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Date

May 6, 2026

Call participants

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

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Takeaways

  • Revenue -- $30.2 million, with both sequential and year-over-year growth driven primarily by Embedded IoT Solutions and unmanned systems programs.
  • Embedded IoT Solutions Revenue Growth -- Up 22%, directly supported by "extremely robust growth" in unmanned systems.
  • Gross Margin (GAAP) -- 43.1%, "roughly flat compared to a year ago," indicating sustained margin improvements from a richer mix of higher margin products and recurring revenue.
  • Gross Margin (Non-GAAP) -- 43.6%, described as "slightly down compared to a year ago" as a result of revenue mix, but remains above 43%.
  • GAAP Operating Expenses -- $14.1 million, "nearly flat with the prior quarter and down approximately 12%" from $16 million in the same quarter the prior year.
  • GAAP Net Loss -- Improved to $1.2 million or $0.03 per share, up from a net loss of $3.9 million or $0.10 per share in the same period last year.
  • Non-GAAP Net Income -- $1.5 million or $0.04 per share, "consistent with the prior quarter and an improvement from the $0.03 per share in the year ago quarter."
  • Cash and Cash Equivalents -- $23.5 million, up $500,000 sequentially and $3.5 million year over year.
  • Operating Cash Flow -- Positive, at nearly $2.2 million for the quarter and $7.9 million fiscal year-to-date.
  • Net Inventories -- $26.4 million as of quarter end, compared to $27.1 million in the prior quarter and $28.2 million in the year-ago quarter, reflecting disciplined inventory management.
  • Debt Balance -- $8.7 million, reduced by $1 million in the quarter and $4 million over the prior twelve months.
  • Net Cash Position -- approximately $14.8 million as of March 31, 2026.
  • Q4 Revenue Guidance -- $29 million to $33 million projected for the next quarter.
  • Q4 Non-GAAP EPS Guidance -- $0.03 to $0.05 per share expected for next quarter.
  • Drone Revenue Outlook (Fiscal 2026) -- Raised to a range of $10 million to $14 million, with management stating confidence in the $12 million midpoint, up from prior guidance of $10 million.
  • Projected Drone Revenue Share (Fiscal 2027) -- Unmanned systems revenue expected to "represent 15% to 20% of overall revenue."
  • Software and Services Mix -- Expanded from 5%-6% to 8%-9% of total revenue over the last two quarters, with a "clear path of sustainably reaching double-digits over the midterm."
  • New Strategic Partnerships -- Announced collaboration with MediaTek for Genio SoCs, extending platform offerings with strong AI performance and coverage of industrial/commercial Edge AI applications.
  • OEM Engagements -- "significantly expanded" OEM engagement, with shipment to "over a dozen" partners and recent design wins including a U.S. body camera manufacturer and a payload detecting hostile drone operators.
  • International Development -- First shipment to Evolve Dynamics (U.K.) and growing engagement with Red Cat in NATO and Asia Pacific, as well as initial work with multiple Ukrainian drone manufacturers.
  • Drone Reference Platform and Counter-UAS Solutions -- Demonstrated adoption in rapid deployment and "counter drone" use cases; highlighted as supporting development cycle acceleration.
  • Federal Spending Dynamics -- "slower federal spending and extended procurement cycles, particularly with our core enterprise and networking products," noted as a timing dynamic, not demand-driven, with margins in these lines "well above our corporate average."
  • Leadership Appointment -- Sano Marsiano named Vice President of Operations in March, bringing extensive experience in "global operations, manufacturing and quality."
  • Event Marketing -- Participation at ISC West 2026, with strong interest in SmartSwitch.ai and SmartEDGE Gateway for security and surveillance customers; growing shift observed toward drone-based surveillance solutions.

Summary

Lantronix (LTRX 13.88%) reported growth in both revenue and profitability metrics, driven by the Embedded IoT Solutions segment and expanding unmanned systems programs. Management raised their fiscal 2026 drone revenue outlook and confirmed growing recurring revenue from software and services. The company advanced its platform with a multi-silicon strategy, notable new OEM engagements, and initial international design wins. Operating momentum was sustained through disciplined expense control, improved net cash, and the addition of a new operations executive. Market opportunities were cited in defense, critical infrastructure, and international expansion, alongside product innovations for counter-drone and edge AI use cases.

  • Saleel Awsare stated, "we are once again increasing our fiscal 2026 drone outlook now to a range of $10 million to $14 million," indicating ongoing upward revisions in the company's expectations for unmanned systems revenue.
  • Brent Stringham highlighted, "Our current debt balance is $8.7 million after having paid down about another $1 million during the current quarter," reflecting continued deleveraging of the balance sheet.
  • "Over the last 2 quarters, we have expanded our software and services mix from 5% to 6% to 8% to 9% of total revenue," according to Saleel Awsare, supporting progress toward a more recurring-revenue model.
  • The company described a "broader shift towards trusted platforms" as U.S. and international customers seek NDAA-compliant solutions, with new design wins validating Lantronix’s platform positioning.
  • The addition of the MediaTek Genio family as a second major SoC partner enables a wider customer and geographic reach, serving both price-sensitive and advanced industrial applications.

Industry glossary

  • SoC (System on Chip): An integrated circuit that consolidates all components of a computer or electronic system, enabling application-specific processing functions within compact devices such as drones or IoT equipment.
  • SoM (System on Module): A compact module including an SoC, additional memory, and supporting hardware, delivering configurable computing power for embedded solutions like edge compute in unmanned systems.
  • NDAA-compliant: Adherence to requirements of the U.S. National Defense Authorization Act, often referencing restrictions on the use of certain foreign-sourced technologies in government or defense procurements.
  • TAA-compliant: Fulfills standards of the U.S. Trade Agreements Act, typically required for government contracts, ensuring products are manufactured or substantially transformed in approved countries.
  • ARR (Annual Recurring Revenue): The amount of recurring subscription or service revenue that a company expects to generate annually from customers, used as a key measure in SaaS and services-based businesses.
  • Blue UAS: A Department of Defense initiative to certify drone solutions for trusted use with approved U.S. government agencies, emphasizing security, supply chain integrity, and compliance.
  • Counter-UAS: Technology and solutions designed to detect, track, and neutralize unauthorized or hostile unmanned aerial systems (drones), often within defense or security contexts.
  • Drone Reference Platform: A standardized development kit or architecture providing essential hardware and software for accelerated design, testing, and deployment of unmanned aerial systems.

Full Conference Call Transcript

Saleel Awsare: 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?

Brent Stringham: 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.

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

Scott Searle: 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?

Saleel Awsare: 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.

Scott Searle: 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?

Saleel Awsare: 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.

Brent Stringham: 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.

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

Austin Bohlig: 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?

Saleel Awsare: 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.

Austin Bohlig: 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?

Saleel Awsare: 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.

Austin Bohlig: 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?

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

Austin Moeller: 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?

Saleel Awsare: 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.

Austin Moeller: 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?

Saleel Awsare: 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.

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

Christian Schwab: 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?

Saleel Awsare: 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.

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

Kevin Cassidy: 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?

Saleel Awsare: 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.

Kevin Cassidy: 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?

Saleel Awsare: 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.

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

Saleel Awsare: 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.

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