Lantronix (LTRX) Q1 2027 Earnings Call Transcript

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DATE

Monday, Nov. 9, 2026

CALL PARTICIPANTS

• President and Chief Executive Officer - Saleel Awsare
• Chief Financial Officer - Brent Stringham

TAKEAWAYS

• Net Revenue -- $32.4 million, representing an 8% increase year over year driven by strength in embedded compute and unmanned systems.
• Embedded IoT Solutions Revenue -- $15.7 million, growing 37% year over year as edge compute platforms gained traction in unmanned aircraft programs.
• Non-GAAP Net Income -- $2.2 million, up 50% year over year from $1.5 million in the prior year's first quarter.
• Non-GAAP Gross Margin -- 45.3%, improving 120 basis points from 44.1% in the prior quarter due to higher-margin recurring revenue from the Nero acquisition and operational cost management.
• Software and Services Revenue -- $2.6 million, increasing to over 10% of total revenue on a pro forma basis following the closing of the Nero Global Tracking acquisition.
• Unmanned Systems Revenue Mix -- 15% to 20% of total revenue, with management expecting this target range to hold for the full fiscal year 2027.
• Q2 Revenue Guidance -- $32.5 million to $34.5 million, which would reflect double-digit year-over-year growth at the midpoint.
• Q2 Non-GAAP EPS Guidance -- $0.04 to $0.06 per share, based on expected non-GAAP net income of $1.8 million to $2.7 million.
• Cash and Marketable Securities -- $51.5 million as of Sept. 30, 2026, including proceeds from a $44 million public and ATM offering conducted in the fourth quarter of fiscal 2026.
• Inventory -- $31 million, increasing from $26 million as of June 30, 2026, to build buffer stock for memory and system-on-modules in anticipation of extended lead times.
• Drone Customer Base -- 29 customers with purchase orders for fiscal 2027, with 14 of those customers located outside of North America.
• Acquisition Capital Outlay -- $10.3 million for Nero Global Tracking, with a final $1.3 million payment scheduled before the end of Dec. 2026.
• IoT System Solutions Revenue -- $14.1 million, reflecting a sequential decline from $15.3 million due to the completion of volume shipments to a lead Tier 1 mobile network operator.
• GAAP Net Loss -- $463,000, or $0.01 per share, representing an improvement from a net loss of $1.4 million in the year-ago period.
• System-on-Module Pricing -- $300 to $700 per unit, depending on the number of tera operations per second and specific functionality.
• GAAP Operating Expenses -- $15.1 million, increasing from $14 million in the prior quarter due to acquisition-related costs and stock-based compensation.

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RISKS

• Stringham stated, "Component costs such as memory and others continues to be a challenge," noting that demand from AI infrastructure and data centers is pressuring availability across the embedded compute market.
• Awsare indicated that orders from drone customers follow specific program schedules and deployment needs, which can create fluctuations in the timing of revenue.
• Management noted that volume shipments to a primary Tier 1 mobile network operator were substantially completed several quarters ago, creating a difficult year-over-year comparison for the IoT System Solutions segment.

SUMMARY

Lantronix, Inc. (NASDAQ:LTRX) reported its fiscal first quarter results, highlighting a strategic shift toward high-margin software services and specialized edge computing for unmanned systems. Management reported that the acquisition of Nero Global Tracking has increased the company's recurring revenue mix, while the inclusion of its hardware in the Blue UAS Framework has created a competitive advantage for defense-related contracts. The company stated it is expanding beyond drone applications into industrial computer vision and smart security through new design wins with large-scale partners. Total liquidity remains elevated following recent capital raises, supporting a strategy of disciplined M&A and investment in AI-capable hardware architectures.

• CEO Awsare stated, "We added our Open-Q 8550CS SOM to the Blue UAS Framework last month, which identifies vetted components for use in unmanned aircraft systems."
• Management reported that the new Spotter platform consolidates edge AI compute, vision processing, sensor fusion, and vehicle flight control onto a single low-power board to simplify drone development.
• The company has engaged a government advocacy firm to increase awareness of its NDAA-compliant networking and compute products among federal stakeholders.
• CEO Awsare noted that the company is seeing increased demand in counter-UAS applications, where operators repurpose low-cost drones to intercept hostile aircraft using edge-based decision-making.
• The company is participating in the Department of War's Gauntlet II competition, supporting one participant in the deep strike category and two in the close quarters category.
• CFO Stringham reported that the company has invested a portion of its cash proceeds into liquid government-backed marketable securities to improve asset yields.
• Lantronix expanded its Plymouth facility to 65,000 square feet to accommodate the assembly and domestic origin certification of its system-on-modules and networking switches.

INDUSTRY GLOSSARY

• Blue UAS Framework: A list of Department of War-cleared drone components and systems that meet security requirements for federal use.
• NDAA/TAA Compliant: Hardware that meets the requirements of the National Defense Authorization Act and the Trade Agreements Act, typically signifying it was not manufactured in prohibited countries.
• SOM (System-on-Module): A circuit board that integrates a processor, memory, and other components into a single package to be used as the core of an embedded system.
• TOPS (Tera Operations Per Second): A measure of the computing performance of an AI chip or processor.
• Out-of-band management: A method of remotely controlling and managing network devices through a dedicated secondary connection that remains active even if the primary network fails.
• Unmanned Systems: Remote-controlled or autonomous vehicles, including drones, ground robotics, and maritime vessels.

Full Conference Call Transcript

Operator: Good afternoon, and welcome to the Lantronix Fiscal Q1 '27 Earnings Call. [Operator Instructions] Please also note today's event is being recorded. I would now like to turn the floor over to Brent Stringham, Chief Financial Officer. Sir, please go ahead.

Brent Stringham: Good afternoon, everyone, 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, 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.

Saleel Awsare: Thanks, Brent, and thank you, everyone, for joining today's call. We entered fiscal 2027 from a position of strength, and our first quarter results reflect that momentum. Revenue grew over 8% year-over-year to $32.4 million. Non-GAAP gross margin expanded about 45% and non-GAAP net income increased 50% to $2.2 million or $0.05 per share, reflecting continued solid execution across the business. Embedded IoT Solutions revenue grew 37% year-over-year in the first quarter, driven by continued strength in unmanned systems, a high-growth market where our edge compute platforms are gaining traction. We remain on track for unmanned systems to comprise approximately 15% to 20% of total revenue this fiscal year.

Our confidence is supported by new design wins across a growing number of applications. As an enabling technology provider, we are positioned to participate in multiple customer programs and platforms rather than relying on the success of any single deployment. Combined with our status as a Western supplier and our NDAA and TAA compliant solution, this positions Lantronix as a long-term platform partner. Reinforcing that platform position, we added our Open-Q 8550CS SOM to the Blue UAS Framework last month, which identifies vetted components for use in unmanned aircraft systems. This is a key competitive differentiator and gives customers an independently vetted compute platform that simplifies qualification and accelerates deployment.

For current and prospective customers, this reduces qualification complexity and program risk, while strengthening our position as a trusted technology partner. It also lays the foundation for bringing additional Blue UAS-ready platforms to market. Building on that momentum, we recently launched Spotter at AUSA in Washington, D.C., where we also met with existing and prospective partners. Spotter brings edge AI compute, vision processing, sensor fusion and vehicle flight control onto one low-power board. By consolidating functions that OEMs might otherwise source and integrate separately, it can simplify system development for autonomous drones and robotics.

Instead of piecing together separate flight controllers, vision boards and compute units, OEMs get an all-in-one, off-the-shelf reference and deployment platform that supports open source robotic stacks. Importantly, the underlying technology also positions us to address unmanned systems beyond our current drone class across air, sea and ground. Beyond the hardware, our deep camera and software integration expertise gives us another key competitive advantage. Advanced computer vision and autonomous platforms require more than processing power. Customers need cameras and sensors to work together reliably, not just connect to a processor. We bring years of experience tuning cameras, fusing sensors and integrating complex software for demanding image and vision applications.

Our work across the software stack allows us to integrate a range of customer selected sensors. This creates opportunities for high-margin engineering services and software revenue as their programs evolve. When a customer designs the Lantronix SOM into their platform and integrates our custom firmware and software, we become deeply embedded in their product architecture, supporting longer-term customer relationships and next-generation platforms across the commercial and defense markets. We are also seeing new opportunities in counter UAS application, where operators are increasingly repurposing low-cost first-person view, or FPV drones to detect and intercept hostile drones. These missions require onboard compute to process sensor data and support real-time edge-based decision-making, included in contested environments directly supporting our NDAA-compliant platforms.

We are also seeing increasing traction in unmanned systems outside North America with activity progressing across Eastern Europe, Australia and Japan. Importantly, the opportunity for our technology extends well beyond drones and defense. We are increasingly leveraging these same capabilities across commercial and industrial computer vision applications, and we are seeing that traction translate into new design wins. Two recent wins for our edge compute solutions highlight this expanding opportunity. The first is with Trimble, where we power their advanced surveying equipment that incorporates multiple cameras and laser technology. The second is with a leading provider of job site security solutions, where our solution enables smart security cameras, providing 360-degree job site intelligence.

Both opportunities highlight the importance of delivering high-performance computing in compact form factors. Our technology helps customers extend battery life and reducing operating costs, while directly supporting job site security and safety. In addition, we are providing high-margin design services for this engagement, driven by our deep knowledge and expertise in computer vision, expanding the opportunity beyond the hardware. Together, these wins show how we are translating our unmanned system success into opportunities across adjacent markets. The same computing capabilities driving our success in unmanned systems are increasingly relevant across industrial, construction and other edge AI applications, expanding our addressable market and creating additional pathways for growth. Turning to IoT System Solutions.

We are expecting sequential revenue growth driven by our strength in our networking products, supported by improving order trends. In out-of-band management, we are building on our SambaNova win and seeing growing interest from other customers deploying AI infrastructure. As these deployments expand, reliable network access to critical networking and compute equipment is becoming increasingly important, particularly when primary networks are unavailable. We believe this is a broader opportunity for our out-of-band solutions as customers manage more complex AI and data center environments, while reducing costly on-site service visits. Turning to critical infrastructure and software services. We closed the Nero Global acquisition during the first quarter.

Importantly, Nero's high-margin recurring revenue has increased our software and service mix to more than 10% of the total company revenue on a pro forma basis. Further advancing our strategy of building a more predictable, high-margin revenue base. Finally, before turning the call over to Brent, I'd like to highlight a couple of additional steps we are taking to strengthen our position across key markets, including adding relevant expertise to our Board and expanding our engagement with industry and government stakeholders. We welcome Jason Lamb as an Independent Director. Jason is a former U.S. Navy SEAL officer and defense technology executive with over 20 years of experience across special operations, technology development and investing.

His perspective at the intersection of national security, autonomous systems and commercializations will be valuable as we scale our unmanned system business. Alongside this addition to our Board, we are also taking steps to strengthen our presence in Washington and deepen our engagement with the government and industry stakeholders. We've engaged a government advocacy firm to elevate Lantronix's profile and increase awareness of our broader portfolio of differentiated technologies and solutions, including the edge compute and networking products we provide to federal customers. In summary, I'm encouraged by our strong start to fiscal 2027.

Our success in unmanned systems continues to validate our technology and execution, while new design wins in computer vision and other intelligent edge applications demonstrate the opportunity to extend that success into additional markets. And with software and services about 10% of pro forma revenue, we benefit from predictable high-quality revenue. With that, I'll turn the call back to Brent to cover the financial results.

Brent Stringham: Thanks, Saleel. As we mentioned, our business is off to a strong start as we begin fiscal 2027. I'll start by discussing our first quarter financial results, including key drivers of our performance and then provide our outlook for the second quarter ending December 31, 2026. Revenue for the first quarter was $32.4 million, up sequentially and year-over-year. The growth in our embedded products was driven by strength in our compute family with unmanned systems revenue performing strongly this quarter. IoT System Solutions was softer sequentially in the first quarter, although we continue to see encouraging demand indicators in parts of the business, specifically around networking and enterprise AI. It's also important to put the year-over-year comparison in context.

Last year's results benefited primarily from meaningful shipments to our lead Tier 1 mobile network operator customer. As we've previously discussed, those volume shipments were substantially completed several quarters ago. Turning to our gross margins. GAAP gross margin for the first quarter was 44.8%, up from 43.7% in the prior quarter and flat with Q1 last year. On a non-GAAP basis, gross margin was 45.3%, up from 44.1% in the prior quarter and consistent with the year ago period. Although our product mix this quarter was more heavily weighted toward our embedded solutions and compute products, gross margins improved sequentially, reflecting higher-margin recurring revenue from Nero, operational initiatives and disciplined cost management.

Based on these trends and our forecasted product mix, we expect gross margins to remain at or near recent levels in the near term. As we discussed in last quarter's call, we continue to monitor our overall supply environment, where demand from AI infrastructure and data centers is pressuring memory availability and pricing across the embedded compute market. This remains an industry-wide dynamic. Through our production model and diversified manufacturing partnerships, we believe we are well positioned with our supply needs over the near and medium term.

Looking at our expenses and profitability, GAAP operating expenses in the first quarter of fiscal 2027 were $15.1 million, up from $14 million in the prior quarter and nearly flat versus the year ago quarter. On a sequential basis, we saw a predictable uptick in our GAAP OpEx driven by stock-based compensation, amortization of new intangibles and acquisition expenses from the Nero acquisition as well as modest increases in certain go-to-market and R&D costs. GAAP net loss for the first quarter of fiscal 2027 was $463,000 or $0.01 per share, compared to GAAP net loss of $1.4 million or $0.04 per share in the year ago quarter.

On a non-GAAP basis, net income was $2.2 million or $0.05 per share, an improvement compared to $1.8 million or $0.04 per share in the prior quarter and $1.5 million or $0.04 per share in the year ago quarter. Turning to our balance sheet. In the fourth quarter of fiscal 2026, we raised a little over $44 million in net proceeds through our public and ATM offerings. We continue to focus on efficiently allocating capital in R&D, go-to-market and strategic M&A in a disciplined and opportunistic manner. Additionally, as of the current quarter end, we have invested a portion of the proceeds into highly liquid government-backed short-term marketable securities to improve the yield on these assets.

During the current quarter, we outlaid approximately $10.3 million for the purchase of Nero Global Tracking with the $1.3 million remaining purchase price expected to be paid before the end of December 2026. As of September 30, 2026, our total cash and cash equivalents plus short-term marketable securities approximated $51.5 million. During the current quarter, our net inventories increased from approximately $26 million as of June 30, 2026, to $31 million as of September 30, 2026. This reflects a strategic decision we made in anticipation of extended lead times to place orders for SOMs and memory, as well as to build buffer stock, positioning us to meet expected demand in upcoming quarters.

Finally, let me provide our outlook for the second quarter of our fiscal 2027, which ends December 31, 2026. We expect revenue to be in the range of $32.5 million to $34.5 million, reflecting double-digit year-over-year growth. Non-GAAP net income is expected to be in the range of $1.8 million to $2.7 million or $0.04 to $0.06 per share. With that, I'll now turn it back to Saleel for closing remarks.

Saleel Awsare: Thanks, Brent. In closing, we are off to a solid start to fiscal 2027. We grew revenue over 8% year-over-year and non-GAAP net income increased 50%. We continue to execute on our strategic transformation, advancing further up the technology stack and combining compute, connectivity, computer vision, physical AI and software and services to create a differentiated higher-value solutions at the intelligent edge. Our success in unmanned systems is increasingly catalyzing expansion into adjacent growth markets, including industrial automation, autonomous robotics and edge AI applications. We believe our capabilities position us to capture a growing share of these large and expanding opportunities.

We are also strengthening our software and services portfolio, which is helping us build deeper customer relationships, increase recurring revenue and improve the predictability and quality of our business over time. While it is still early in the fiscal year, continued execution, the diversity of our business and a growing pipeline of customer opportunities reinforce our confidence in the trajectory of the business. We believe we are well positioned to deliver double-digit revenue growth this year, while continuing to build a more scalable and profitable company. With that, operator, let's open the line for questions.

Operator: [Operator Instructions] Our first question today comes from Scott Searle from ROTH Capital.

Scott Searle: Nice job on the quarter, nice outlook as we start off fiscal '27. So, maybe to start diving in on the unmanned and drone front, I wonder if you could provide some metrics in terms of book-to-bill, maybe diversity of the customers or how you're feeling in terms of doubling the drone-related revenue in fiscal '26 as we look out to this year. And I was hoping you could expand a little bit as well in terms of the opportunity of non-drone, non-unmanned systems in job site, industrial and other applications that you're starting to see some of that traction. What could that look like in fiscal '27?

Saleel Awsare: Scott, thank you for the question. Let me start with your drone question as we spoke about. So -- and I'll give you some specific metrics so you feel -- you can get a feel for what we are doing. We are 4 months into the fiscal year as of today, and we have secured orders with 29 customers for fiscal 2027. Our customer orders obviously follow program schedules and deployment needs. There are many more customers in the design phase that we are developing solutions for. So the 29 that I mentioned earlier, we have POs from them that we intend to ship. So therefore, the number is going to be much higher as the year progresses.

We don't specifically disclose quarterly drone revenue, but our expectations remain for unmanned systems to be 15% to 20% of the total revenue in fiscal Q1. And then by the way, fiscal Q1, the revenue was well within that mentioned range of 15% to 20%. So all-in-all, quite well. Let me talk a little bit about the international area where you talked about beyond the U.S. So current customers are across EMEA mainly and then starting in APAC. Out of the customers that I mentioned, the 29 that we have POs for, 14 of them are international. And we are seeing interest in North America, Ukraine -- beyond North America in Ukraine, U.K., Australia, Japan.

Those are the areas that we see. So I hope I covered the drone question to your understanding. Let me talk about the other application, 2 applications that we announced, and I'm really excited about them. We are getting to be known as the go-to company for computer vision. Because we uniquely put together our deep camera expertise, our ability to integrate cameras, sensors into a working solution. And I was very happy to announce Trimble, a multibillion-dollar company that's using our product, including -- and I would say a solution. So it's our SOM plus services to power their advanced surveying equipment, and it's got multiple cameras, including lasers.

So we've really done a fair amount of work around that. And the second one is a provider of job site security, where the solution really enables smart security cameras, providing 360-degree job site security and safety. The reason they use Edge AI is because they want to be able to communicate with the person on a ladder or what have you, telling them, okay, maybe it's unsafe behavior. So it's edge compute really that you're talking about. We talk about physical AI. These are all physical AI applications that Lantronix is enabling.

Scott Searle: Very, very helpful. And maybe if I could switch gears over to the out-of-band management front. It's not something we talked about a lot in recent quarters, but it seems like that's stabilizing and starting to grow. I'm wondering if you could calibrate us in terms of what the kind of annualized size of the business is right now and what's driving some of the opportunities? How should we think about growth in fiscal '27 for that segment?

Saleel Awsare: Yes. Scott, thank you for that also. We are seeing growth of out-of-band mainly driven in 2 areas. One is the traditional electronics business, which is doing fine with the introduction of the SLC 9000. Us introducing a brand-new product has been very helpful and now customers are starting to adopt. And second one, I've talked about a win with SambaNova on their SN40 platform where we are in their rack. We are seeing traction with them as they expand, obviously.

But more importantly, we are now starting to work with a couple of other vendors where they are aggregating our product, our out-of-band product that sits on top of a rack with other devices from companies like Arista and Cisco. Early days, but good trends as I think about the future.

Operator: Our next question comes from Austin Bohlig from Needham.

Austin Bohlig: Congrats on the great results. Saleel, first question for you, and I know it's a little bit fresh. But just following the midterm elections, just curious if you guys have had any conversations with some of your key customers and how that may impact kind of the out year of their order activity?

Saleel Awsare: Yes. Austin, as you said, it's really fresh. And so far, it's been less than a week. So far, so good. As I said, we've got all our orders that I talked about are NCNR. So it's not that they can't cancel those orders, and we are working with them. And about close to half of our customers that we intend to ship to in this fiscal year that we've told you are international ones. And additionally, we've got a long slew of other customers we are working with for defining -- developing solutions for. So all-in-all, I feel good sitting here today.

Second thing, Austin, which is also important, we've brought on some advocacy folks starting October 1 to make sure Lantronix is top of mind irrespective of what's happened in the midterm. And the folks we work with have worked on both sides of the aisle, and you'll be seeing some announcements as we think about the future. So all-in-all, looking good so far.

Austin Bohlig: Okay. And then correct me if I'm wrong, but with this new product with Spotter, it seems like with enhanced capabilities, likely comes with like higher ASPs. So I'm just curious like as some of these key customers ramp, like are you guys expecting these maybe higher-performing modules to accelerate, which will help maybe drive ASPs across the portfolio?

Saleel Awsare: Yes. Thank you for that question, Austin. So our ASPs, and this has been well known for the system on module today, are $300 on the low side as high as $700 on the high side, depending on how many tops and functionality we have. I believe you had the opportunity to see Spotter at AUSA. It's going to be on the higher end because what it does is extend their offering beyond the SOM. It combines compute with other functions on one single board. And in addition, we're also supporting flight control, as I mentioned in the past. With Spotter being the flight computer, all the customer really needs is a drone frame to flight.

So -- and I want to be very clear, Spotter is the first of a planned family of boards that we're going to be making because the reception after AUSA has been tremendous. Customers have been asking us and they want to start early POCs with it. We won't be shipping until end of the calendar year, but we are off to a good start, and we're going to be showing it in its full form at CES in early Jan. So Spotter is going to be a great product, and it's really done with working with our customers, with the key point being how fast we can get them to market.

That's all it's all about, getting our customers into production quickly.

Austin Bohlig: Okay. Okay. And then I guess just last question for you, Saleel. How should we be thinking about the M&A strategy going forward? And if there's any more kind of actionable things in the hopper?

Saleel Awsare: Yes. Austin, so we've been very clear and disciplined about M&A, and I think Brent mentioned that. Two areas, things around edge compute and unmanned systems, and recurring revenue. And those are the things that we are focused on. We have a robust pipeline that we are working through. So stay tuned is all I can say. But again, we have the ability to do some decent M&As in the future.

Operator: Our next question comes from Josh Sullivan from JonesTrading.

Joshua Sullivan: Just how does Lantronix win as drone customers look to consolidate the supplier base? We had this explosion of the supply chain over the last 2 years, but it seems there's a desire by the customer base to consolidate or at least the consolidation phase ahead. If we look at Spotter, some of these other products you're talking about, what are you seeing from customers that are looking to reduce supply complexity and then how you guys get in front of that?

Saleel Awsare: Yes. Josh, our first mover advantage is really helping us. We have become, in my mind, the go-to company for I would say, anything that's got an NVIDIA solution today using our Qualcomm partnership to go after solutions in the market. So -- and a couple of the things that we've done from a -- if you think about how I think about it, we've procured memory. We've procured SOMs. So as the customers want to ramp up and they want to ramp up quickly, they'll be able to work with us for the longer term. Number two, we are not just providing a one-off product.

We are providing you a family of products, anywhere from 8 to 10 TOPS to 100 TOPS with a different variety of ASPs. Number three, with the Spotter technology, that is also going to be a family of flight computer boards or single board computer to go do this. So we are in a good position today. And from our customers' perspective, they really find us to be a partner, not only for the hardware, but a solution view because we are able to solve some of the toughest problems they see like image stabilization, like integrating different cameras, all kinds of different technologies.

So sitting where we are at today, the customers are going to be indexing over to Lantronix even if there's a consolidation. And I believe we come up at the top.

Joshua Sullivan: Then maybe one on the Blue UAS listing for Open-Q. I think you talked about it really driving measurable time lines for design activity. Is there early customer indications on that? Or is there any way to quantify how much speed it actually adds to the process at this point?

Saleel Awsare: So Blue UAS happened about a month ago, Josh, if not a little less than that. The way I'm quantifying it is we have the -- to my knowledge, we are the only Blue UAS certified SOM in the market. And we've got additional Lantronix system on modules that are going through the Blue UAS testing. All the customers that I have spoken to, the minute I tell them Blue UAS, they're like, great. That means it's a vetted approved solution, in addition to our NDAA and TAA really brings us really a customer solution that works. So Josh, I mean, it's going to take a little time. It's only been a few weeks since we've announced it.

But so far, the reception has been very good, taking another barrier away from the customers to make a decision to use Lantronix.

Operator: Our next question comes from Austin Moeller from Canaccord.

Austin Moeller: So my first question here, can you elaborate on the status of the Ukraine sales channel opportunity with partners there like DoD? And if we think about the $15 million to $20 million that you expect from drone-related revenues, is the focus more on Eastern Europe now or just sales for the Pentagon?

Saleel Awsare: So in the Eastern European opportunities, DoD is one of them. There are a few others that we're working with that we will not be naming. But as I mentioned, we've got a lot of customers in EMEA, and they're mainly in Eastern Europe. And they could be in Latvia, Lithuania, obviously, Ukraine, Finland. They are the folks who are moving with a lot of speed. So as I said, about half -- a little less than half the customers now are focused there. And we are working with them very closely, and they have the budgets to move forward.

As for the Pentagon and DOW, we are engaged with our -- some of the largest customers in the drone programs that are out there. So where we sit today, our solutions are being accepted on both sides of the Atlantic Ocean quite well and even across the Pacific in Japan now. So as I think about the future, I believe international becomes more and more important as I think about the future. But the U.S. continues to be an important driver for us also.

Austin Moeller: Okay. And what's your view of the remote access power over Ethernet modem opportunity with government agencies and government contractors in this new Congress?

Saleel Awsare: Yes. So we believe that the budgets are getting -- will be approved. And a lot of these customers that we go, Austin, as you and I have spoken are in the federal realm, so like the FBI, the National Geospatial, NSA. And we haven't seen any slowdown in the budget perspective as of yet. And as you know, this quarter is a busy quarter for that business. So we'll continue to see that as we move forward. I don't anticipate an issue as of today.

And to add a finer point, as you know, we hired as of October 1, the advocacy group, primarily to make sure people understand that if there is a choice between an international PoE switch or a device server or a Lantronix, which is a U.S.-based company, they should go with the U.S.-based company. So that's one of the reasons we've hired some advocacy. So we'll be doing some of that work starting October 1.

Operator: Our next question comes from Jaeson Schmidt from Lake Street.

Jaeson Schmidt: Just curious if you could discuss the Tier 1 MNO customer and how we should think about that opportunity going forward? Or if it is an opportunity here in fiscal '27?

Saleel Awsare: Yes. The Tier 1 MNO, as we've spoken in the past, Jaeson, we have shipped the substantial majority of the units probably 3 or 4 quarters ago, 2 or 3 quarters ago. And they're in the deployment phase. The good news is our recurring revenue is increasing as they deploy more and more. We are also engaged with them on an additional design, which will take a little bit while. But again, really to their specific spec -- specifications that could increase the opportunity size for us as they continue to deploy not only the one that we have, but also looking at this new design that we are working with them on it.

So we're not going to see the same amount of revenue we saw in fiscal '25 and '26 and '27, but we are definitely engaged with them and the software or the SaaS revenue for them is starting. Overall, as you can see, the company has been growing nicely over the last 4 quarters or so.

Operator: And our next question comes from Christian Schwab from Craig-Hallum.

Benjamin Taxdahl: It's Ben Taxdahl on for Christian. Great quarter. My first question is just on the Plymouth facility. We were just talking about the ASP and Spotter and such. So can you just break down what current capacity looks like? And if you have a target of unmanned systems, maybe on like a monthly or yearly basis, that would be helpful.

Brent Stringham: Yes, Ben, on the Plymouth facility, we've -- as we've spoken previously, we do have a good amount of space there that allows us to build up some equipment and do some substantial transformation of some of our products that allow us to get a made in America stamp on them or a country of origin America as we bring in some of the materials and things for SOMs. We don't have a specific number or capacity targets necessarily, but we feel good about the size of the facility and the equipment that we brought in over the last quarter or so.

It's not a substantial investment dollar-wise either, and we're pretty much ready to go going forward here starting into Q2 as we've discussed previously.

Saleel Awsare: And Ben, our facility size is 65,000 square feet. So we've got room to expand as we bring Spotter, the SOMs, and even out-of-band and some of the switches and everything else. So we're going to -- we're growing nicely into that facility.

Benjamin Taxdahl: That's helpful. And then, Brent, just a last question for you. With the gross margin, we're kind of setting a higher base here. Is that mainly due to the recurring business? And then how much of this higher base is being offset by some of the component costs?

Brent Stringham: Yes. As we mentioned, the addition of the Nero acquisition with the recurring revenue and the higher margin profile there definitely helped this first quarter. It was only a partial quarter of revenue that we saw in Q1 with the acquisition, but expect a full quarter here in the December quarter that we're in. Component costs such as memory and others continues to be a challenge, as I mentioned in the script. But we've been largely able to pass those costs on to our customer chain. We continue to work through supply issues there.

We think, overall, our margin profile, as we've disclosed in the kind of the mid-40s is where we still feel comfortable company-wide, despite the mix that we may see quarter-over-quarter.

Benjamin Taxdahl: And then, Saleel, if I could just squeeze one more in here. How many of the 29 customers are participating in the Drone Dominance competition? And what gauntlet would it be?

Saleel Awsare: Yes. So the gauntlet that got released, I think, a month ago or so, was Gauntlet II. And being very crisp on this. On the Gauntlet II, there were 2 areas then, the deep strike and closed quarters. We are working with 1 in the deep strike and 2 in the closed quarters. I'm just being very transparent and clear with you guys. And there are 5 on each side, if you remember. A couple of them were from Ukraine, so -- and a couple of them are U.S. Thank you, everybody. So thank you, everyone, for your questions and joining us today. We appreciate your continued interest in Lantronix and your support.

As we progress through fiscal 2027, our growth opportunity is coming into sharper focus. And what we are seeing extends well beyond drones. We are translating our success in unmanned systems into new opportunities across computer vision, robotics and other intelligent edge applications. With growing traction across these markets and continued disciplined execution, we remain confident in our ability to deliver double-digit revenue growth for the full year. Thank you again, and we look forward to updating you on our progress.

Operator: And that concludes today's conference call and presentation. We do thank you for attending. You may now disconnect your lines.

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