ramp that up, we should see margins pick up slightly.

Now as I mentioned before, there is maybe a little headwind on the other side with some of the growth in modules on the drone and UAS business. But net-net, I think there's opportunity to grow the margins.

Great. And then my last question as far as future potential strategic M&A. Saleel, do you have a target list of companies that you're looking at or targeting? Or should we not really anticipate any further tuck-in acquisitions, for example, in fiscal year '27?

Yes. We've been very deliberate and thoughtful as to how we run this company. We've got cash on the balance sheet. We want to grow in 2 areas: unmanned systems, increasing our strength in there, move up the drone stack. And secondly is on recurring revenue. Both of those areas we like. And we have a list of companies we are looking at and some even we are engaged with. So yes, we are moving forward on that, Christian.

The next question will come from Austin Moeller with Canaccord.

Nice quarter. Just my first question here, it sounds like Putin wants to call a general mobilization to invade Kyiv from the north. So if you start producing and shipping songs at scale in Eastern Europe, how would you expect the gross margins on songs to compare in Eastern Europe relative to what you might get on the drone dominance program at the higher build rates?

Yes. Thanks for that, Austin. With respect to our European business or potential European businesses, I think the gross margins on our songs there, it's reasonable to think they might be slightly more challenged than maybe what we've seen here in our -- in the growth we've seen over the last year here, mostly in the U.S.

Okay. And how does the AVT Australia opportunity open up the -- does that open up the TAM for SOMs and drones in Asia Pacific? Or does that -- will that also open up the opportunity in Asia Pacific and the Middle East for tactical drones?

Yes. The AVT, which is a CACI company, Austin, I'm sure you're familiar with them, a big company in the U.S., a defense tech company. So right now, our understanding is it's Asia Pacific, it's Europe, some America and some in the Middle East. So it really does open up. And we are also actively engaged with customers now in Japan.

As you know, they're thinking about NDAA and TA certification. I'll be meeting some of them shortly at one of the shows coming up. So we've been very thoughtfully going. North America started in Europe, working with Australian opportunity, which is it's a good-sized opportunity for us. So as I said earlier, when somebody else asked me a question, we're going internationally, and we are spreading internationally. We are putting go-to-market resources. So our breadth is improving every day.

This concludes our question-and-answer session. I would like to turn the conference back over to Saleel Awsare for any closing remarks.

Thank you again for your questions and joining us today. We appreciate your continued interest in Lantronix and your support throughout the year.

Fiscal 2026 marked important progress in our journey. The strategy that was beginning to take flight is now delivering measurable results. As we enter fiscal 2027, we are continuing our climb with greater momentum, a stronger platform, a clear visibility into multiple opportunities that we expect will drive double-digit revenue growth for the full year.

In September, I will be at the Piper Sandler Government & Defense Tech CEO Summit in Washington, D.C., the Lake Street BIG Conference, and the Gabelli Aerospace & Defense Symposium in New York, and the Needham Summit in Minneapolis. Thank you very much, everybody.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Welcome to the Lantronix Q3 2026 Earnings Call. [Operator Instructions] Please note this event is being recorded.

I'd like to turn the conference over now to Mr. Brent Stringham, Chief Financial Officer. Thank you, and over to you.

Good afternoon, everyone, and thank you for joining our fiscal third quarter earnings call. Joining me 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-in details for the phone replay in today's earnings release.

During this call, we may make forward-looking statements, which involve risks and uncertainties that could cause our results to differ materially from current expectations. We encourage you to review the cautionary statements and risk factors contained in today's earnings release, which was furnished to the SEC and is available on our website and other SEC filings such as our 10-K and 10-Qs. Lantronix undertakes no obligation to revise or update publicly any forward-looking statements to reflect future events or circumstances.

Additionally, during the call, we 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 will now turn the call over to Saleel.

Thanks, Brent, and thank you, everyone, for joining today's call.

We delivered revenue of $30.2 million and non-GAAP EPS of $0.04, both within our guidance range. Our Embedded IoT Solutions portfolio delivered extremely robust growth of 22% year-over-year, driving overall sequential and year-over-year revenue growth for the company. This performance reinforces our position as a critical onboard edge compute platform for unmanned systems, an increasingly important contributor to our business. Gross margin also remained strong at above 43%, supported by a richer mix of higher margin products and recurring revenue across the portfolio. Overall, these results reflect a disciplined execution and continued momentum across the business.

Turning to our results. We continue to see strong demand for unmanned systems or drones, supported by favorable industry and military tailwinds that position Lantronix for sustained growth. Our customer list in unmanned systems continues to expand, reflecting both the effectiveness of our drone strategy and the increasing need for reliable, real-time computing solutions. Drones are physical AI in action, and we deliver that capability to our customers by enabling autonomy, edge compute and real-time decision-making, further increasing the value of our technology.

The FCC's December 2025 action, which bars DJI and other foreign drone makers on the covered list from obtaining approval for new drone models in the U.S. has meaningfully improved the outlook for domestic and trusted supplier platforms. This environment strengthens our competitive moat as a U.S. partner that is both NDAA and TAA compliant, providing trusted and secured AI-enabled edge compute platform solutions for the Group 1 and 2 drone ecosystems.

Further, we are expanding both our capabilities and the number of active engagements. Our SoMs or System on Modules provide the onboard edge compute foundation for greater autonomy, which is becoming increasingly critical as mission complexity rises and the market pushes beyond what human operators alone can support. In aerospace and defense, scale will require more intelligence, more autonomy and Lantronix is helping enable that shift. As a result, we are moving up the tech stack, evolving from supporting the camera to enabling full intelligent drone and counter drone systems.

In parallel, growing interest in swarming and coordinated autonomy is driving demand for larger fleets requiring more advanced Edge AI and machine learning-based compute solutions to support increasingly complex missions. Beyond the drone itself, we are expanding our role into counter UAS and spectrum dominance applications. These markets require high-performance, low-power compute to process sensor data and enable real-time decision-making in contested environments. As systems become more intelligent, connected and electronically aware, we expect our SoMs and broader technology to play an increasingly central role across more of the mission stack.

Given the growth opportunity ahead, we are investing to scale. We are expanding our technical R&D talent to deepen our capabilities and capture more opportunities across the drone ecosystem, while also expanding our dedicated drone sales effort. As the unmanned aerial systems market continues to heat up, new entrants will emerge. However, our first-mover advantage positions to become the go-to provider for unmanned systems compute, and these investments are designed to strengthen the moat around our business as a critical platform partner to the unmanned ecosystem.

In parallel with those investments, we are also advancing the product and technology initiatives that will support our next phase of growth. During the quarter, we announced the advancement of our multi-silicon strategy with MediaTek's Genio family of system-on-chip or SoC platforms, strengthening our ability to serve a wide range of Edge AI and industrial IoT applications. MediaTek's SoCs delivered strong AI performance with processing power comparable to our Qualcomm platforms, while offering a feature set highly optimized for industrial and commercial use cases. By adding MediaTek, we are filling important use case coverage in our portfolio. Both MediaTek and Qualcomm are highly capable Edge AI compute solutions and together allow Lantronix to serve a broader set of customers and end markets with architectures tuned to their specific requirements.

Diving deeper, we continue to build momentum during the quarter. We significantly expanded the number of OEMs we engaged with and now have shipped product to over a dozen of these partners. Importantly, we recently converted one of these engagements into a design win, another drone as a first responder program with one of the largest U.S. based body camera makers. This adds a new DFR customer and further validates our position as a leading compute and connectivity provider across the UAS ecosystem.

We also secured a new customer win with a payload that identifies hostile drone operators, marking our expansion into counter drones. This new win reinforces our role as a trusted partner in mission-critical applications, underscoring our expanding relevance into counter unmanned systems, where FPV drones are used to detect, track, identify and mitigate hostile systems in contested environments. More broadly, it demonstrates our Edge AI drone solutions support the full UAS ecosystem, including counter drone use cases.

In addition to expanding capabilities and applications, we have been growing beyond the U.S. market into international markets, as we are now supporting global expansion with Red Cat as they enter NATO and across the Asia Pacific. We also made our first shipment to Evolve Dynamics, a U.K. based developer of unmanned aerial systems serving the defense, emergency response and critical infrastructure markets. Expanding our unmanned OEM customer base internationally is an important part of our growth strategy, and this shipment marks another step in expanding our reach across the global autonomous system ecosystem.

Additionally, we recently engaged with multiple Ukraine drone makers. Ukraine is becoming one of the most leading edge and fastest evolving market for unmanned systems globally, and its domestic drone companies have demonstrated a remarkable real-world performance. As the United States Department of War continues to increase its investments in unmanned systems, collaborating with leading Ukrainian innovators provide us with critical insights and validation opportunities for our technology in highly demanding real-world environments.

We are seeing a broader shift towards trusted platforms with customers increasingly moving away from Chinese components towards NDAA-compliant solutions. This transition is creating meaningful opportunities for Lantronix, particularly as customers evaluate our products such as our Drone Reference Platform, which helps shorten development cycles and accelerates evaluation to deployment.

Further, in March, we formed a strategic collaboration with Unusual Machines to support the next generation of unmanned platforms. This partnership combines Lantronix's edge compute and integrated connectivity solution with UMAX flight components to help accelerate deployment time lines, enhance ISR and autonomous capabilities across aerial systems. Together, this enables both companies to pursue emerging opportunities tied to the Department of War's drone dominance program, and we believe we are well positioned to capitalize on this near-term growth opportunity. We are encouraged by the early progress made during the collaboration so far, and we'll release additional updates as appropriate.

We are making a concerted effort to strengthen our position in the unmanned ecosystem by scaling the platform and introducing new capabilities that support faster, easier and more effective deployments. As we expand the platform, we are building an ecosystem around it, one that enables customers and partners to adapt, integrate and scale solutions more seamlessly. We are encouraged by the momentum we've built in unmanned systems since entering the market just over a year ago. And we are once again increasing our fiscal 2026 drone outlook now to a range of $10 million to $14 million. Our team is executing with urgency, and we continue to see a clear path for unmanned systems to represent 15% to 20% of overall revenue in fiscal 2027.

Moving to software and services. We remain excited about the expanding ARR we are seeing. Over the last 2 quarters, we have expanded our software and services mix from 5% to 6% to 8% to 9% of total revenue, and we see a clear path of sustainably reaching double-digits over the midterm. This confidence is driven by our ability to layer high-value software and services onto a growing installed base of hardware already in the field. As we integrate capabilities such as device management, analytics, AI orchestration, we are not only expanding recurring revenue streams, but are also improving overall mix and increasing the lifetime value of each deployment. Over time, we believe this will drive greater revenue visibility, stronger margins and a higher quality business model overall.

On IoT system solutions, we continue to experience slower federal spending and extended procurement cycles, particularly with our core enterprise and networking products, which includes media converters and out-of-band management. Federal customers are moving more cautiously and continued government shutdowns have resulted in slower ordering patterns and a more measured pace of conversion. That said, these are timing dynamics, not demand issues. Importantly, enterprise and networking continue to deliver margins well above our corporate average and provides strong cash generation, giving us the ability to reallocate resources into near higher growth opportunities such as unmanned aerial systems and critical infrastructure monitoring.

In summary, I'm encouraged by our third quarter performance and the discipline of our execution as we continue to deliver strong margins and profitability. We are hyper-focused on growing the business, and we are putting the right team and capabilities in place to capture the growing opportunities we are seeing.

Before passing the call over to Brent, I want to highlight a couple of important developments, starting with a key leadership addition for our next phase of growth. In March, we appointed Sano Marsiano as our new Vice President of Operations, bringing years of leadership experience across global operations, manufacturing and quality. Also in March, we participated in ISC West 2026, where we showcased SmartSwitch.ai, SmartEDGE Gateway and our Edge AI solutions for autonomous systems. We saw strong interest in both our Drone Reference Platform and SmartSwitch, particularly from security and surveillance customers evaluating next-generation perimeter monitoring and agentic edge network configuration monitoring and proactive maintenance.

A consistent theme was a growing shift towards drone-based surveillance for large compounds, complementing or in some cases, reducing reliance on fixed parameter camera infrastructure, an area where we are uniquely positioned. We offer an integrated full stack solution that spans switches and drones, offering customers a single differentiated partner for autonomous perimeter security. Nobody else in the market can deliver the breadth we provide.

With that, I'll turn the call back to Brent to cover financial results. Brent?

Thank you, Saleel. I'll first start with our fiscal third quarter financial results and some of the key drivers behind our performance, after which I'll provide our outlook for the fourth quarter ending June 30, 2026.

As previously discussed, our current quarter revenue was $30.2 million. We saw sequential and year-over-year growth driven by strength in embedded compute products, including our A&D and drone programs and continuing momentum in software and services revenues. Federal customers are moving cautiously, resulting in slower ordering patterns for our core enterprise and networking products. However, like Saleel mentioned, we believe these are primarily timing dynamics, not demand issues, and we should benefit once this market normalizes.

Turning to our gross margins. In the third quarter, GAAP gross margin was 43.1%, roughly flat compared to a year ago. On a non-GAAP basis, gross margin was 43.6%, slightly down compared to a year ago. Our current quarter margins reflect the revenue mix we have spoken to with embedded IoT solutions, particularly our compute products, driving our growth. We continue to remain focused on disciplined cost management that has driven our execution over the last year, which we expect to contribute to sustaining our gross margins near current levels.

Looking at expenses and profitability. GAAP operating expenses in the third quarter of fiscal 2026 were $14.1 million, nearly flat with the prior quarter and down approximately 12% from $16 million in the year ago period. We continue to observe the leverage in our OpEx model based on the actions we took last year and the ongoing cost discipline that we are executing on. GAAP net loss for the third quarter of fiscal 2026 improved to $1.2 million or $0.03 per share compared to GAAP net loss of $3.9 million or $0.10 per share in the year ago quarter. On a non-GAAP basis, net income of $1.5 million or $0.04 per share was consistent with the prior quarter and an improvement from the $0.03 per share in the year ago quarter.

Moving to the balance sheet. We ended the quarter with cash and cash equivalents of $23.5 million, an increase of approximately $500,000 from the prior quarter and $3.5 million from the year ago period. During the current quarter and fiscal year-to-date periods, we generated positive operating cash flow of nearly $2.2 million and $7.9 million, respectively. Net inventories were $26.4 million as of March 31, 2026 compared to $27.1 million last quarter and $28.2 million in the year ago quarter.

Our current debt balance is $8.7 million after having paid down about another $1 million during the current quarter. In the last 12 months, we have lowered our debt balance by nearly $4 million. Our net cash position on March 31, 2026 was approximately $14.8 million. Lastly, our outlook for the fourth quarter of fiscal 2026 ending June 30, 2026, is as follows: we expect revenue to be in the range of $29 million to $33 million. Non-GAAP EPS is expected to be in the range of $0.03 to $0.05 per share.

Now back to Saleel for some closing remarks.

Thanks, Brent. Before turning to Q&A, I want to leave you with a few key takeaways as we approach the end of fiscal 2026. We remain highly confident in the opportunity ahead in unmanned systems. This market is scaling rapidly, supported by strong customer engagement, favorable regulatory dynamics and an expanding base of OEMs and end market relationships. We continue to broaden our customer roster, win new programs and deepen our role with existing partners. At the same time, we are moving up the technology stack beyond cameras, adding more intelligence, secure connectivity and system-level capabilities, further positioning Lantronix as a more strategic and valuable partner over time.

At the midpoint of our raised drone outlook, we are targeting $12 million in revenue this fiscal year. We recently had one of the largest funding catalysts yet with the fiscal 2027 Department of War budget release and a record $75 billion proposed for unmanned and autonomous systems through the Defense Autonomous Warfare Group or DAWG, reinforcing our view that the super cycle is accelerating across the ecosystem.

Looking ahead, we continue to expect drone revenue to roughly double in fiscal 2027 and represent approximately 15% to 20% of the total revenue. Just over 9 months ago, drones contributed minimal revenue. Today, they are becoming a meaningful growth driver and helping propel our next phase of growth. As Brent mentioned, our Q4 outlook points to a strong finish to fiscal 2026. We believe we are operating from a position of strength and have greater confidence in our growth trajectory today than at any point since beginning the transformation.

In Embedded IoT, revenue grew by over 20% year-over-year, driven by strong traction in unmanned systems. We have raised our drone expectations once again, supported by a growing number of shipments, new customer engagements, expanding use cases across drone and counter drone applications. We are also broadening our geographic reach with new international customers, further validating Lantronix's role as a trusted Edge AI compute partner for the unmanned systems ecosystem. In critical infrastructure monitoring, we completed deployment of our Tier 1 MNO customer and are adding ARR to the business, which we expect will support higher margins and greater revenue visibility over time.

We also see additional land and expand opportunities in adjacent high-value cell tower applications, including power banks and rectifiers, while Kompress.ai continues to gain traction in the industrial compressor market. The progress we made repositioning Lantronix towards a higher growth vertical is becoming increasingly evident in our results. And we believe the momentum we built will carry into next year. Based on what we are seeing today, we expect to deliver double-digit revenue growth in fiscal 2027, marking an important next step in Lantronix's evolution towards a more focused, faster-growing, higher quality and more profitable business.

With that, operator, we will now open the call for questions.

[Operator Instructions] We have the first question from the line of Scott Searle from ROTH Capital.

Saleel, maybe just to jump in on the drone front, it's a big range of $10 million to $14 million, which implies a wide variance in the June quarter. I'm wondering if you could just give us an idea of why you're seeing such a wide range in the existing June quarter? And then as we're looking out to fiscal '27, it looks like you're expecting the business to nearly double, somewhere in the ballpark of $20 million to $30 million. I'm wondering if you could talk a little bit about some of the levers in either direction there, be it, is dollar content increasing for you? Do you have to acquire some additional technologies to continue to drive the presence there? Or is it just unit growth and more customers that you're engaged with going into commercial production?

Scott, thank you for the question. I guess, you're right. We put the range because we've always done a $2 million range. We are confident about our midpoint about $12 million. Remember, the midpoint last quarter was $10 million. And a few quarters back, we had said around $5 million to $7 million range. So we are confident about the $12 million midpoint. I hope I answered your first part of your question.

The second one, the growth, we are seeing across the whole spectrum of drone business or unmanned systems. It's going beyond drones now into counter drones with spectrum dominance and things like that we have invested in, and we are seeing growth. We're also seeing early shoots on unmanned on the ground and in the sea. So all those areas, we do that.

And to your point, we expect to grow the business -- double the business into fiscal '27, sitting where we are at today with the list of customers we are working with, the programs that we have aligned. And it's now, as I've mentioned, beyond just aerospace and defense. We're getting drone as a first responder. We're getting into commercial areas. So really a very positive picture as I look forward for the next 12 months.

Great. Very helpful. And if I could just follow-up then. The MediaTek relationship is interesting in terms of diversifying your silicon base, but they also have a pre-existing strong channel into areas such as robotics. I wonder if you could just give us some updated thoughts on that and when we might expect a first design win on that front?

And then for Brent, real quickly, just can you help calibrate us in terms of the IoT system solutions business, the mix of federal business on that front?

Yes. So let me do the MediaTek real quick, and then I'll pass it to Brent. MediaTek, to your point, we announced it at embedded world mainly because anything with vision, they're in the robotics space. Robotics are strong in Asia. They are a big partner for us. And additionally, it's going to go into Europe and Asia, which is the focus now. And they felt the capabilities Lantronix brings with what we have done in our edge compute and Edge AI solutions, they thought it was a good partner for us. So I expect design-ins and design wins coming up this calendar year.

Brent, go ahead.

Yes. And then, Scott, I think you're asking about the kind of the mix of federal and our IoT systems business. It does fluctuate from quarter-to-quarter, but right around 15% to 20% is kind of where we've traditionally seen that mix of business as a percentage of that segment that we disclosed.

We have the next question from the line of Austin Bohlig from Needham.

Congrats on the great unmanned system results. Just wanted to piggyback off the 2027 question. And now that you guys are expanding, it sounds like internationally nicely, what can we assume of this kind of double guide for 2027 of what's U.S. versus international?

Thanks for the question, Austin. Right now, a huge majority of our revenue is domestic. Our first international design win -- and we shipped to Evolve Dynamics out of U.K., they won a U.K. defense contract. So we are involved with that. What I'm uber excited about is what's happening in Ukraine. And you're familiar with that. As the Ukrainian supply chains pivot away from China to NDAA and TAA certified, we are now seeing early engagements. I'm going to be at XPONENTIAL next week, which is a big drone show, I have a bunch of meetings with some of the senior executives who are -- got companies out of Ukraine. And the ability and capabilities they're going to bring is also going to be phenomenal. So autonomy is key and edge compute is key, and we enable both of that. So I don't have a specific number for how much international is going to be for fiscal '27, but that's definitely a big growth vector for us.

Got you. And then I guess kind of a follow-up based on that. So like with the wins that you currently have in this double guide, what -- is this just baking in of what you have kind of with your customer wins today, meaning any kind of new wins could be potential upside to this number?

Yes. As I said, Austin, in my prepared remarks, the number doubling from where we are at today is based on the visibility that we have with the customers that we are working with. As you are well aware, it's a dynamic market and changing pretty quickly. So as we go through the year, we'll keep on updating you as we see that. But definitely, there is an opportunity to go up from here.

Okay. And then I guess just one last one. The counter UAS market, super exciting. How should we be thinking about kind of like the split between kind of counter and just maybe traditional UAS business?

I think counter UAS is becoming a very important piece for the future. I had the great opportunity to meet with a few customers just within the last 2 weeks, and we've got our first design win there and shipments there, as I mentioned, for spectrum dominance and just in a GPS-denied environment. And that, Austin, makes the need for edge compute because you need autonomy and you need to be able to do counter UAS functionality when you're in a very GPS-denied environment. So our solution, the ability to run models and AI on it is very important. For us, it's an early start. So we've got ways to go from winning customers, but our solution is working out really well. So that's another big vector of growth for us.

[Operator Instructions] We have the next question from the line of Austin Moeller from Canaccord.

First, could we discuss some of the involvement with the Drone Dominance vendors? And how might the IBAS Defense Industrial Base investments benefit your capacity as some of these programs ramp into production?

Yes. So 12 vendors got picked in the first tranche of DDP. We know who they are. We are working with some of them. There's another -- I believe it's in the May -- sorry, in the September time frame, Austin, if I'm not mistaken, the second tranche, and we are kind of -- we are engaged with a bunch of customers in that space, all requiring the need of edge compute and autonomy. So our device and our module is going to be well suited for that.

As for the IBAS program, which is going to -- so first of all, we're also going to be having our first Blue UAS solution ready this quarter. So that's another big plus we've got in the works. So we'll be one of the first ones with the Blue UAS compute module for this market. So we are getting ourselves more and more integrated with the Department of War and its suppliers as they move forward.

Great. And if we look at the fiscal year '27 budget request, how does the $54.6 billion front-end funding request for the Defense Autonomous Warfare Group, how should we think about backlog expansion for Lantronix over the next 12 to 24 months if that is passed by Congress over the summer?

Yes. Austin, the number is so large, and that's what I'm so excited about. So from your perspective, this could -- it's a game-changing amount of dollars that are going into autonomy or autonomous unmanned systems, and we are the leader in the space. We have invested in it, and we are the compute solution, the go-to compute solution for this. And all of these solutions are going to need a compute platform, and we are right there.

So I am ready as this expands, and we've got a bunch of inbounds now from customers wanting to qualify us, get our dev kits, do POCs. So as I said, the team is hustling with a sense of urgency. This is extremely exciting times at Lantronix. So I don't want to put a number out there, but it's game-changing amounts of dollars. So you can assume that. And in the past, as we said, our ASPs are between $400 to $700. So you can back the math into $12 million. I mean it's a logarithmic change if it all goes through.

We have the next question from the line of Christian Schwab from Craig-Hallum Capital Group.

I just have one quick question. Of the recent Drone Dominance that you referred to, are -- how many of the top 10 people on that list do you think could you tell us are current customers or prospective customers?

We are -- I don't want to go into the numbers, Christian, because some of them we've got NDAs with. I'm not giving you any names. But we are well aligned with a bunch of those folks who are in the first 12, and we also know who are going for the second tranche. So I feel good about where we are at with the DDP. And by the way, the Drone Dominance Program, the Department of War has increased the ASP on it. So giving more room for these guys to add additional AI, machine learning and compute in their products. So we are well situated as I look at it.

We have the next question from the line of Kevin Cassidy from Rosenblatt Securities.

Congratulations on the great progress. I was just along the lines of what are the key factors that you need to expand your gross margins? Is it increasing the technology stack? Is it the volume? What are the key factors or is there a factor to expand gross margin?

So let's put it in perspective, Kevin, as I think about it, literally for Q4 of '24, our gross margins were in the high-30s. We now have been in the 43% to 45% range for the last couple of quarters, last 3 quarters. So we made good progress towards improving the gross margin. I'd like to start moving it above 45%. So how are we going to do it? One is software and services, which was 5% to 6% a few quarters back, is now 8% to 9% of the revenue, going up to 10% to 12%, pushes the gross margin up.

As importantly or more importantly, on our drone business, which we said is going to -- we've upped the numbers to $12 million for this fiscal year at the midpoint, adding more software around it, adding more machine learning and AI models, adding a framework, moving up the tech stack. So running more of beyond just camera integration now to flight control to other technologies. So to your point, moving up the tech stack and providing a platform for our customers.

Great. That's good. And maybe just as a follow-up on the MediaTek, adding MediaTek as another source. And you say it gives you a broader range. Is it geographically or is it a price performance trade-offs that you'll be able to do?

Good question, Kevin. Geographically, very much so, allow us to be stronger in Asia Pac and Europe in the future. Qualcomm is a great partner of ours. We've done really well with them. So that's number one. And number two, you hit it on the -- allowing us to play in some of the more price-sensitive markets that we need to be. And it kind of covers both of that.

This concludes our question-and-answer session. I would like to turn the conference back over to Saleel Awsare for closing remarks.

Thank you again for your questions and joining us today. We appreciate your continued interest in Lantronix and hope you will continue to join us on this journey. While we are encouraged by the progress we've made, we believe we are still ascending rapidly with long flight ahead and plenty of altitude still to gain before reaching cruising altitude. I'll be at XPONENTIAL next week and the Needham Emerging Growth Conference, followed by the Craig-Hallum Conference later this month. And I look forward to connecting with many of you there. Thank you again, and we look forward to updating you on our progress soon.

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Good day, and welcome to the Lantronix, Inc. 2026 Second Quarter Results Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Brent Stringham, Chief Financial Officer. Please go ahead.

Good afternoon and thank you for joining our fiscal second quarter earnings call. Joining me 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-in details for the phone replay in today's earnings release. During this call, we may make forward-looking statements, which involve risks and uncertainties that could cause our results to differ materially from current expectations.

We encourage you to review the cautionary statements and risk factors contained in today's earnings release, which was furnished to the SEC and is available on our website and other SEC filings such as our 10-K and 10-Qs. Lantronix undertakes no obligation to revise or update publicly any forward-looking statements to reflect future events or circumstances.

Additionally, during the call, we 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 will now turn the call over to Saleel.

Thanks, Brent, and thank you, everyone, for joining today's call. We continued our momentum into the second quarter through disciplined execution, delivering revenue of $29.8 million and non-GAAP EPS of $0.04, both well within our guidance range. As expected, we experienced double-digit growth year-over-year when excluding our EMEA smart grid customer, Gridspertise.

Profitability remained strong, driven by continued year-over-year gross margin expansion and the operating leverage created by last year's cost optimization initiatives. Overall, Q2 was another step forward in aligning financial execution with our long-term Edge AI strategy. More importantly, we are now seeing that strategy translates into tangible customer adoption across multiple end markets as several customer engagements are moving from development and pilots into broader deployment.

As we discuss our end markets, it's worth noting that the government shutdown last quarter created a short-term slowdown in purchasing activity from certain federal agency customers. Despite this disruption, our teams executed well and delivered solid results. Diving into the markets we operate in, beginning with drones and unmanned systems, calendar 2026 is widely expected to mark the start of an unmanned aerial systems super cycle, reflecting accelerating adoption of autonomous platforms across defense and commercial applications.

This view is increasingly supported by the broader defense funding environment. The signed fiscal 2026 U.S. defense budget already includes over $13 billion in enacted funding allocated across unmanned systems, autonomy, ISR and counter-UAS programs, including reconnaissance drone initiatives across the full range of mission profiles.

While portions of this funding have yet to be released, the scale and breadth of these allocations suggests meaningful capacity to support more advanced unmanned platforms as programs move from development into execution. Looking ahead, we believe unmanned autonomous and AI-enabled platforms are well positioned to capture a growing share of future defense modernization spending.

We are also seeing a broader shift in how the Department of War engages with domestic drone supply chain with a more commercial and partnership-oriented mindset focused on accelerating readiness and scaling production across trusted suppliers. Against this backdrop, our evolution within unmanned systems positions Lantronix squarely in the value creation layer of the ecosystem.

Since entering this market, we moved up the stack from initially providing general purpose compute modules to delivering intelligent imaging platforms and now to enabling integrated system-level workflows that combine sensing, processing and secure connectivity. In many deployments, our AI edge compute modules serve as the brains of the drone, enabling autonomous operation and real-time decision-making independent of a network connection.

As a result, Lantronix operates at the intersection of payload, compute and connectivity, 3 of the highest value and least easily substituted layers in modern unmanned systems where we believe value creation and customer relationships compound over time. We currently focus on Group 1 and 2 short-range reconnaissance drones, which aligns well with where a significant portion of current unmanned funding is directed.

These programs typically represent multiyear engagement with strong lifetime value supporting applications ranging from surveillance to advanced payloads. Today, we are working with over 15 OEMs, and these customers are increasingly looking to deepen their engagement with us. In response to customer demand, we introduced our drone reference kit at CES last month, designed to accelerate time to market for defense and commercial UAV developers.

This platform reinforces our strategic shift from a component supplier to a platform partner by reducing integration complexity and development risk in regulated environments. Red Cat with their Teal Drones continues to expand their work with us beyond hardware into software and next-generation platform development.

As their production needs increase, we are expanding our support, accordingly, including higher volume bills for the Teal platform and follow-on commitments that reinforce Red Cat's confidence in our capabilities. We are also partnering in their next-generation drone platform, strengthening our position as a long-term partner. Additionally, we were selected by Flightwave, a Red Cat company to incorporate our Open-Q System-on-Module into their new drone, another example of the deepening trust in our technology across the ecosystem.

Importantly, these engagements are not limited to design wins or early development. We have demonstrated the operational capability to support high-volume production today, and we believe we are well positioned to scale alongside our customers as the United States and allied governments accelerate deployment of unmanned system.

In December, our Edge AI solution was selected by Trillium Engineering to power gimbal imaging systems deployed across ISR, infrastructure inspection and WiFi operations, validating the performance, security and reliability of our Edge AI architecture for mission-critical deployments. We also recently secured our first design win with Flock Safety in the drone as first responder or DFR category, extending our Edge AI capabilities into public safety applications.

While early, this win represents growing interest beyond defense in real-time AI-enabled situational awareness at the edge. Lastly, we expanded our engagement into AI-enabled threat detection through a new collaboration with Safe Pro Group. Together, we are helping building an integrated edge intelligence ecosystem by combining Safe Pro's object threat detection models with our compute modules to enable real-time on-device detection of land mines and other ground hazards without the reliance on cloud connectivity.

By allowing drones and autonomous platforms to identify threats that endanger soldiers, vehicles and civilians on the ground, this collaboration meaningfully strengthens our role at the center of a growing network of defense and autonomous systems standardizing on AI compute technology. We are seeing clear and accelerating momentum in our drone business through the first half of fiscal 2026.

Drone revenues grew meaningfully from Q1 to Q2, driven by deeper customer engagement and the early benefits of our platform-led approach, positioning us to realize operating leverage as programs scale over time. As customer programs expand and move further into execution, we are seeing continued growth through the remainder of the fiscal year and into fiscal 2027.

Reflecting the strength and the pace of our momentum since entering the drone market approximately a year ago, we are raising our expectation to a range of $8 million to $12 million in drone revenue this fiscal year, an increase from the previous range of $5 million to $10 million with drones becoming an increasingly meaningful contributor as programs scale.

Now turning to critical infrastructure monitoring, an important long-term pillar of our industrial IoT strategy, where our intelligent hardware, secure connectivity and perception software come together to deliver end-to-end solutions. Moving to our Tier 1 U.S. mobile network operator. The rollout continues to progress as expected. We recognized revenue over the last 2 quarters, and this deployment remains an important foundation of our recurring revenue strategy.

Looking ahead, our focus is on expanding beyond monitoring generators into additional high-value applications within the tower, including backup power bands and rectifiers. Each cell tower includes these systems, and the opportunity is compatible in size to the generated deployment we support today. This program represents a step forward in building recurring revenue and is scaling into a repeatable multiyear deployment model.

Over the last 12 months, software and services accounted for approximately 6% of total revenue, which we view as the early innings. As we replicate this model across additional sites and applications, we see a clear and achievable path to more than doubling that mix over the midterm by layering software, analytics and AI pipeline orchestration into hardware deployments already in the field.

At CES, we debuted SmartEdge.ai and SmartSwitch.ai, our new Edge AI gateway and AI-powered fiber switch. Together, these solutions create a unified platform for real-time video analytics, intelligent connectivity and multi-camera orchestration across enterprise and industrial environments. A key advantage of this platform is its ability to upgrade existing infrastructure.

There are millions of deployed non-intelligent cameras and devices already in the field, and our solutions enable customers to bring AI capabilities to these environments without requiring hardware replacement. This significantly expands our addressable market and supports scalable brownfield upgrade opportunities across surveillance, smart buildings and critical infrastructure.

In summary, I'm encouraged by our performance through the first half of fiscal 2026. We are executing with discipline as we scale high-growth verticals, expand software-enabled recurring revenue and deliver continued operating leverage from a leaner cost structure.

What's most compelling is that our diversified growth vectors, unmanned systems, critical infrastructure monitoring and enterprise connectivity are increasingly converging around a common edge AI platform. This convergence enables efficient scaling, deeper customer relationships and positions Lantronix to capture long-term secular tailwinds across aerospace, defense and intelligent infrastructure. With that, I'll turn the call back to Brent to cover the financial results. Brent?

Thank you, Saleel. Let me begin by going through the financial results for our fiscal second quarter, including some of the key drivers behind our performance. I'll then provide our outlook for the third quarter ending March 31, 2026. As Saleel noted, in the current quarter, we delivered revenue of $29.8 million. Excluding Gridspertise, we experienced year-over-year growth driven by strength in embedded compute, including our A&D and drone programs, along with solid contributions from our network infrastructure switch products.

We also delivered higher SaaS-based ARR supported by the ongoing ramp of our critical infrastructure monitoring deployment with the Tier 1 MNO we've discussed. Turning to gross margins. In the second quarter, GAAP gross margin was 43.6% compared to over a 3-year high of 44.8% last quarter and was up from 42.6% a year ago. On a non-GAAP basis, gross margin was 44% compared to 45.3% last quarter and 43.2% in the prior year quarter.

As we mentioned previously, the prior quarter's margin partially benefited from certain inventory recoveries and royalty benefits that came in slightly above plan. Overall, our continued underlying margin performance is supported by a higher mix of premium products and the disciplined cost management that we've been speaking to. Turning to expenses and profitability.

GAAP operating expenses in the second quarter of fiscal 2026 were $14 million, down just under 6% from the prior quarter and also down approximately 9% from $15.4 million in the year ago period as our P&L continues to benefit from the actions we took last year. GAAP net loss for the second quarter of fiscal 2026 improved to $1.3 million or $0.03 per share compared to GAAP net loss of $2.4 million or $0.06 per share in the year ago quarter.

On a non-GAAP basis, net income improved to $1.6 million or $0.04 per share compared to non-GAAP net income of $1.5 million or $0.04 per share in the prior quarter. Turning to the balance sheet. Net inventories were $27.1 million as of December 31, 2025, compared to $26.8 million in the prior quarter and $29.1 million in the year ago quarter.

We ended the quarter with cash and cash equivalents of $23 million, an increase of approximately $800,000 from the prior quarter. During the second quarter, we also generated positive operating cash flow of nearly $2.2 million. During the quarter, we paid down about another $1 million of our outstanding debt, leaving a remaining balance of approximately $9.7 million as of December 31, 2025, which compares to $14.7 million a year ago.

Our corresponding net cash position currently is approximately $13.3 million. Now moving to our outlook for the third quarter of fiscal 2026, which ends March 31, 2026. We expect revenue to be in the range of $28.5 million to $32.5 million. Non-GAAP EPS is expected to be in the range of $0.03 to $0.06 per share. I'll now turn the call back to Saleel for closing remarks.

Thanks, Brent. As we move to the second half of fiscal 2026, I'm energized by the momentum across our business and the clarity we have around our path forward. Our Edge AI strategy is driving real adoption across our growth vectors, and we are increasingly operating from a position of strength. There are 3 key takeaways I want to leave you with today. First, drones are scaling faster than we initially expected.

We are seeing strong execution, expanding customer engagement and clear momentum as programs move into broader deployment. Reflecting this progress, we increased our fiscal 2026 drone revenue outlook to $8 million to $12 million, a meaningful step-up from our prior expectations. Second, we see drones becoming a material contributor to our business as we look ahead.

Based on the trajectory of current programs and customer demand, we expect drone revenue to represent approximately 15% to 20% of the total revenue in fiscal 2027, reinforcing our confidence in the durability and scale of this opportunity. Third, our platform-led approach is creating leverage. We are combining edge AI, embedded compute and connectivity across drones, critical infrastructure and enterprise markets, while maintaining a disciplined cost structure and expanding recurring revenue.

This positions us to scale efficiently as demand accelerates. We are disciplined, well positioned and entering our next phase of growth with momentum. We believe Lantronix is building a differentiated edge AI platform with expanding end markets, increasing mix of higher-value revenue and a clear runway ahead. With that, we'll now open the call for questions. Operator?

[Operator Instructions] The first question today comes from Scott Searle with ROTH Capital.

Nice to see the drone momentum starting to accelerate a little earlier than expected. Maybe quick to kick off, Saleel, to calibrate on IoT systems & solutions, I think it was down sequentially. Can you just provide some commentary in terms of what happened on that front and kind of how we expect things to transition over the next couple of quarters going forward? And then on drones, I wonder if you could give us an idea about what the December quarter looked like in terms of contribution.

And I want to clarify your comments in terms of fiscal '27, raising the guidance for fiscal '26, but in '27, I thought you said 15% to 20% of the mix, which gets drones over $20 million in absolute dollars in fiscal '27. I want to make sure that, that's in the ballpark. And then a lot of developments going on within the marketplace and specifically in the last day or so, I think there was commentary around the drone dominance program starting to kick into gear with awards starting in March.

I'm wondering if you could provide some commentary about your participation in that. I think there are 25 entities involved, and it sounds like you're working with 15-plus and just kind of give us an idea of how well you are positioned there and how defensible the opportunity is for you.

Scott, thanks for the question. Let me start with the drone section first because you've got a few things that let me unpack all of that for you. So let's do revenue. On the revenue side, as I said, our prior expectation was about $5 million to $10 million for fiscal '26, which ends in June. We have now moved it up to $8 million to $12 million in fiscal '26. So it's a meaningful increase. We're seeing a lot of momentum in the business. So we feel good where we are at.

Without getting into the details, Q1 to Q2, we saw a big bump up. So we are very happy. And that's why we believe we'll continue to increase every quarter into Q3 and Q4 as I look forward. For fiscal '27, you've done the math right. It should be 15% to 20%. So it could be anywhere from $20 million to $30 million range, give or take. So that's how big part of our company's revenue it will become. The other question you had is about the differentiation and how we are winning. Let me get -- spend some time on that.

It's really a very important point, and let's spend a few minutes on it. So first, our differentiation starts where we operate in the drone stack. We are at the intersection of payload integration with our edge compute and secure connectivity. So it all goes hand-in-hand. Second is our long-term relationship with Qualcomm, which is a real advantage because we are able to meet the requirements, which is known as SWaP, size, weight, power compared to what's in the market right now.

So we are winning using that solution, making a system-on-module. At CES, as you know, we announced a drone platform in anticipation of the drone dominance program, and I'll come back to that in a minute. So we announced that. We started providing a full solution and a kit. So we are providing a system solution as opposed to just a module. And I've said this in the past, we win because embedding cameras into systems is in our DNA. We've done that for a long time.

And this is probably one of the more complex one where they have 6 to 8 cameras on each drone. We know how to integrate that into a solution that the customer can use and go to market. The other thing is the market is up and coming and new and us making it easier for our customers to get to market fast is really a big differentiator now as we are able to go out and work with a lot of customers.

And over time, I believe this creates a lot of stickiness, all the things that I talked about, and the margins are going to improve. Out of the 25 customers -- 25 folks who won -- the vendors who won the drone dominance, this is the first one, by the way. It's going to be a multi-quarter program, and then it's going to be a total of, I believe, 300,000 drones over the lifetime over the next 18 months. So they only did 30,000 in the program, which is a start.

We are working with a sizable amount of them, either directly or through some of our partners where we are in the gimbal. So the list was very exciting to see the list. I happen to know a lot of the folks on the list. So I hope I covered all the drone's questions. I'm going to have Brent take the IoT systems a little bit into detail. But I just want to remind everybody, we did have a bit of a shutdown last quarter where some of our IoT system products get sold. With that, Brent, go ahead.

Yes, Scott, to build on that real quick on some of our IoT box products. The quarter ending September or, so our prior quarter is traditionally a heavier quarter with some of the Fed customers in the Fed buying season and that summer quarter ending in September. So some of that was expected in terms of a sequential decline.

And we also saw a pretty meaningful ramp in our Tier 1 MNO customer from the prior 2 quarters as we shipped and deployed a big number of those boxes to them. And so here in the December quarter, we are still shipping, but the program is nearing its end point on the rollout. So I think those 2 things are kind of contributing to that category being down quarter over-quarter.

The next question comes from Christian Schwab with Craig-Hallum.

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

Yes. So thank you for that question, Christian. So as we stated pretty clearly, our ASP is in the $400 to $500 range today, and this is mainly in the Class Group 2 drones that we are in. As we go to a full turnkey kind of solution, it will move up quite nicely as we do more integration in the hundreds of dollars more.

And if we go -- and our plan is then also to go after the FPV drones, which will have a bit of a lower ASP. So it's going beyond one kind of price point where we're now having a portfolio that we are going after. So it's going to vary, but it's a healthy ASP that we are seeing and good margins in the business.

Great. And then as we look -- we kind of, in essence, gave guidance for what we think the drone business can be in fiscal year '27. What type of growth rate do you think we should assume for the core business or the non-drone business in '27? And what would be the potential puts and takes to that?

Christian, we do quarterly guidance, as we've said in the past. We see -- let me -- the drone business, I think, is new and exciting, and you can see double-digit -- high double-digit growth rates in that, which is great. Also, the December quarter, Lantronix grew 17% Y-o-Y when you remove Gridspertise. And drones were a component of it, but the other businesses also.

At the midpoint that we have put out there, the whole business is again growing. So I see fiscal '27 to be a good year. The numbers that the analysts have us at are what we are working through, and we are not allergic to what the numbers are out there right now.

Okay. That's fair. And then regarding operating expenses, given the increased growth opportunities, would you -- is there anything that you're aware of that would materially change operating expenses on a go-forward basis? Or should we just assume less than revenue, obviously?

Yes, Christian, on the near term, next quarter or 2, I think it's safe to assume OpEx kind of in the range of around $11.8 million to maybe $12.3 million a quarter. So kind of in the range of what we're seeing in the last couple of quarters. OpEx was slightly lower than that, I believe, here in this quarter. But in Q3, Q4, the range I just mentioned is probably a reasonable estimate.

The next question comes from "Jaeson Schmidt with Lake Street.

Just curious if you could quantify what the government shutdown or that impact was in the December quarter. Obviously, as you noted, caused some friction. And then relatedly, if you're seeing any supply constraints today, obviously, with the well-known memory shortage out there. Just curious if you're seeing any other dynamics.

What I want to leave you with the government shutdown, and I think Brent talked a little bit about the IoT systems, which is our box products, which were a bit slower than we anticipated because of the shutdown. But the team executed so well that we were able to make up all of it, and I'm really happy with that. So think about that from that perspective. The government is starting to normalize. So we hope -- I expect and hope that things will improve on that side, if you think about it.

On the memory -- great question on the memory shortage, by the way, Jaeson, everybody is talking about it. We do see pricing and supply pressures going on. We are proactively working with our customers to alleviate this to ensure that we are supplying them enough product, especially in some of the new businesses like our drone stuff. So we have got supply that we have prepared for them.

They're working with us closely on that. And we don't see a big issue in the short term or even the midterm. Longer term, I mean, we got to think about all of that. But we'll be -- we are able to work around most of the issues that we are having, and we're working with our customers very closely to ensure there is no supply disruptions.

Okay. That's really helpful. And then just as a follow-up, given the momentum and upward revision to your drone revenue guidance, coupled with -- I mean, it sounds like the software piece of the pie is going to continue to grow going forward. How should we think about the gross margin profile? Or are you thinking about sort of the near-term or medium-term gross margin profile differently given those dynamics?

Yes, Jaeson, on the margins for that business specifically and to answer your question on the near term, I think we've said previously, the margins are near our kind of our corporate average, maybe slightly below those levels. But longer term, as software services become a bigger part of what we're providing our customers, we would expect the margin to slightly increase. But in the near term, next quarter or 2, we're not forecasting a meaningful increase in what we previously discussed.

Jaeson, let me add another point on the gross margin. You can see compared to the year ago, we are up. Last quarter, we were up. This quarter, we are up. So the trajectory is where we want it to be. And we are working on all of this as you think about it. So that gives you an understanding that we are building a moat around our business, right? That's how the gross margin is improving. And we got to keep working it, but I'm pleased to see the upward progress that the team has made.

The next question comes from Austin Moeller with Canaccord.

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

Yes. So on the Drone Dominance and the FCC ruling on December 23 is going to be helpful for all American manufacturers. And Austin, we are working with a slew of companies now to get them enabled and into the market faster. And I can go over the list. We've got Red Cat, multiple programs, multiple Red Cat companies, Trillium, which is big and it's in the large ecosystem there, Sightline, Gremsy. We worked with Safe Pro, and you're going to be seeing more announcements from us.

So we are getting geared up to support this, and that's why we increased our expectation for next year to 15% to 20% of the company's revenue, which is very meaningful. The other little thing in my prepared remarks that you might have got, we got our first win in the Drone as a First Responder category, which is if you would think about it as a commercial or a public safety area.

Now that's new and unique because that was all held by the Chinese in the past. Now that's getting created in the United States, and we want to be a part of that also. So great and exciting times ahead of us, and we are ready. We are ready.

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

Yes. We are looking at M&A really in 2 areas as I think about the company, looking at, a, subsystems like should we be -- now we're working with some companies that do a lot of the drone manufacturing already. So -- but can we integrate more into our SoMs, can we add a software layer around it? SPAI is a perfect example where we partnered with somebody who's putting their IP onto our SoMs. So M&A is going to be an important feature as I think about the future as we create more of an ecosystem and a platform play, Austin.

So we're talking and talking to a bunch of folks in that. The other area we're also looking at M&A is around our critical infrastructure monitoring, where we want ARRs and software to be a larger portion of the company. So we are -- both of those areas are areas we're going to focus on, and that will get this company to higher gross margins, higher software revenues, higher stability as I think about it.

That's really interesting. Exciting time in the drone industry.

This concludes our question-and-answer session. I would like to turn the conference back over for any closing remarks.

Thank you for your questions and joining us today. We appreciate your continued interest in Lantronix and look forward to keeping you updated as we execute our strategy. We are excited to have you with us on this journey, and we believe we are just beginning to take flight. With that, thank you very much.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Good day, and welcome to the Lantronix, Inc. 2026 First Quarter Results Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Brent Stringham, CFO. Please go ahead.

Good afternoon, and thank you for joining our fiscal first quarter earnings call. Joining me 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-in 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 will now turn the call over to Saleel.

Thanks, Brent, and thank you, everyone, for joining today's call. We entered fiscal 2026 from a position of strength, and our first quarter results reflect that momentum. We delivered revenue of $29.8 million and non-GAAP EPS of $0.04, both at the high end of our guidance range. Revenues grew 3% sequentially and 3% year-over-year, excluding Gridspertise, underscoring the progress we have made in positioning Lantronix for profitable growth. Importantly, non-GAAP EPS improved from $0.01 in Q4 to $0.04 in Q1, driven by gross margin expansion and the operating leverage created by last year's cost optimization initiatives.

Turning to the overall market environment. Industry dynamics remain favorable for Lantronix. We continue to see record defense funding and supportive regulatory momentum driving long-term opportunities across our 3 verticals. At the same time, demand for networking and connectivity solutions remain strong, creating continued tailwinds for our network infrastructure business and reinforcing our role as a trusted partner in government and smart city applications.

Starting with unmanned aerial systems, commonly known as drones, we are benefiting from broad-based demand across multiple customers. The AUSA event in Washington, D.C. was highly productive as we met with several strong existing and new partners, further strengthening our position in the market. We made good progress in fiscal Q1 as we expanded our presence and scale production with Red Cat's teal drones, where we've already secured meaningful follow-on orders, a clear sign of customer confidence in our capabilities.

We are also partnering with Red Cat on next-generation platforms designed to further enhance the drones performance and mission readiness. At the end of Q1, our OEM engagements grew from 10 last quarter to 17 today, highlighting accelerating customer adoption and market momentum. This activity is supported by a few recent developments.

We introduced our Edge AI drone solution, which integrates payloads from Gremsy and Teledyne FLIR. Working with these partners, we completed a reference design that validates the solution performance and simplifies integration for OEM customers. The solution enables longer flight times, real-time edge data processing and up to 80% faster integration for developers. Just as important, it meets stringent NDAA and TAA requirements for defense and government programs.

More recently, Sightline Intelligence selected our Edge AI technology for integration into its new high-performance video processing solution for defense and commercial drone applications, further expanding our reach within the UAS ecosystem.

Together, these advancements underscore our ability to deliver secure AI-enabled flight systems at scale. While still early in the fiscal year, we are encouraged by our momentum in our drone business. This is a growing contributor to Lantronix and positions us for potential upside to our initial expectations as these programs scale through the remainder of fiscal 2026.

Building on this momentum, we recently introduced EdgeFabric.ai, our new visual orchestration platform for Edge AI deployment, which debuted at Qualcomm's Imagine Conference in September. Purpose-built for our Open-Q System on Module or SOM solutions, EdgeFabric.ai enables customers to design and deploy AI application in minutes instead of months without needing a team of AI experts. Whether configuring smart cameras, industrial IoT monitors or other Edge AI-enabled devices, customers can now visually design their AI workflows and deploy them instantly. All without writing a single line of code.

By simplifying development and automating deployment, EdgeFabric.ai strengthens customer engagement, accelerates time to market and creates a foundation for recurring software and services revenue over time. In asset monitoring, a key long-term component of our industrial IoT strategy, we partnered with Vodafone IoT to launch Kompress.ai by Lantronix, a subscription-based SaaS platform targeting the $27 billion global industrial air compressor market. While still in the early stages, we view this as a significant long-term opportunity, one that expands our reach, enhances our edge-to-cloud capabilities and creates incremental high-margin recurring revenue potential over time.

Together with our progress in drones and EdgeFabric.ai, Kompress.ai reinforces our execution of the long-term strategy to build scalable platforms that expand recurring revenue and strengthen our diversified model. Our strategy is clear: scale high-growth verticals, expand software-enabled recurring revenue and drive operating leverage from a leaner cost structure.

This quarter marked another important step forward with increased engagement with aerospace and defense customers, the launch of EdgeFabric.ai and continued expansion in targeted platforms. At the same time, our core network infrastructure business delivered solid growth and margins in focus areas, demonstrating consistent execution and strengthening our diversified model. I'll now pass it on to Brent to cover the financial results. Brent?

Thanks, Saleel. With the business off to a strong start in fiscal 2026, I'll walk through our first quarter financial results, discuss the key drivers behind our performance and then provide our outlook for the second quarter. As Saleel mentioned, in the first quarter, we delivered revenue of $29.8 million, an increase of 3% from the prior quarter and approximately 3% higher than the same period last year when excluding the impact od Gridspertise. Sequential growth was primarily driven by strength in some of our network infrastructure products, continuing to highlight our diversified revenue base.

Turning to margins. In the first quarter, GAAP gross margin was 44.8%, up from 40% last quarter and 42.1% a year ago. On a non-GAAP basis, gross margin was 45.3%, an improvement from 40.6% in Q4 and 42.6% in the prior year quarter. The increase reflects a more favorable product mix, lower inventory charges and benefits from certain royalties. We're encouraged by the continued strength in our underlying margin performance, supported by a higher mix of premium products and disciplined cost management. Looking ahead, we expect gross margin to remain healthy and generally consistent with first half fiscal 2025 levels.

We continue to proactively manage our global footprint in a dynamic trade environment, and we are closely monitoring evolving tariff and trade developments. We're also working closely with customers to help them adapt to changing cross-border requirements.

Turning to expenses and profitability. GAAP operating expenses in the first quarter of fiscal 2026 were $14.9 million, up less than 2% from the prior quarter and down 10% from $16.6 million in the year ago period. GAAP net loss for the first quarter of fiscal 2026 was $1.4 million or $0.04 per share compared to GAAP net loss of $2.5 million or $0.07 per share in the year ago quarter. On a non-GAAP basis, we reported net income of $1.5 million or $0.04 per share compared to non-GAAP net income of $400,000 or $0.01 per share in the prior quarter.

Turning to the balance sheet. Net inventories were $26.7 million as of September 30, 2025, compared to $26.4 million in the prior quarter and $29.5 million in the year ago quarter. We ended the quarter with cash and cash equivalents of $22.2 million, an increase of over $2 million from the prior quarter. During the first quarter, we also generated positive operating cash flow of approximately $3.6 million. As we noted on our last call, in August, we refinanced our term debt into an asset-backed line of credit with the same lender. During the quarter, we paid down another $1 million of our outstanding debt, leaving a remaining balance of approximately $10.7 million as of September 30, 2025, and a corresponding net cash position of $11.5 million.

Now turning to our outlook for the second quarter of fiscal 2026, which ends December 31, 2025. We expect revenue to be in the range of $28 million to $32 million. Non-GAAP EPS is expected to be in the range of $0.02 to $0.04 per share. With that, I'll turn the call back to Salil for closing remarks.

Thanks, Brent. To close, fiscal 2026 is off to a strong start, and we remain confident in the trajectory ahead. At the midpoint, our Q2 guidance implies sequential revenue growth and nearly 20% year-over-year growth, excluding Gridspertise, together with another quarter of solid profitability. This outlook reflects the operating leverage and cost discipline we established last year while enabling continued investment in our highest growth opportunities.

We are encouraged by the sustained momentum across our drone and asset monitoring platforms, driven by new customer programs and growing adoption of our integrated AI solutions. At the same time, our core network infrastructure business is performing well with steady demand in out-of-band management and strong contribution from switches and device service, supported by healthy enterprise and industrial connectivity demand as we approach the calendar year-end.

With robust industry tailwinds, a strong balance sheet and disciplined execution, we believe we are well positioned to deliver growth and profitability in fiscal 2026 and beyond. With that, we'll now open the call for questions. Thank you.

[Operator Instructions] The first question today comes from Ryan Koontz with Needham & Co.

Nice quarter, guys. With regards to the drone opportunities, Saleel, can you maybe outline like where we are in this kind of adoption period? You talked about some wins, these -- when you count a win, you count that as a design win? And what gives you confidence that it's yours? And what's the competitive landscape like for you there?

Ryan, thank you for your question. As I spoke in my prepared remarks, we are now working with 17 OEMs. A few of them have already gone into design-in, design win and some of them into shipping. So we're seeing accelerating momentum in the drone business and very proud of the progress that we've made. Our outlook definitely has improved over the last 90 days. And while it's still early, we expect demand to accelerate throughout the fiscal year, presenting potential upside to what my current expectations are. And longer term, as I said, we expect this opportunity could be 10% to 15% of the company's revenue. So good progress in all areas for the drone area and feeling good as we sit here today.

Got it. Great. And I know you had a generator win with a major service provider. Any update there as far as how that business is progressing?

Yes. Thanks for that question. So as we had mentioned earlier, we have the generator win with a large MNO, if you remember. That is progressing well, and we are now moving beyond the diesel generator to other equipment that needs to get tracked. So it's a growing business for us for asset tracking. Additionally, we announced Kompress.ai, which is focused more on the compressor space, but based on the same theme, which builds on our successes of the Tier 1 MNO and expands our recurring revenue model and supports our critical infrastructure strategy. So it's going as per plan, and the deployment for the MNO is also continuing nicely.

Great. Maybe just a follow-up there. You talked about a new product here with this Kompress.ai. What's the sales and fulfillment model there you have with Vodafone IoT?

Yes. Kompress.ai is an AI-powered SaaS solution designed really to generate long-term high-margin recurring revenue while addressing urgent market needs with compressors who have really no tracking in there. So we -- Vodafone has partnered with us. They will provide the connectivity for it, Ryan, while we provide both the hardware and the SaaS deployment and the revenue for that longer term. So it's early days, but we expect this in the next 24 months to start providing revenue into the model as we think about it. But more and more ARR. So it builds on what we did with the Tier 1 MNO and now it builds on that and more ARR revenue as I think about the future.

The next question comes from Scott Searle with ROTH Capital.

Nice job on the quarter. Saleel, maybe just to dive right in, you had a couple of comments about out-of-band management, but I'm wondering if you could provide a little bit of color there in terms of strength, weaknesses, kind of how you're feeling about growth on that front. And then to go back to drones for a second, with the government shutdown ongoing, is there any impact on that? Or because you're basically dealing with various primes and vendors that the design activity continues, but there just might be some delays in terms of how shipping and revenue ramps up? And if that changes your expected time line to get to 10% to 15% of sales? And then I had a follow-up.

Thank you for that question, Scott. Let me start with the second question first because it's current. Most of the defense drone in UAS are funded through multiyear contracts. So we are seeing minimal to no disruptions to our existing work. So as I sit today, we are full on with the customers. We are shipping to them. So no -- I don't anticipate any issues or concerns with that. Does that give you a perspective, a clear idea of what I'm thinking about the drones perspectively on this?

Yes.

Going on to the out-of-band one, we are seeing growth in out-of-band from last -- from the June quarter to the September quarter, and we are anticipating as we go into the December quarter to see -- again, we don't call it out specifically. It's part of our IoT business, but we are definitely seeing growth in that space as more deployments are happening. And we'll be able to do some announcements probably later this year, early next year on some big win that we've done in that space. So feel confident around out-of-band as we go through the fiscal year. More importantly, we are going to be introducing a brand-new out-of-band product late this year to go after some new markets. But stay tuned for that. We'll get into it more in our next call with you, Scott.

Got you. And then on the ARR front, you've got a couple of different ways that you're attacking the market with the sell-side monitoring, with Kompress, attacking the compressor market. Two things. I guess I'm wondering how big of an opportunity can that be as you look out 12, 18, 24 months in terms of the recurring revenue stream? And then as I think about other adjacent opportunities, particularly once you start to bring in your video performance and video AI capabilities that you're using in the drone market, are there other adjacencies that you could see expanding into over the next couple of quarters?

So again, I'll take your second question first because we are very good with cameras, and we've been good with cameras, and that's why we are winning in drones. We supply what you call. We are in the payload. And if you think about it, that's the most important part of the drone. So what's the next adjacency, which we are definitely looking at. I won't be going to details this time around is robotics. Human-eyed Robots are going to happen, what do they need? They need a good camera. Second one is security and surveillance, an area that we are doing well in with some customers. So again, good adjacent opportunities, same basic IP and technology and a solution that we provide to.

Going to your first question about ARR, as I said, our first foray into ARR has happened with the MNO opportunity, as we said, with the sell side. And it's a small portion of the revenue. Software and services is 5% to 7%, and Brent can correct me if I'm wrong. I expect that to keep on chugging along to 7% to 9% and 10% in the future as you aggregate all of that as a bucket that we call out, Scott.

The next question comes from Christian Schwab with Craig-Hallum.

Congrats on a good quarter. I guess it wasn't clear to me the 17 OEM potential on the drone side of the business, when would you anticipate being that being 10% to 15% of revenue? Is that something that could happen as soon as fiscal year 2027?

Yes. As I sit here today, it's definitely on my radar for a fiscal year 2027 possibility of 10% to 15% of revenue.

Okay. And then last quarter, you highlighted a Tier 1 telecom service provider. I think it was on the backup power systems, but it was an $8 million to $10 million win. Did you recognize any revenue in the quarter? And what is your outlook on that for the next few quarters?

Yes, we recognized revenue in the September quarter, and we intend to recognize revenue in the December quarter. So it's going well and as planned. No surprises here. Last quarter, it's progressing nicely is all I was trying to say, Christian.

Okay. And then a follow-up on that. When would you anticipate follow-on orders from that customer?

So we get quarterly orders from them. So maybe the way to think about it is it's a run rating business now. We had talked about the 50,000 piece opportunity, and we have purchase orders from them for that whole opportunity in place. We haven't shipped it all. We'll continue to ship it as the year progresses. Beyond that, we are expecting probably sometime in calendar '26 to get follow-on orders for additional -- not necessarily for the diesel generator that we talked about, but additional equipment that they want to have tracked.

The next question comes from Scott Searle with ROTH Capital.

Just 2 quick follow-ups on the financial front. Just first, I wanted to clarify the gross margin outlook. I think you said in line with fiscal first half of '25. So in the low 40s, 42%, 43% to think about that the next couple of quarters. And then, Saleel, just in terms of an early shot at fiscal '26 in terms of how you're thinking about growth that this is, in fact, a growth year, and we should continue to expect sequential progression of the revenue stream over the next couple of quarters?

Yes, Scott, thanks. On the gross margin, you're right. We -- last quarter, we talked about returning from a down quarter, low -- we're right around 40%, I think, last quarter and talked about returning to 43%, 44%, which is what we saw a year ago. And so we think modeling at that level going forward in the near term is appropriate.

Yes, Scott, to add more color, the September quarter, we did a non-GAAP gross margin of 45.3%. It's the highest gross margin that the company has had in the last few years that I have been here and beyond that. So it's turned nicely as we are focused on cost controls, working with our CMs, all good things. What was your second question, Scott?

The growth rate for fiscal '26, how you're expecting the sequential progression just conceptually over the next couple of quarters and if you're, in fact, still expecting growth overall for the year?

Yes. Again, we do quarterly guidance. So put it in perspective, Y-o-Y without Gridspertise, we are growing close to 20%, Scott. That's darn good. So I expect sitting here today, we expect to staircase up. Again, we don't give annual guidance, but nothing has changed in my mind. We feel good today, sitting here today.

The next question comes from Jaeson Schmidt with Lake Street.

Just looking at that wireless operator opportunity or just that market in general, can you talk about any sort of discussions or engagements you're having beyond that customer you've already won? And how are you looking at that opportunity longer term?

Yes. Jaeson, thank you for that question. So with that MNO, the opportunity, as we've said in the past, could be 3x the size. So we could grow that business nicely just with them. With the introduction of Kompress.ai, we've opened a new market right? And we were at the compressor show a few weeks back, and we feel good about that. It's early days. But then you've got another MNO who's working with us. We haven't named the first one, but this one we named and they were very happy to do a joint announcement with us, which is Vodafone IoT.

So this is a part of one of the key verticals, asset tracking, asset management, just preventive maintenance, all of that is what we did. So moving forward, this is a focus area in addition to all the drones that we talked about, and we should see growth moving forward with this.

Okay. Perfect. And then just a follow-up for me. Looking at that drone opportunity, to your point, kind of 10% to 15% potential in fiscal '27, as drones become a bigger portion of the pie, does that significantly alter what gross margin ultimately will settle out to be?

I'll let Brent opine on it a little bit after I'm done. The good news with the drone opportunity right now, it's a decent gross margin for us right now. So we are uber focused on gross margin. So I expect to continue where we are at right now, but Brent can add to it.

Yes, I think that's generally accurate, Jaeson. I mean with the kind of the wide breadth of products we have, we're still kind of forecasting that margin profile into the near and middle term that I mentioned previously.

This concludes our question-and-answer session. I would like to turn the conference back over for any closing remarks.

Thank you very much for everyone for joining the call. We will be at the Craig-Hallum and the ROTH conferences in New York in a couple of weeks. Thank you so much.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Good day, and welcome to the Lantronix Fourth Quarter and Full Year 2025 Results Conference Call. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Brent Stringham, Chief Financial Officer. Please go ahead.

Good afternoon, and thank you for joining our fiscal fourth quarter and full year 2025 earnings call. Joining me 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-in 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 will now turn the call over to Saleel.

Thanks, Brent, and thank you, everyone, for joining today's call. Fiscal 2025 marked a turning point for Lantronix, a year of disciplined execution, meaningful transformation and building the foundation for sustainable long-term growth. The progress was evident in our fourth quarter results with revenue of $28.8 million and a non-GAAP EPS of $0.01, both well within our quarterly guidance range. These results reflect a return to growth in our core revenue base, excluding the impact of Gridspertise, our EMEA smart grid customer.

As we enter the new fiscal year, we see powerful industry dynamics creating significant opportunities for Lantronix. We believe we are entering a multiyear growth cycle for unmanned aerial systems, supported by record defense funding and favorable regulatory momentum. According to the U.S. Department of Defense, more than $13 billion is earmarked for unmanned platforms in 2026. We that increased focus on secure U.S.-made technologies, we believe the demand environment for our solutions has never been stronger. Against this backdrop of growing demand, we are beginning to see meaningful traction in the market, highlighted by our most recent win with Red Cat's Teal drones, which we formally announced last week. We've been collaborating with their team for some time, and our TAA and NBAA compliant solution now powers Teal's Black Widow drones for the U.S. Army's short-range reconnaissance program. As a Blue UAS approved platform, this program highlights both the rigor of qualification process and the mission-critical role of our technology. We began shipments in the June quarter, generating initial revenue and strengthening visibility into fiscal 2026.

We believe our competitive edge lies in our deep camera expertise. Military and other high-performance drone requirements include advanced camera tuning, sensor fusion and complex software integration capabilities we have refined over many years. Equally important, being North America-based and fully compliant with NDAA and TAA regulations further positions us as a trusted supplier to OEMs and defense contractors engaged in U.S. government programs. Red Cat's Teal drones exemplifies our secure edge compute solutions, drive long-term growth opportunities in the drone market.

Beyond defense, our partnership with Aerora highlights our ability to deliver high-performance Edge AI solutions for commercial drone applications. By combining our compute module, the Teledyne FLIR's thermal camera and PRISM AI software, we enable more intelligent, real-time decision-making for applications like autonomous flight, surveillance and industrial inspection. Early market feedback has been very positive, and we expect revenue contribution from these solutions to begin in fiscal 2026. Looking ahead, we see broader industry trends including government investment and rising demand for U.S.-based suppliers, creating a strong runway for both defense and commercial growth.

Moving to our next win. We recently signed a multiyear agreement with a major U.S. mobile carrier to provide devices and services as they modernize over 50,000 backup power systems at wireless cell sites nationwide. This win is a strong validation of our edge infrastructure strategy, enabling resilient network uptime, improved life cycle management and real-time operational visibility across thousands of distributed locations. So far, we booked nearly all the initial units and have begun shipping in the June quarter. With additional orders expected as the rollout continues, we believe this is a long-term opportunity with this customer and expect additional volume beyond this initial deployment reflecting the depth of our relationship and the strategic nature of the program.

In addition to the sizable hardware deployment, this design win also incorporates our perception platform, enabling remote monitoring and ongoing management of connected assets. As these devices are brought online, we expect they will contribute our growing base of high-margin annual recurring revenue. This win also opens the door to broader collaboration with the carrier over time, including additional software-enabled services and potential expansion across their larger network footprint.

These types of wins highlight our transition from a traditional hardware supplier to a strategic platform partner helping customers accelerate intelligence at the edge. This evolution positions us to capture a larger share of customer wallet, deepened long-term relationships and embed our solutions more directly in their critical operations. By moving up the value chain, we are not only expanding revenue opportunities but also creating stickier, high-margin business over time.

Turning to our growth outlook. As we turn the corner into a new fiscal year, we are seeing growing momentum fueled by recent design wins that are expanding our customer base and enhancing the predictability of our business. This diversification marks an important step forward as we move past the impact of Gridspertise and underscores the underlying strength of our core platform. Q1 is off to a strong start. With healthy engagement from both new and existing customers across multiple verticals, our core business has stabilized and is now positioned to deliver growth over the longer term. At the same time, we are beginning to see encouraging traction in our Edge AI strategy.

Looking ahead, our visibility in fiscal 2026 has improved, supported by momentum across the 2 strategic pillars of our platform, Edge IoT, compute and connectivity and network infrastructure encompassing out-of-band management and networking solution. The momentum is driven by recent design wins in Edge IOT and out-of-band, continued investment in product innovation and expanding relationships across our distribution and technology partner ecosystems. Together, these initiatives reinforce our ability to scale profitably and capture long-term opportunities at the Intelligent Edge.

With that, I turn the call over to Brent to provide more detail on our financial performance. Brent?

Thanks, Saleel. Building on that strategic context, I'll now walk through our fourth quarter and fiscal 2025 financial results, highlight the key drivers behind our performance and provide our outlook for the first quarter of fiscal 2026. Looking back on fiscal 2025, we delivered revenue of $123 million, reflecting the transition from a record fiscal 2024 to a more normalized revenue base. As we've noted before, fiscal 2024 included a significant contribution from Gridspertise, which accounted for roughly 25% of revenue that year. In fiscal 2025, we recognized just over $11 million from Gridspertise in the first half with minimal revenue contribution in the second half of the year as the customer continued to work through its prior deployments. Excluding this customer, our core revenue base stabilized in the second half of the year and the operational discipline we've driven over the last 12 months positions us for more sustainable and diversified growth in fiscal 2026.

In the fourth quarter of fiscal 2025, we delivered revenue of $28.8 million a sequential increase from $28.5 million in the prior quarter and approximately 4% higher than fiscal Q4 2024 when excluding the impact of Gridspertise. This growth, driven by continued momentum in our Edge IoT products underscores the strength of our core platform and the benefits of a more diversified revenue base.

Turning to margins. In the fourth quarter, GAAP gross margin was 40% compared to 43.5% in the prior quarter and 38.1% in the year-ago period. On a non-GAAP basis, gross margin was 40.6% versus 44.1% last quarter and 38.8% in the year-ago quarter. The sequential decline primarily reflects inventory charges for aged inventory and higher duties and tariffs incurred in the quarter. Despite these temporary impacts, margins remain above the year ago period, reflecting benefits from our ongoing cost and supply chain initiatives as well as a favorable product mix.

As we continue to carefully manage our inventories and the impact of tariffs, we expect gross margins to recover to the levels we achieved in the first half of fiscal 2025. We've made strong progress on our 90-day plan to further improve our cost structure and supply chain efficiency. As of today, the vast majority of U.S.-bound products are now manufactured outside of China reducing costs and minimizing potential tariff exposure going forward.

Turning to expenses and profitability. GAAP operating expenses in the fourth quarter of fiscal 2025 were $14.7 million down from $16 million in the prior quarter and $18.2 million in the year ago period. GAAP net loss for the fourth quarter of fiscal 2025 was $2.6 million or $0.07 per share compared to GAAP net income of $400,000 or $0.01 per share in the year ago quarter. GAAP results for both the fiscal fourth quarter and full year include restructuring charges of $900,000 and $3.5 million, respectively, related to the cost reduction initiatives we executed during the year. On a non-GAAP basis, we reported net income of just under $400,000 or $0.01 per share compared to non-GAAP net income of $1.1 million or $0.03 per share in the prior quarter.

Cost reductions that we have discussed in recent quarters continue to benefit our P&L with non-GAAP operating expenses down by just under $200,000 from the prior quarter and approximately $1.9 million compared to the year ago quarter. Importantly, the proactive steps we took have reduced just over $4 million of costs relative to fiscal 2024, and the implemented efficiency measures have created a leaner operating structure and meaningful leverage in our model. We streamlined our operations, optimized our supply chain and reduced operating expenses while continuing to invest into strategic growth initiatives. These actions allowed us to maintain profitability on a non-GAAP basis despite the year-over-year revenue decline.

Turning to the balance sheet. Net inventories decreased to $26.4 million as of June 30, 2025, compared to $28.2 million in the prior quarter and $27.7 million at the end of fiscal 2024. We ended the June quarter with cash and cash equivalents of $20.1 million, up from the prior quarter. For the quarter, we generated positive operating cash flow bringing our full year fiscal 2025 operating cash flow to $7.3 million. During the year, we paid down approximately $4.5 million of term debt or 28% of our outstanding balance.

As of June 30, 2025, our remaining debt was approximately $11.8 million, resulting in a net cash position of $8.3 million, providing us with a stronger balance sheet entering fiscal 2026. We also recently refinanced this term debt into an asset-backed line of credit with the same lending partner. This refinancing reduces interest expense, provides greater flexibility on principal repayments and extends the maturity to August 2028. Together with our debt reduction efforts, these actions strengthen liquidity and improve the efficiency of our capital structure.

Now turning to our outlook for the first quarter of fiscal 2026, which ends September 30, 2025. We expect revenue to be in the range of $28.5 million to $30.5 million. Non-GAAP EPS is expected to be in the range of $0.02 to $0.04 per share.

With that, I'll turn the call back to Saleel for closing remarks.

Thanks, Brent. To close, fiscal 2025 was a year of transformation for Lantronix, one in which we built a strong foundation for profitable growth and position the company to capitalize on high-value opportunities and Edge AI and infrastructure modernization. We reshaped our global operations, established 4 centers of excellence, streamlined our cost structure and strengthened our balance sheet. We successfully integrated the NetComm IoT acquisition and deepened our strategic partnership with Qualcomm, expanding our capabilities in Edge IoT and AI-driven innovation.

On top of this, we proactively mitigated tariff exposure and realigned our supply chain actions that reduce risk and support improved gross margin performance going forward. Collectively, these initiatives have focused our resources on the highest impact opportunities, embedded meaningful operating leverage into our model. And strategically, we position Lantronix to scale with sustained profitability as we enter fiscal 2026.

With that, we now open the call for your questions.

[Operator Instructions] And your first question today will come from Jaeson Schmidt with Lake Street.

I just want to start with the drone opportunity. Obviously, a massive market and you guys are seeing some really nice traction here out of the gate. How should we think about the potential for you guys here in the near term, both with Red Cat and what you potentially have in the pipeline?

Jaeson, Saleel, thank you for that question. We are extremely excited about the drone market and the drone opportunity. Just to give you a frame of reference, we announced Red Cat about a week ago. But as of this quarter, we have over 10 different drone makers that we're working on, mainly military or industrial applications. We see this market growing really nicely into fiscal '26, representing a meaningful portion of our business longer term. And again, it's fueled by programs like the SRR with Red Cat and as more funding comes, we are well suited there. And I think the key is our competitive edge is our expertise in cameras.

We've been working around cameras for a long time, and that's really what a drone requires, the camera tuning, the fusion, the software integration and then us being North American-based NDAA and TAA certified really allows us to win these contracts. So we have shipped, as I said, last quarter -- I mean, in the June quarter, we have visibility into fiscal '26 with a few of the 10 drone makers. And as we get into early 2016 calendar, we'll be seeing more of these companies going into production. So we are feeling really good, as I sit here today.

Okay. That's really helpful. And then just as a follow-up, if you could comment on sort of what you're seeing from a bookings or order perspective so far here in September. If I look back at the past few years, usually, September is sequentially down. But obviously, the midpoint of your guidance for September here is for growth sequentially. Just curious if you could provide some additional color around the dynamics driving that growth.

Yes. Jaeson, another great question. You're right. In the past, maybe last year or the year before, we might have -- we were down sequentially. We are seeing momentum in our business. We are seeing new customers that we've acquired and the momentum is really broad-based throughout our core business, including our Edge IoT, which is -- some of it is new and then even our networking business. And out-of-band also is growing nicely into this quarter. So builds a lot of confidence as you think about fiscal '26.

Your next question today will come from Ryan Koontz with Needham & Company.

You had some real interesting comments there on gross margin. I just want to make sure I'm not losing the forest through the trees here, so to speak. Can you maybe unpack that, Saleel, in terms of how you think about gross margins evolving over the next 12 months?

Yes. Ryan, great question. I think -- not I think, I know in the June quarter, we had some one-off gross margin-related items like tariffs and some inventory. But moving forward, it's going to be closer to 44%, 45% for the fiscal year. But I'll pass the mic to Brent to add a little bit more color to that.

Yes. I think, Ryan, as we talked about in the prepared remarks, we're seeing gross margins for the upcoming quarters here in fiscal '26 returning to what we saw a year ago in the -- Saleel mentioned 44%, we're trending in that direction going forward.

Great. Super. And then maybe all these opportunities in the drone market around defense and unmanned vehicles, can you talk a bit about -- is that a new channel for you? Are you working direct? Are you working through integrators? I mean maybe walk through some of the commercial side of these drone opportunities? Are they very similar to your business in the past? Or is it somewhat new kind of market motion?

Yes. Ryan, another great question. And you know I've spoken before. We kind of started on this journey of unmanned UAS or drones in calendar '24. And into that, we've kind of worked with Teledyne FLIR, which was a very important announcement that we did. They are the leader in thermal imaging cameras, which is this market is all about. They gave us, hey, we are a great partner for them. So that helped us and we work with them on major designs.

And then just having this camera expertise working with some of the integrators that are out there, and we've increased our understanding of the market, what we can do for the market, and that's how we've really gotten to winning somebody like Red Cat on one of their big's programs. And this one, we pretty much got done in 8 months from beginning to end. So it was really all systems go, all hands on deck to get them ready. So we are very proud of what we've done there.

That's great. So Teledyne, it sounds like to some degree they're pulling you into some of these deals in a kind of a partner ecosystem?

Yes. Teledyne first pulling us into quite a few and they're a big company with a lot of access. So it's been very helpful.

Yes. That's great. Maybe one last one if I can squeeze it in. You talked about this backup generator for sell-side opportunities. Great to finally get that deal closed. Any more you can tell us about that? And are there other opportunities similar to that in the pipeline that you can address?

Yes. Thanks, Ryan. Another great question, right? We announced a big Tier 1 mobile win with about 50,000 of our gateways, our FOX gateways in that. And we anticipate, longer term, this should be at least 3x what it is as we progress over the next couple of years. So the good news is we booked most of the order. We started to ship in the June quarter, which we did, and we'll continue to ship throughout this fiscal year. I do want to make one point of clarification, Ryan, which is, I think, very important. Not only are we selling a hardware, but we are also incorporating our Percepxion platform enabling remote monitoring and device management.

And as these devices come online, we are starting to get our first real ARR or annual recurring revenue. So that's another great thing. So that's going to start -- is not starting at any big number, but as the more and more devices come online, it's going to do that. So it shows the investments that we were making in the last 18 months in these areas, where giving a platform, giving a solution has enabled us to be successful. So I'm optimistic, just with this vendor, it could get bigger and there are more that we're working on.

And your next question today will come from Christian Schwab with Craig Hallum Capital Group.

Just as it relates to the drone opportunity, can you give us an idea of what your average dollar content would be per device, not specifically to Red Cat itself, but the entire 10 customers you're dealing with just kind of to give us either an idea of what your dollar content is, please?

Yes. Great, great question, Christian. It's approximately around $500. So it's pretty very good from an ASP perspective. So as you know, if the volumes get into many thousands or tens of thousands, this is meaningful revenue for the company as you think about moving forward.

Great. And then in your prepared comments, you talked about a meaningful revenue opportunity I assume some customers, of course, have different volumes that they would be planning on shipping over a multiyear time frame. When you think of that market, could you give us a broad range of revenue? Is this a $5 million business in 2 years? Is this a $20 million business that some guidepost for us to be thinking about?

Yes. Great question, again, Christian. I would say the opportunity per customer, and again, some are going to be bigger, some are going to be smaller. The customer size could be $4 million to $5 million annualized each customer. Again, as I said, the ones that we are working with today, if they are a bit smaller ones, they could be smaller. But again, they're going to come online and as they win their sockets. So -- could this be a 10% to 15% of Lantronix's revenue in fiscal '27? There's a probability it could get there. But we're working through all that and working through all the customers. But the opportunity size on some of the early ones are $3 million to $5 million each.

Your next question today will come from Scott Searle with ROTH Capital.

It looks like I'll back clean up. Maybe just a quick clarification, Brent, on the inventory write-down, I'm wondering if you could quantify that. I'm not sure if I missed that. And then a couple of the segments there. I just want to clarify what are you seeing in terms of out-of-band management in terms of in the June quarter and as we're going into the back half of the calendar year here. And I just want to clarify in terms of the September guidance that there's no Gridspertise in those numbers? And then I had a couple of follow-ups.

Yes. Thanks, Scott. On the inventory, one way to maybe look at it is based on the margins that we disclosed here in the quarter, we said that tariffs were a part of that. Probably -- tariffs probably made up about 100 basis points of the decline in margin quarter-over-quarter with a large part of the difference being some of the inventory charges that we took in the quarter. Could you repeat the second part of your question?

Out-of-band management contribution in the quarter, what kind of growth were you seeing in June? What are you guys seeing in terms of the book and the build of business as we're looking into the second half?

Yes. Out-of-band quarter-over-quarter, obviously, we don't break out the details at that level, but out-of-band is -- was up quarter-over-quarter from our third quarter, and we're seeing pretty solid momentum in that business with some of the resources and other things we have going on in that product line. And then you had asked about -- what was the third part of your question?

Gridspertise, yes. Just in terms of Gridspertise in terms of the guidance.

Yes. We don't currently have any Gridspertise estimates in our guidance.

Scott, just to put it right, we've had no Gridspertise since January 1st of this year. right? So we've taken it out. So as I said, the core business is growing nicely.

Great. Now I just wanted to clarify. Now Saleel, the drone opportunity really starting to perk up for you. It seems like there's an incredible backlog of opportunities. Is there a number that you're comfortable with in fiscal '26? You talked about fiscal 2017 maybe being 10% to 15% of revenues. Kind of what is that -- what do you think that looks like in fiscal '26? And when does it start to become meaningful in terms of contribution on a quarterly basis in fiscal '20?

We don't specifically call out the details, but it's definitely going to be meaningful in this year, and it's in the millions of dollars for the fiscal year, right? It's not tens of millions this year, but in the millions of dollars. And as I said, these guys are just starting to launch and our ASP is pretty good at around $400. It's $500 approximately, give or take. So we're feeling good about that. Does that kind of give you a goal post for this year?

Absolutely it does. Just trying to calibrate where we are in the ramp? And maybe just a little follow-up on that front. I want to make sure I understand in terms of your software content versus what FLIR brings to the equation. And then as you look at the characteristics of why you're being adopted in drones, being at low power, right, I think you're leveraging off of Qualcomm processors as well as your computer vision and AI capabilities. There are other markets related to security, surveillance, et cetera, that fit into that as well. So I'm wondering if there are, I'll call them, tethered opportunities as opposed to drones and UAV that are starting to perk up in your backlog or opportunity pipeline?

Yes. So a bunch of questions there, right? So FLIR is a partner, but it's not for everyone. I want to be clear about that, right? FLIR is with some of the customers that we're working with, the recent announcement we did does not use FLIR. So we had to provide some camera tuning, some of the software that we have, and they also had some software. So it was kind of a combination of both things. Remember, we did some services work for them. So it was kind of getting together on this. So FLIR is great. It's doing well for us, but we also are doing independent programs, Scott, on that.

The other area that this is going to go into is robotics, as you think about it, right, because robotics needs cameras. Those are very on the early days. I think you'll see opportunities percolating probably calendar Q1, calendar Q2 that we are looking at. But right now, we are laser-focused on the drone area. As you know, the U.S. government is making a big push, Secretary of Defense, Hegseth, talked about two drones per platoon, the smaller ones. And you hit the key point, we have worked with our customer to make sure that they have enough range. And there's a whole -- and you and I can talk offline on what the range means and how that needs to be. So right now, it's all hands on deck to get these guys -- multiple guys over the hub.

Got you. And lastly, if I could, I'll just slip one in on the carrier opportunity. There's a nice recurring revenue component that goes along with it. I'm not sure if you can quantify that, I'd love to get your thoughts. And then just in terms of RFP pipeline, it sounds like you think that could be 3x the size of where it is today. I'm just kind of wondering if you're actually -- those opportunities are currently percolating or with a formal RFP or if you guys are just continuing to knock on other doors.

So two questions. We do call out software and services. So the ARR will be a part of that. But we also have service portion of that. So it's going to be shown in that line as you think about the future. As for the carrier one, there is one RFP that we are bidding on, and we believe we were at a good high probability of getting that. But this carrier company has now sent us to the Generac and these other guys who make these backup power generators and they've kind of told us, we are the approved vendor for that. So that also is in motion as you think about it. So therefore, we believe in the next few years -- next couple of years, this should be a larger portion, as I said, could be as high as 3x of what we announced already.

This will conclude our question-and-answer session. I would like to turn the conference back over to Saleel Awsare for any closing remarks.

I want to thank everyone for you joining us. I know it's a Labor Day coming up. So please enjoy the weekend. And Lantronix will be at the Gateway Conference next week in San Francisco. Please, hopefully, you can join us there. Thank you so much.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.