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Welcome to the Lantronix Q3 2026 earnings call. 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. 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 Salil.

Thanks, Brent, 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 remains strong at about 43%, supported by a richer mix of higher margin products and recurring revenue across the portfolio. These results reflect a disciplined execution and continued momentum across the business. Turning to our results. We continue to see strong demands 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 mode 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. 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 wide range of Edge AI and Industrial IoT applications. MediaTek's SoCs deliver 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 continued to build momentum during the quarter. We significantly expanded the number of OEMs we engage with, and now have shipped product to over 12 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 remarkable real-world performance.

As the United States Department of War continues to increase its investment 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 Umak's flight components to help accelerate deployment timelines, 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-$14 million.

Our team is executing with urgency, and we continue to see a clear path for unmanned systems to represent 15%-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%-6% to 8%-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, 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 provide 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 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 Gateways, and our Edge AI solutions for autonomous systems. We saw strong interest in both our drone reference platform and SmartSwitch.ai, 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 perimeter 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 3rd quarter financial results and some of the key drivers behind our performance. After which, I'll provide our outlook for the 4th 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 NDAA 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. 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-$33 million.

Non-GAAP EPS is expected to be in the range of $0.03-$0.05 per share. 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%-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. 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.

We have the first question from the line of Scott Searle from Roth Capital. Please go ahead.

Thanks for taking my questions. Hey, Saleel, maybe just to jump in on the drone front. You know, it's a big range of $10 million-$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. As we're looking out to fiscal 2027, looks like you're expecting the business to nearly double somewhere in the ballpark of $20 million-$30 million. I'm wondering if you could talk a little bit about, you know, 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?

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-$7 million range. 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 it and we are seeing growth. We are also seeing early shoots on unmanned on the ground and in the sea. All those areas, we do that.

To your point, we expect to grow the business, you know, double the business into fiscal 2027, sitting where we are at today with the list of customers we are working with, the programs that we've 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. Really, a very positive picture as I look forward for the next 12 months.

Great. Very helpful. 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. 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? Thanks so much.

Yeah. 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 is strong in Asia. They're a big partner for us. Additionally, it's gonna go into Europe, and Asia, which is the focus now. They felt the capabilities Lantronix brings with what we have done in our edge compute and Edge AI solutions, they thought was a good partner for us. I expect design-ins and design wins coming up this calendar year. Brent, go ahead.

Yeah. Scott, I think you're asking about the kind of the mix of federal in our IoT systems business. You know, it does fluctuate from quarter to quarter, but, you know, right around 15%-20% is kinda where we've traditionally seen that mix of business as a percentage of that segment that we disclose.

Great. Thanks so much. I'll get back in the queue.

Thank you, Scott.

Thank you. We have the next question in the line of Austin Beaulac from Needham. Please go ahead.

Hi, guys. Thanks for taking my question, and congrats on the great unmanned system results. Just wanted to piggyback off the 2027 question. 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, you know, huge majority of our revenue is domestic. Our first international design win, we shipped to Evolve Dynamics out of U.K. They won a U.K. defense contract, we are involved with that. What I'm uber excited about is what's happening in Ukraine. 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 gonna be at XPONENTIAL next week, which is a big drone show. Have a bunch of meetings with some of the senior executives who got companies out of Ukraine, the ability and capability they're gonna bring is also gonna be phenomenal. Autonomy is key and edge compute is key, we enable both of that.

I don't have a specific number for how much international is gonna be for fiscal 2027, but that's definitely a big growth vector for us.

Gotcha. And then I guess kind of a follow-up based on that. Like with the wins that you currently have in this double guide, 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?

Yeah. 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. As we go through the year, we keep on updating you as we see that. Definitely there is an opportunity to go up from here.

Okay. 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 two 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. 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. Our solution, the ability to run models and AI on it is very important. For us, it's a early start, we've got ways to go from winning customers, but our solution is working out really well. That's another big vector of growth for us.

All right. Well, keep up the great work, guys. Thanks for taking my questions.

Thank you, Austin.

Thank you. We have the next question on the line of Austin Moeller from Canaccord. Please go ahead.

Hi, good afternoon. 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?

Yeah. You know, 12 vendors got picked in the 1st tranche of DDP. We know who they are. We are working with some of them. I believe it's in the May, sorry, in the September timeframe, Austin, if I'm not mistaken, the 2nd tranche. We are engaged with a bunch of customers in that space, all requiring the need of edge compute and autonomy. Our device and our module is gonna be well-suited for that. As for the IBAS program, which is gonna, you know, first of all, we are also going to be having our 1st Blue UAS solution ready this quarter. That's another big plus we've got in the works. We'll be 1 of the 1st ones with a Blue UAS compute module for this market.

We are getting ourselves more and more integrated with the Department of Defense and its suppliers as they move forward.

Great. If we look at the fiscal year 2027 budget request, how does the $54.6 billion funding request for the Defense Autonomous Warfare Group, how should we think about backlog expansion for Lantronix over the next 12-24 months if that is passed by Congress over the summer?

Austin, the number is so large, and that's what I'm so excited about. From your perspective, it's a game-changing amounts 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. All of these solutions are going to need a compute platform, and we are right there. I am ready as this expands. We've got a bunch of inbounds now from customers wanting to qualify us, get our dev kit, do POC. As I said, the team is hustling with a sense of urgency. This is extremely exciting times at Lantronix.

I don't want to put a number out there, but it's game-changing amounts of dollars, so you can assume that. In the past, as we said, our ASPs are between $400-$700, so you can back the math into $12 million. I mean, it's a logarithmic change if it all goes through.

Excellent. Exciting news. I'll pass it back there. Thank you.

Thank you. We have the next question on the line of Christian Schwab from Craig-Hallum Capital Group. Please go ahead.

Hey, guys. I just have 1 quick question. Of the recent Drone Dominance that you referred to, you know, how many of the, you know, top 10 people on that list do you think could you tell us are current customers or prospective customers?

I don't wanna go into the numbers, Christian, because some of them we've got NDAs with, and I'm not giving you any names. 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. I feel good about where we are at with the DDP. By the way, the Drone Dominance Program, the Department of Defense has increased the ASP on it, giving more room for these guys to add additional AI, machine learning, and compute in their product. We are well-situated as I look at it.

Great. No other questions. Thank you.

Thank you, Christian.

Yeah. Thank you. We have the next question from the line of Kevin Cassidy from Rosenblatt Securities. Please go ahead.

Hi. Yeah, thanks for taking my question. Congratulations on the great progress. I was just along the lines of, you know, what are the key factors that you need to expand your gross margins? Is it the increasing the technology stack? Is it the volume? You know, what are the key factors or is there a factor to expand gross margin?

Let's put it in perspective, Kevin, as I think about it. Literally for, you know, Q4 of 2024, our gross margins were in the high 30s. We've been in the 43-45 range for the last couple of quarters, last three quarters. We made good progress towards improving the gross margin. I'd like to start moving at about 45%. How are we gonna do it? One is software and services, which was 5%-6% a few quarters back, is now 8%-9% of the revenue. Going up to 10%-12% pushes the gross margin up. As importantly or more importantly, on our drone business, which we said, you know, we 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. Running more of beyond just camera integration now to flight control, to other technologies. To your point, moving up the tech stack and providing a platform for our customers.

Great. Thanks for that detail. That's good. You know, 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, 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. That's number 1. Number 2, you hit it on the allowing us to play in some of the more price-sensitive markets if we need to be. It kind of covers both of that.

Okay. Understood. Great. Thank you.

Thank you, Kevin.

Thank you. 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 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 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. All participants will be in a listen-only mode. After today's presentation, to ask a question, please press star then one on a touch-tone phone. 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-Ks and 10-Qs. Lantronix, Inc. 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 MER smart grid customer Grid Expertise. Profitability remains 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 translate 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 suggest 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 the 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, Inc. 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, Inc. operates at the intersection of payload, compute, and connectivity—three of the highest value and least easily substituted layers of modern unmanned systems—where we believe value creation and customer relationships compound over time. Currently focused 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 multi-year engagements 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 builds for the Teal platform and follow-on commitments that reinforce Red CAT's confidence in our capabilities. We are also partnering on 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 OpenCue system and 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 systems. In December, our Edge AI solution was selected by Trillium Engineering to power Gimbal Imaging Systems deployed across ISR, infrastructure inspection, and Wi-Fi 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 Safeco Group. Together, we are helping build an integrated edge intelligence ecosystem by combining SafePro'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 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, 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 two 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 systems and opportunities comparable in size to the generator deployment we support today. This program represents a step forward in building recurring revenue and scaling into a repeatable multi-year deployment model. Over the last twelve 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 achievable path to more than doubling that mix over the mid-term by layering software analytics and AI pipeline orchestration into hardware deployments already in the field. At CES, we debuted Smart Edge AI and Smart Switch 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 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, Inc. 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.

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 Grid Expertise, we experienced year-over-year growth driven by strength in embedded compute, including our AMD 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 three-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 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 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 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 $0.04 per share. I'll now turn the call back to Saleel for closing remarks.

Thanks, Brent. As we move through 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're increasingly operating from a position of strength. There are three 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 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, Inc. 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.

We will now begin the question and answer session. To ask a question, if you are using a speakerphone, please pick up your handset before pressing the keys.

The first question today comes from Scott Searle with ROTH Capital. Please go ahead.

Hey, good afternoon. Thanks for taking my questions. Nice to see the drone momentum starting to accelerate a little earlier than expected. Maybe quick to kick off, so to calibrate on IoT systems and 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 2027 raising the guidance for fiscal 2026, but in 2027 I thought you said 15% to 20% of the mix, which gets drones over $20 million in absolute dollars in fiscal 2027. So we 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? Thanks.

Scott, thanks for the questions. Let me start with the drone section first, because you've got a few things there, 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 to $10 million for fiscal 2026, which ends in June. We have now moved it up to $8 to $12 million in fiscal 2026. 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 2027, you've done the math right. It should be 15% to 20%, so it could be anywhere from, you know, $20 million to $30 million range give or take. So that's how big a 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 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 with 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 an 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're 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. This is probably one of the more complex ones where they have six to eight 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 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 eighteen months. So they only did 30k 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. I happen to know a lot of the folks on the list. So I hope I covered all the drones questions. I'm going to have Brent take the IoT systems a little bit into detail. But 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.

Yeah. Scott, to build on that real quick on some of our IoT box products. You know, 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 in that, you know, that summer quarter ending in September. So some of that was expected in terms of, you know, sequential decline. And, you know, we also saw a pretty meaningful ramp in our Tier 1 MNO from the prior two quarters as we shipped and deployed, you know, a big number of those boxes to them. And so here in December, we, you know, we are still shipping, but the program is nearing its endpoint on the rollout. I think those two things are kind of contributing to that category being down quarter over quarter.

Great. Thanks so much. Very exciting news about the drones. Get back in the queue. Thank you.

Thank you, Scott.

The next question comes from Christian Schwab with Craig Hallum. Please go ahead.

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

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, you know, quite nicely as we do more integration. 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're 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, you know, we kind of in essence gave guidance for what we think the drone business can be in fiscal year 2027. 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, Lantronix, Inc. grew 17% year-over-year when you remove the Grid Expertise. And growth 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 2027 to be a good year. The numbers that the analysts have us at are what we're working through. And we're not allergic to what the numbers are out there right now.

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

Yes. Christian, on the near term next quarter or two, 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 and Q4, the range I just mentioned is probably a reasonable estimate.

Okay. That's fantastic. Congrats to other questions. Thank you.

Thank you, Christian.

The next question comes from Jaeson Schmidt with Lake Street. Please go ahead.

Hey, guys. Thanks for taking my questions. Just curious if you could quantify what the government shutdown or that impact was in December, obviously, as you noted, causes cost and 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 is 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 expected 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. You know, 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 memories, great question on the memory shortage, the way, Jaeson. Everybody's 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 the supply that we have prepared for them. They are working with us closely on that. And we don't see a big issue in the short term to even the midterm. And longer term, I mean, we gotta think about all of that. But 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 own 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 two, 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 you know, that gives you an understanding that we're building a moat around our business. Right? That's how the gross margin is improving. And we gotta keep working it, but I'm pleased to see the upward progress that the team has made.

No. Gotcha. Thanks a lot, guys.

The next question comes from Austin Moeller with Canaccord. Please go ahead.

Hi, good afternoon. Nice quarter.

Thanks, Austin.

Just my first question, now the defense budget is passed and the FCC has banned new Chinese drones. 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 some?

Yes. So on the drone dominance and the FCC ruling on December 23, it 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, you know, 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, Grimsy. We worked with SafePro, and, you know, 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, you know, expectations 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 and 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 you know, 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?

Yeah. We are looking at M&A really in two areas as I think about the company. Looking at subsystems like should we be now we're working with some companies that do a lot of the drone manufacturing already. But can we integrate more into our SOMs, we add a software layer around it? SPAR is a perfect example where we partnered with somebody who's putting their IP onto our SOM. So M&A is going to be an important feature that I think about the future as we create more of an ecosystem and a platform play, Austin. So you know, 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 ARR and software to be a larger portion of the company. So both of those areas are areas we're focused on. And that'll get this company to higher gross margins, higher software revenues, higher stability as I think about it.

That's very interesting. Exciting time in the drone industry. Thanks.

Thank you, Austin.

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, Inc. 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.