It seems the hype of the Internet of things (IoT) has been growing and growing due to the potential for the IoT to bring profound changes to many industries and devices. For those of you that don’t know, the IoT is basically connecting previously unconnectable devices to the internet so information from those devices can be aggregated and analyzed. This ability to collect and analyze information from devices will allow more automation, improve efficiency, allow the ability to create better designed products, and other innumerable benefits.
The projected compound annual growth rate for IoT devices and software is predicted to be from mid-20% to 30%-plus for the next several years. It seems projections for overhyped industries should be taken with a grain of salt, but it is not hard to imagine there is going to be tremendous growth for the IoT due to the benefits it will bring.
One sector of the IoT that is projected to be the largest is the enterprise IoT, and one of the industries in the enterprise IoT that is projected to see the largest investment is the industrial sector. Lantronix (NASDAQ:LTRX) is a microcap technology company that provides products that enable the IoT for the industrial sector as well as other sectors: healthcare, security, energy, transportation, and IT/data centers.
Lantronix currently derives about 75% of its revenue from what is classifies as IoT. This makes Lantronix one of the few “pure play” IoT stocks. The company makes IoT building blocks that they sell to OEMs. The OEMs then incorporate the building blocks into their IoT products. Lantronix also makes IoT gateways that allow devices to connect to the Internet. Lantronix has many case studies on their website detailing how OEMs integrate their IoT building blocks and gateways into their products.
In addition, Lantronix is currently working on a software program called Mach10 that is in Alpha stage. Mach10 is being designed to enable OEMs to quickly and profitably deliver web-scale IoT applications and services. It was mentioned during a recent investor presentation that they plan to deploy Mach10 to the marketplace at the end of the year. Mach10 will allow Lantronix to move up the IoT food chain and potentially increase their IoT hardware sales by providing a more complete IoT solution. IoT software is projected to have a bigger and more profitable share of the IoT market than IoT hardware. If Lantronix can develop an attractive software application for the IoT sector this will definitely help their growth and profitability in the future.
The second biggest source of revenue for Lantronix, at around 20% or so, is their IT management products which have been increasing market share in the past few quarters. In particular their SLC8000 has been gaining traction. The SLC8000 allows IT personnel to remotely access IT equipment in data centers. It was mentioned on the recent investor presentation that the IT management sector is a 100 – 200 million market that is not really growing. Therefore, there has not been a lot of innovation in IT management products by their competitors. The SLC8000 is a newer product compared to their competitors and is starting to steal market share. The IoT side of Lantronix is the more compelling side of the business but if the IT management side continues to gain market share this will be a bonus.
A third segment of Lantronix’s revenue is discontinued products listed as “other.” This includes revenue from discontinued products such as their xPrintServer. The revenue from this segment continues to decline as these products are phased out.
The current CEO of Lantronix, Jeffrey Benck, joined Lantronix on Dec. 7, 2015, and immediately focused the company on IoT. Since that time, the company’s IoT revenue has been steadily growing. On Feb. 10, 2016, Sanjeev K. Datla jointed the company as CTO. Sanjeev has a software background and should be instrumental in the development of Lantronix’s MACH 10 software program. Recently the company hired Intel veteran, Shahram Mehraban, as vice president of marketing to help drive IoT growth. The management team of Lantronix is keen to drive growth of IoT devices and software.
Since the appointment of Jeffrey Benck in Q2 2016, the company’s financial metrics (revenue, gross margin, net income, and profit margin) have been steadily improving. Refer to the table below.
|
Q1 16 (10/29/15) |
Q2 16 (2/16/16) |
Q3 16 (4/27/16) |
Q4 16 (8/23/16) |
Q1 17 (10/27/16) |
Q2 17 (1/26/17) |
|
|
Revenue (mils) |
10.57 |
9.54 |
9.96 |
10.52 |
10.94 |
11.22 |
|
IoT |
7.88 |
7.09 |
7.57 |
8.03 |
7.87 |
8.30 |
|
IT Management |
1.35 |
1.32 |
1.25 |
1.59 |
2.44 |
2.27 |
|
Other |
1.34 |
1.14 |
1.14 |
0.90 |
0.63 |
0.65 |
|
Gross Profit (mils) |
5.07 |
4.59 |
4.78 |
4.94 |
5.70 |
5.81 |
|
Gross Margin |
47.97% |
48.11% |
47.99% |
46.96% |
52.10% |
51.78% |
|
NI (mils) |
-0.33 |
-0.93 |
-0.46 |
-0.25 |
-0.10 |
0.04 |
|
EPS (diluted) |
-0.02 |
-0.06 |
-0.03 |
-0.02 |
-0.01 |
0.00 |
|
Profit Margin |
-3.12% |
-9.75% |
-4.62% |
-2.38% |
-0.91% |
0.36% |
|
Diluted Shares (mils) |
15.10 |
15.16 |
15.23 |
15.55 |
17.25 |
17.70 |
Also, the company recorded its first quarter of GAAP profitability in 10 years last quarter. I think it is reasonable to speculate that these trends will continue in future quarters as the adoption of the IoT continues.
However, it’s possible the sequential improvement in the company’s financial numbers the past five quarters looks better than it actually is. There was a pretty significant decline in all of the company’s financial metrics from Q1 2016 to Q2 2016 when the current CEO took over. For instance, overall revenue in Q1 2016 was 10.57 million and IoT revenue was 7.88 million. Revenue in the most recent quarter, Q2 2017, surpassed both of those metrics but overall revenue growth is only 6.1% and IoT revenue growth is only 5.3% since Q1 2016. If the company really is experiencing organic revenue growth this will become more apparent in future quarters as last quarter’s revenue was a high water mark for the past couple of years.
I speculate the projected growth in the IoT sector will continue to propel Lantronix in the future but if the improvement the last several quarters is more of a mirage than real growth this will obviously not bode well for the company’s stock price. Another potential thing to consider with Lantronix is that it’s a microcap with a low float, so there could be large stock swings in the company’s stock price in either direction depending on how the growth story plays out.
The adoption of IoT in the industrial sector is still in its infancy so I think it is a reasonable to assume that as IoT adoption increases over the next several years that Lantronix will be able to continue to grow revenues and become more profitable. It will be an added benefit if Lantronix’s IT management products can continue to grow market share. In addition the MACH 10 software program is a wild card that may allow the company to move up the IoT food chain and propel future growth.
Lantronix has a lot of positives and momentum going for it, and if the company can come close to matching the projected growth rate of the IoT industry, the stock price will assuredly go up.
Disclosure: I am/we are long LTRX.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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