On Wednesday, Lantronix (NASDAQ:LTRX) discussed fourth-quarter financial results during its earnings call. The full transcript is provided below.
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Summary
Lantronix reported a strong finish to fiscal 2026, with an 8% year-over-year revenue growth to $31.2 million and a 300% increase in non-GAAP EPS to $0.04, driven by a 34% growth in embedded IoT solutions, particularly in the drone business.
The company's unmanned systems revenue reached $12.6 million, boosted by regulatory shifts favoring domestic suppliers, and new partnerships in Europe and Australia, expanding its international presence.
Lantronix acquired Wesima Networks' industrial IoT business, enhancing its software and services revenue mix to about 10%, aiming for a more predictable, higher-margin business model.
For fiscal 2027, the company expects revenue of $31 million to $33 million for Q1 and anticipates unmanned systems to represent 15% to 20% of total revenue, with continued focus on expanding its drone market and software services.
Gross margins improved to 44.1% in Q4, with expectations to maintain or slightly improve these levels in fiscal 2027 despite potential pressures from component costs.
Lantronix ended fiscal 2026 with over $60 million in cash and no debt, providing flexibility for strategic M&A and growth initiatives.
Full Transcript
OPERATOR
Good day and welcome to the Lantronix 2026 fourth quarter results conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation there will be an opportunity to ask questions. To ask a question you may press star then one on a touch-tone phone. To withdraw your question please press star then two. Please note this event is being recorded.
I would now like to turn the conference over to Mr. Brent Stringham, Chief Financial Officer. Please go ahead.
Brent Stringham, Chief Financial Officer
Good afternoon everyone and thank you for joining our fiscal fourth quarter earnings call. Joining me today is our President and Chief Executive Officer, Salil Alsaray. 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.
Salil Alsaray, President and Chief Executive Officer
Thanks, Brent, and thank you everyone for joining today's call. The fourth quarter marked a strong finish to fiscal 2026. Over the course of the year we transformed our operating model, strengthened our balance sheet and built the foundation for profitable growth. We are now seeing the tangible results of that work. Our continued strong execution drove 8% year over year revenue growth to $31.2 million and a 300% increase in non-GAAP EPS to $0.04.
Both metrics were within our guidance range. Importantly, our embedded IoT solutions, which includes our drone business, grew 34% year over year. Gross margins remained strong at about 44%, reflecting our team's disciplined execution as we accelerate momentum across the business. Turning to the broader operating environment, starting with unmanned systems, fiscal 2026 was the year our drone opportunity progressed from early validation to a meaningful growth engine for Lantronix.
We set the foundation in Q4 last year when we secured our first drone win with RedCat powering Teal Drone's Black Widow platform for the U.S. Army's Short Range Reconnaissance Program. As a Blue UAS–approved platform, this was a rigorous qualification process and we believe we won the program because of our deep camera expertise and years of experience in camera tuning, sensor fusion and the complex software integration required for military-grade imaging.
Our status as a North American supplier was also a key factor. With NDAA and TAA compliance now table stakes for defense programs, a trusted domestic supply chain mattered as much as our deep technical capabilities. That win came against a backdrop of record defense funding, with the U.S. Department of Defense earmarking over $13 billion for autonomous systems in 2026 alone, alongside clear and growing requirements for secure U.S.-made technology.
From there we built on the early momentum, adding several customers including Sightline, Trillium Engineering and others to our drone roster. Over the course of the fiscal year, we scaled our broader unmanned systems engagements from roughly 10 in Q1 to over 30 today. That growth accelerated following a major regulatory shift in December 2025 when the FCC restricted China-based DJI, historically the dominant drone supplier, from introducing new products into the U.S. market. The move created a significant tailwind for domestic trusted supply platforms like ours and was soon followed by meaningful U.S. government funding to accelerate the deployment of domestic drone technologies. And just a couple weeks ago that regulatory momentum was further reinforced by the action from Washington. The President signed a Section 232 proclamation imposing new tariffs on foreign-made drones and components aimed at reducing reliance on foreign suppliers and building out domestic manufacturing capacity.
While the FCC's action in December focused on restricting new foreign-made drones and components from entering the market, this latest action is broader, directly targeting the economics of importing drones and related components across the existing market. This is another clear tailwind for domestic, NDAA-compliant suppliers like Lantronix, and we expect it to accelerate the shift towards domestically manufactured alternatives. Just as important, we are seeing the industry focus shift from simply building more drones to making drones increasingly autonomous.
At the scale governments and commercial operators envision, there simply won't be enough trained pilots to operate every drone. And training new operators takes time. This makes autonomy essential, and autonomy requires powerful AI compute at the edge, what we call physical AI. And that's exactly where Lantronix fits. Our edge compute platform enables the onboard intelligence that allows drones to perceive, navigate and execute missions autonomously in GPS-denied environments, positioning us at the center of this long-term transition.
Against this backdrop, we delivered $12.6 million in unmanned systems revenue in fiscal 2026, above the midpoint of our most recent guidance range. Importantly, this momentum extends beyond defense. We are also seeing growing adoption across commercial, industrial, agricultural, drone-as-a-first-responder and counter-UAS applications, reinforcing the breadth of our unmanned systems opportunities. Our international expansion is also progressing well, including two recent partnerships we formed in the unmanned systems market.
The first is with DoD Solution, an Estonian-Ukrainian developer of onboard autonomy technology for drones and other unmanned systems. By combining Lantronix edge compute solutions and engineering expertise with DoD Solution's Aura autonomy platform, we are supporting a range of demanding applications. This partnership also strengthens our presence in Europe and Ukraine where demand for our solutions continues to grow. Our second partnership is with AVT Australia, a CACI company that develops gimbal camera payloads for drone manufacturers.
AVT has designed its payload around our system and module platform which is purpose-built for high-performance AI and robotics applications. Together, these partnerships demonstrate Lantronix's growing presence across the global unmanned systems ecosystem. Additionally, we recently announced a collaboration with Swarmer, a U.S.-based drone autonomy software company. Together we are developing a production-ready compute platform that combines Swarmer's combat-proven software with roughly four times the onboard processing power focused on Group 1 unmanned aerial systems.
This collaboration highlights the strength of our hardware, software integration and engineering services while creating a path to long-term production revenue as Swarmer scales across U.S. and allied defense programs. With that, let me turn to our IoT system solution business. After navigating several quarters of federal government shutdowns which created extended procurement cycles, we are beginning to see conditions improve. Q4 revenue grew 16% sequentially driven by a recovery in our out-of-band management portfolio, strength in network switches and early signs of stabilization in our federal business.
Within out-of-band management we are seeing growing traction in the data center space as edge compute and AI infrastructure deployments accelerate the need for remote monitoring and control of critical IT and data center equipment. One proof point of this is SambaNova Systems, where our out-of-band solution is deployed as a part of their DataScale platform, a purpose-built AI infrastructure rack for large-scale inference and training workloads. We provide dedicated remote access to the critical networking and compute infrastructure within that platform.
Moving to our critical infrastructure monitoring vertical, just over a month ago, we took another step forward in our platform strategy by acquiring Wesima Networks' industrial IoT business, including its Nero global tracking platform, for $11.7 million, which closed this month. The tuck-in acquisition adds approximately $5 million in annual revenue with the majority coming from ARR and gross margin in the mid to high 60s range. Based on the purchase price relative to the asset's financial profile, we view this as a highly favorable transaction and one that is immediately accretive to earnings.
Just as important, it advances a strategy we've been executing deliberately over the past several quarters, layering more software onto our hardware base to expand recurring revenue. That strategy is increasingly visible in our revenue mix. Our software and services mix has steadily increased throughout the year, moving from 5% to 6% of revenue and then to 7% to 8%. With this acquisition, on a pro forma basis, our software and services revenue mix increases to about 10% of total company revenue.
This represents a meaningful step towards a more predictable, higher-margin business model. Beyond the immediate financial benefits, we see meaningful cross-sell potential. Nero brings an installed base of roughly 125,000 device tags across fleet, municipal restoration and industrial asset tracking markets, creating a natural opportunity to deploy our cellular gateways, modems, edge compute products and connectivity solutions. Together, Nero's software and our hardware provide customers with a more vertically integrated end-to-end asset monitoring solution.
In summary, I'm encouraged by our performance in fiscal 2026 and the significant progress we achieved. Our focused execution, disciplined operating approach and strengthened organization are providing tangible results. We are meaningfully scaling our presence in high-growth verticals, increasing the contribution of software-enabled recurring revenue and continuing to realize operating leverage from a more efficient cost structure. As we enter fiscal 2027, we believe Lantronix is better positioned than ever to benefit from long-term growth trends reshaping edge computing and connectivity.
With strong momentum, a differentiated portfolio and a clear strategic roadmap, we are excited about the opportunities ahead and remain committed to creating long-term shareholder value. With that, I turn the call back to Brent to cover financial results.
Brent Stringham, Chief Financial Officer
Thanks, Salil. I'll begin with our fourth quarter and fiscal 2026 financial results and some of the key drivers behind our performance, after which I'll provide our outlook for our first fiscal quarter ending September 30, 2026. For fiscal 2026 revenue was nearly $121 million, representing 8% growth over fiscal 2025 revenue of just over $111 million. Excluding GridZferTise, our growth was driven by more than 15% annual growth in embedded IoT solutions led by Unmanned Systems.
As Salil mentioned, Unmanned Systems revenue reached $12.6 million, above the midpoint of the $10 million to $14 million range we provided last quarter. Revenue for the fourth quarter was $31.2 million, representing both sequential and year-over-year growth. Our IoT system solutions rebounded in the quarter, contributing more than $15 million of revenue after slower ordering patterns in the prior two quarters related to the government shutdowns in late calendar 2025 and early 2026.
As we've said over the past several quarters, we viewed those federal headwinds as timing related rather than reflective of underlying demand. The 16% sequential growth we delivered in the fourth quarter reinforces that view. Turning to our gross margins in the fourth quarter, GAAP gross margin was 43.7%, up from 43.1% in the prior quarter, and 40% a year ago. On a non-GAAP basis, gross margin was 44.1% compared with 43.6% in the prior quarter and 40.6% a year ago.
The year-ago period was impacted by aged inventory charges and higher duties and tariffs. The sequential improvement reflects a combination of favorable revenue mix, including stronger performance in system solutions, and the continued focus of our operations team on supply chain efficiency and execution. Looking ahead, we believe these efforts, together with our disciplined approach to cost management, should support gross margins at or near current levels in fiscal 2027.
Let me also briefly address the broader supply environment, which we continue to monitor closely. Memory availability has tightened and prices have increased as AI infrastructure and hyperscaler data centers consume a growing share of industry supply. This is an industry-wide dynamic affecting the embedded compute market broadly and is not unique to Lantronix. We believe our early preparation has positioned us well in this constrained environment.
Leveraging our fabless operating model and diversified manufacturing partners, we identified these trends early and proactively secured supply. Looking at our expenses and profitability, GAAP operating expenses in the fourth quarter of fiscal 2026 were $14 million, slightly down from the $14.1 million in the prior quarter and down approximately 5% from $14.7 million in the year-ago period. We continue to observe the leverage in our opex model based on the actions we took last year and the ongoing cost discipline that we are executing on.
GAAP net loss for the fourth quarter of fiscal 2026 improved to $269,000, or $0.01 per share, compared to a GAAP net loss of $2.6 million, or $0.07 per share, in the year-ago quarter. On a non-GAAP basis, net income of $1.8 million, or $0.04 per share, compares to $1.5 million, or $0.04 per share, in the prior quarter and was an improvement from the $0.01 per share in the year-ago quarter. Moving to the balance sheet, we raised just over $44 million in net proceeds during the quarter through our public and ATM offerings, bringing our year-end cash balance to more than $60 million.
We also repaid the remaining $8.7 million of debt and ended the fiscal year debt free. Our strong balance sheet gives us the flexibility to execute our growth strategy while remaining disciplined and opportunistic in allocating capital to the highest-return opportunities across R&D, go-to-market initiatives, and strategic M&A. During the current quarter and full fiscal year, we generated positive operating cash flow of approximately $1.9 million and $9.9 million, respectively.
Net inventories were $25.8 million as of June 30, 2026, compared to $26.4 million last quarter and $26.4 million in the year-ago quarter. Lastly, our outlook for the first quarter of our fiscal 2027, which ends September 30, 2026, is as follows. We expect revenue to be in the range of $31 million to $33 million. Non-GAAP EPS is expected to be in the range of $0.04 to $0.06 per share. With that, I'll turn the call back to Salil for closing remarks.
Salil Alsaray, President and Chief Executive Officer
Thanks, Brent. Fiscal 2026 was a year of measurable progress. We returned the core business to growth, established Unmanned Systems as a meaningful contributor, expanded recurring revenue, and significantly strengthened our financial position. Along the way, we continued transforming Lantronix from a broad-based hybrid provider into a focused solutions platform combining compute, connectivity, physical AI, software, and services. At the intelligent edge, Unmanned Systems is the clearest proof point.
From minimal revenue contribution a year ago, we delivered $12.6 million in fiscal 2026 after raising our outlook three times, we tripled our active engagements, expanded our global customer and partner base, and moved further up the technology stack. In fiscal 2027, we expect Unmanned Systems to represent 15% to 20% of total revenue with continued growth beyond these levels in subsequent years. We enter fiscal 2027 with multiple engines of profitable growth, the strongest financial position in our history, and confidence in our ability to deliver double-digit revenue growth.
As we continue to move further up the technology stack and expand our role across the broader autonomy ecosystem, we believe Lantronix is becoming the go-to edge compute company for unmanned systems. And with that, operator, we will now open the call for questions.
OPERATOR
Thank you. We will now begin the question-and-answer session. To ask a question, you may press star then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw the question, please press star and then two. At this time, we'll pause momentarily to assemble the roster. The first question will come from Austin Bowlig with Needham.
Please go ahead.
Austin Bowlig, Analyst at Needham
Hey guys, thanks for taking my question, and congrats on the strong results and really strong traction in the unmanned business. So, just to dive in a little bit into your newest fiscal 27 drone guide, would love to get a sense of what your visibility looks like into this number. And does this largely just assume the engagements that you have today?
Salil Alsaray, President and Chief Executive Officer
Thank you for the question, Austin. And specifically to the guide, it does have into the visibility we have today and the engagements. And what I want to clarify is we're working with over 30 vendors now. We've shipped to over a dozen already. And not only are we doing unmanned systems, specifically drones, but we are also in the counter-UAS area. We actually shipped to a couple customers in the last quarter. So the breadth of the opportunity is there.
We've seen decent visibility as we started fiscal 27, and the numbers are based on where we see it today.
Austin Bowlig, Analyst at Needham
Okay, perfect. And maybe just to get a little bit more color on this: 15% to 20% of revenues, is it fair to assume that from an absolute dollar perspective, you guys did almost $13 million in fiscal 26? Should we be assuming this could be at least maybe $25 million in 27?
Salil Alsaray, President and Chief Executive Officer
Yeah, yeah, we should be there around the $25-plus range for fiscal 27.
Austin Bowlig, Analyst at Needham
Awesome, thank you. And then just one last quick one here. Would love to know, is there any big impact to you guys, both positively and negatively, related to the new drone tariffs that were announced a couple weeks ago?
Brent Stringham, Chief Financial Officer
Yeah, I think, Austin, I'll take that one. It's definitely a structural tailwind for our drone business. Being an NDAA/TAA compliant solutions provider, we believe that this tariff policy could support additional design win opportunities for us. On the actual tariff side of things, we don't see a meaningful impact based on the way some of our components are imported today as more general-purpose modules as opposed to specific drone components. So the things that we import from Taiwan and other areas, we're not anticipating a meaningful impact at this time.
Salil Alsaray, President and Chief Executive Officer
Yeah, Austin, let me add one more thing. As you're well aware, we've got a big facility in Plymouth, Minnesota, and we are ramping up there to provide our drone customers with products with a TAA, NDA certified and, in the midterm, country of origin, United States of America. So I feel this is going to be helpful for Lantronix.
Austin Bowlig, Analyst at Needham
Awesome. All right, guys, well keep up the great work. We'll be in touch.
Salil Alsaray, President and Chief Executive Officer
Thank you so much, Austin.
OPERATOR
The next question will come from Scott Buck with Titan Partners. Please go ahead.
Scott Buck, Analyst at Titan Partners
Hey, good afternoon, guys. Thanks for taking my questions. I'm curious, between Swarmer and the DoD solutions and, I guess, all the Ukraine-linked programs, what percentage of unmanned revenue is tied to Ukraine demand, and how do you think about that revenue in a ceasefire scenario?
Salil Alsaray, President and Chief Executive Officer
So, Scott, thank you for that question. Our drone revenue for the last 12 months of fiscal 26 and fiscal 27: for fiscal 26 it's mainly U.S.-based, a big majority of it. Fiscal 27, the Ukraine portion is not a meaningful portion, specifically with the one customer that we talked about and we mentioned. So I don't see a measurable concern for a ceasefire or what have you, because the growth we have just changed how war is conducted, and this requires the ability to have unmanned systems, more specifically unmanned systems with autonomy.
And that is where we fit. So I don't anticipate any big issues if specifically that ceasefire happens in Ukraine.
Scott Buck, Analyst at Titan Partners
Great, that's helpful. Color. And then my second question, just on gross margin: as unmanned scales, do you start to see some mix pressure there, or does the growth in the software and services offset that?
Brent Stringham, Chief Financial Officer
Yeah, thanks, Scott. I'll take that one. You're right. With the expected growth of our module business related to unmanned and drones, there is natural pressure. The margins in that business are slightly below kind of our corporate average, in the low to mid-40s there. So we do see potential pressure. But as you mentioned, we expect to continue to grow some of the higher-margin sides of our business, including the ARR, which Salil talked about with the acquisition, and seeing a return to growth in some of our other businesses that carry higher margins, some of the network infrastructure and other products that might have had some headwinds against them earlier in fiscal 26 with government shutdowns and things like that. So we think the offset between those two kind of keeps us in a similar range to where we've been company-wide.
Scott Buck, Analyst at Titan Partners
Perfect. I'm going to go back.
Salil Alsaray, President and Chief Executive Officer
Yes, Scott, let me just add a little bit more color to your question about specifically in Ukraine. I think the message I want to make sure comes through: we have expanded our reach. We talked about Ukrainian customer, we talked about a big win in Australia with CACI, which is a big company, U.S. headquartered. And you're going to hear more in the next call about international expansion beyond North America. So I want to be clear, we're going global and we're seeing traction globally.
Scott Buck, Analyst at Titan Partners
No, perfect. I appreciate that, and congrats on the strong result, guys.
Salil Alsaray, President and Chief Executive Officer
Thank you.
OPERATOR
The next question will come from Josh Sullivan with JonesTrading. Please go ahead.
Josh Sullivan, Analyst at JonesTrading
Good evening. Just a follow-up on the 232 decision. Have you seen any change in behavior or activity from customers since the announcement?
Salil Alsaray, President and Chief Executive Officer
Yeah. So Josh, thank you for that question. This is Salil. It's pretty fresh, but we have had a few customers come to us pretty quickly to make sure that we are NDAA and TAA certified. And then when I mentioned to them we are going to start obviously doing more manufacturing out of our testing area in Plymouth, Minnesota, they were very happy to hear that. So as I said earlier in my prepared remarks and even what Brent said, we believe this is a good tailwind for us, especially with our solutions.
So interest in us being U.S. headquartered and delivering solutions here. So I think it's a big plus for us.
Josh Sullivan, Analyst at JonesTrading
Got it. And then on the Nero acquisition, now that you're a software-hardware end-to-end solution, what other markets might that take you into, or what does that capability allow you to do?
Salil Alsaray, President and Chief Executive Officer
Yeah, so if you think about Nero asset tracking, you know, they've already got 125,000 tags out there. So two things as you think about the markets: they've been very focused on restoration and fleet tracking. Lantronix has been very focused on managing, you know, diesel power generators at cell sites with the big MNOs. Think about how we can start putting that together. That was a part of our overarching strategy that we did this deal for. They bring a strong software backbone to us.
It ties in with our perception software that we have and really goes after new markets that we are going after and they will be able to get us there faster. Secondly, we have hardware, right? Nero Global Tracking did not have their own hardware. They were buying hardware from other companies. Our cellular modems and gateways are a perfect fit into that. So we're going to see an upsell from our side from our hardware business that we have. So it's a great fit.
You know, gross margins in the 60-plus percent. We really like it and it helps the company overall. And more importantly, it takes our software and services business that I've been saying was 5 to 6%. We took it to 7 to 8. I wanted it over 10%. Guess what, guys, we took it to over 10%.
Josh Sullivan, Analyst at JonesTrading
And then I guess on the SLC 9000, what does the rollout of that product look like? What's the TAM there? You know, obviously a huge market, but curious what you think you can access there over kind of what time frame.
Salil Alsaray, President and Chief Executive Officer
Yeah, thanks for the SLC 9000. For those on the call, it's our out-of-band product, and I mentioned in my prepared remarks that we won a design with a company called SambaNova Systems out of Silicon Valley, you know, heavily funded by Intel. And in that one we are sitting in their rack — I think it's called the DataScale rack that they have. And we are sitting in that rack, so we are excited about, as they go deploy their racks and, you know, each rack has accelerated nodes, host servers and our box on the top, so it gives you remote access to it.
We believe the TAM in this market could be over half a billion dollars and we're just getting started with this. SambaNova is one proof point of our SLC 9000 and the product is ready and it's already started to ship. And you know, I'll add to it, SambaNova picked us because of our ease of use, our reliability and our zero-touch provisioning that we've designed in. Additionally, our APIs integrated their tools. So this is a long-term business for us as I think about it.
Josh Sullivan, Analyst at JonesTrading
Good, good. Thank you. I'll leave it there, thanks.
OPERATOR
The next question will come from Jason Schmidt with Lake Street. Please go ahead.
Jason Schmidt, Analyst at Lake Street
Hey guys, thanks for taking my questions. Just for first, starting on the drone markets a little, given your comments about the traction you're seeing globally, are you continuing to expand the sales team and infrastructure focused on this market?
Salil Alsaray, President and Chief Executive Officer
Jason, thank you for that question. And yes, we are expanding the go-to-market as we think about the future. As a matter of fact, we kicked off the fiscal year with having a drone summit with all the stakeholders at Lantronix meeting for literally a week, going through all the opportunities. How do we need to go tackle them? So we've added resources in North America, we've added resources in Europe. We're also going to be adding some resources in advocacy in Washington, D.C. So really, you know, big effort going on to do this and I really feel this is going to pay really well for us. The ROI is going to be wonderful for it.
Jason Schmidt, Analyst at Lake Street
Okay, that's really helpful. And then just as a follow-up, obviously the memory availability remains tight and there's some pricing pressure out there. Are you guys going to pass through some of these prices as part of your price mitigation strategy?
Brent Stringham, Chief Financial Officer
Yeah, Jason, we're working closely with customers on the memory issues that, you know, everybody seems to be facing right now. So, you know, from a cost pass-through standpoint, we're obviously trying to be careful, but working with customers on what's most reasonable for both parties. And I think, in general, you know, most parties out there kind of expect those costs to be passed through. And so, you know, that's kind of the direction we're seeing others heading.
Jason Schmidt, Analyst at Lake Street
Understood. Thanks a lot, guys.
OPERATOR
Thank you. The next question will come from Christian Schwab with Craig-Hallum Capital Group. Please go ahead.
Christian Schwab, Analyst at Craig-Hallum
Great. Good quarter, good outlook, guys. I just want one quick question, then another follow-up. The cash at quarter end that you highlighted, did that take into account the recent tuck-in acquisition, or should that be reduced?
Brent Stringham, Chief Financial Officer
Yeah, so our cash at June 30, our fiscal year end that we reported, we had not closed the acquisition yet, Christian. So no disbursements of any cash or proceeds had taken place as of year end.
Christian Schwab, Analyst at Craig-Hallum
Okay, I just wanted to get that quick map. As we look at your outlook for next fiscal year, excluding the unmanned systems, which you've given great clarity on, you know, we ran into multiple headwinds that we've addressed over the last few quarters in the remaining part of the business — let's just lump it and call it all IoT systems. Given, you know, the strong sequential growth in the quarter and new opportunities, for example in the out-of-band product that you highlighted, would you expect that portion of the business to be like a 5 to 10% growth business or maybe even better than that in fiscal year '27?
How should we think about that?
Salil Alsaray, President and Chief Executive Officer
Yeah. So Christian, thank you for that question. So we had a 16% growth quarter over quarter the first half of the fiscal year of '26. As you remember, we had government shutdowns and some of that business is our federal business. So that was affected by that. I'm just being careful as I give you guides and we want to be intelligent about how we go about doing it. We believe that business should grow and with that mindset that we are seeing, design-in activity here — one piece of data is something called quote activity for this business — and that is doing really well.
So, you know, as I said, we expect the company to grow double digit and we are confident we can deliver that. I believe we can deliver that. So, you know, stay tuned as we move forward. But we grew 16% quarter over quarter.
Christian Schwab, Analyst at Craig-Hallum
Great. Thank you for that clarity. And then my last question, just as it related to gross margins — you know, as we layer in and expand our ARR in higher gross margin portions of the business, you know, potentially helping offset any type of pressure you may have as far as component costs — do you think gross margins could improve throughout the course of the year, or do you expect them to be relatively stable?
Brent Stringham, Chief Financial Officer
Christian, we do think there's opportunity to grow the gross margin throughout fiscal '27, especially as we see, as I mentioned earlier, an uptick in some of these other businesses that do carry higher gross margins as compared to how we performed in fiscal '26. And certainly the ARR that comes along with the acquisition — and to the extent we can continue to ramp that up — we should see margins pick up slightly. Now, as I mentioned before, there is maybe a little headwind on the other side with some of the growth in modules on the drone and UAS business.
But net-net, I think there's opportunity to grow the margins.
Christian Schwab, Analyst at Craig-Hallum
Great. And then my last question. As far as future potential strategic M&A, you know, do you have a target list of companies that you're, you know, looking at or targeting, or should we not really anticipate any further tuck-in acquisitions, for example, in fiscal year '27?
Salil Alsaray, President and Chief Executive Officer
Yeah, you know, we've been very deliberate and thoughtful as to how we run this company. We've got cash on the balance sheet. We want to grow in two areas — unmanned systems, you know, increasing our strength in there, move up the drone stack. And secondly is on recurring revenue. Both of those areas we like. And we have a list of companies we are looking at and some even we are engaged with. So yes, we are moving forward on that, Christian.
Christian Schwab, Analyst at Craig-Hallum
Great. No other questions. Thank you.
Salil Alsaray, President and Chief Executive Officer
Thank you, Christian.
OPERATOR
The next question will come from Austin Mohler with Canaccord. Please go ahead.
Austin Mohler, Analyst at Canaccord Genuity
Hi, good afternoon, Salil and Brent. Next quarter, just my first question here. It sounds like Putin wants to call a general mobilization to invade Kiev from the north. So if you start producing and shipping SOMs at scale in Eastern Europe, how would you expect the gross margins on SOMs to compare in Eastern Europe relative to what you might get on the drone dominance program at the higher build rates?
Brent Stringham, Chief Financial Officer
Yes, thanks for that, Austin. With respect to our European business or potential European businesses, I think the gross margins on our SOMs there, it's reasonable to think they might be slightly more challenged than maybe what we've seen here in the growth we've seen over the last year here, mostly in the U.S.
Austin Mohler, Analyst at Canaccord Genuity
Okay. And how does the AVT Australia opportunity open up — does that open up the TAM for SOMs and drones in Asia-Pacific, or does that also open up the opportunity in Asia-Pacific and the Middle East for tactical drones?
Salil Alsaray, President and Chief Executive Officer
Yeah. The AVT, which is a CSCI company, Austin — I'm sure you're familiar with them; big company in the U.S., a defense tech company. So right now our understanding is it's Asia-Pacific, it's Europe, some America and some in the Middle East. So it really does open up. And we are also actively engaged with customers now in Japan. As you know, they're thinking about NDAA and TAA certification. I'll be meeting some of them shortly at one of the shows coming up.
So, you know, we've been very thoughtfully going North America, started in Europe, working this Australian opportunity which is, you know, it's a good-size opportunity for us. So as I said earlier when somebody else asked me a question, we're going internationally and we are spreading internationally. We are putting go-to-market resources. So, you know, our breadth is improving every day.
Austin Mohler, Analyst at Canaccord Genuity
Super exciting. I'll pass it back there.
Salil Alsaray, President and Chief Executive Officer
Thanks. Thank you so much for that question.
OPERATOR
This concludes our question and answer session. I would like to turn the conference back over to Salil Asare for any closing remarks.
Salil Alsaray, President and Chief Executive Officer
Thank you again for your questions and joining us today. We appreciate your continued interest in Lantronix and your support throughout the year. Fiscal 2026 marked important progress in our journey. The strategy that was beginning to take flight is now delivering measurable results as we enter fiscal 2027. We are continuing our climb with greater momentum, a stronger platform, a clear visibility into multiple opportunities that we expect will drive double-digit revenue growth for the full year.
In September, I will be at the Piper Sandler Government and Defense Tech CEO Summit in Washington, D.C., the Lake Street BIG Conference and the Gabelli Aerospace and Defense Symposium in New York, and the Needham Summit in Minneapolis. Thank you very much, everybody.
OPERATOR
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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