Data I/O Q3 2023 Earnings Call Transcript

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October 26, 2023

There are 8 speakers on the call.

Operator

Afternoon, everyone, and welcome to the Data IO Third Quarter 2023 Financial Results Conference Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. Please also note today's event is being recorded. At this time, I'd like to turn the floor over to Jordan Darrow, Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you, operator, and welcome to the Data IO Corporation's Q3 2023 financial results conference call. With me today are the company's President and CEO, Anthony Ambrose and Chief Financial Mr. Jerry Ng. Before we begin, I'd like to remind you that statements made in this conference call concerning future revenues, results from operations, financial position, Markets, economic conditions, supply chain expectations, estimated impact of tax and other regulatory reform, Product releases, new industry partnerships and any other statements that may be construed as a prediction of future performance or events are forward looking statements, which involve known and unknown risks, uncertainties and other factors, which may cause actual results to differ materially from those expressed or implied by such statements. These factors include uncertainties as to the impact from global and geopolitical events, international trade regulations, Order levels for the company and the activity level of the automotive and semiconductor industry overall, ability to record revenues based on the timing of product deliveries and installations, Market acceptance of new products, changes in economic conditions and market demand, part shortages, pricing and other activities by competitors and other risks, including those described from time to time in the company's filings on Forms 10 ks and 10 Q with the Securities and Exchange Commission, press releases and other communications.

Speaker 1

The accuracy and completeness of forward looking statements should not be unduly relied upon. Data IO is under no duty to update any of these forward looking statements. And now, I would like to turn over the call to Anthony Ambrose, President and CEO of Data IO.

Speaker 2

Thank you very much, Jordan. I'd like to begin my formal remarks by addressing our 2023 Q3 financial and operational performance, And then I'll turn it over to Jerry Ng for a more detailed look at the numbers. We have a strong year over year revenue growth of 25% Through the 1st three quarters of the year and more recent challenging business conditions in Q3. As I mentioned in the release, the 3rd quarter was mixed. We won some very exciting deals and saw strength in adapter bookings, but system bookings were soft as customers deferred capital purchasing decisions into the 4th Quarter.

Speaker 2

We also saw customers move delivery dates from Q3 to early Q4, which we did not normally see. For whatever reason, whether it be the strike in North America, interest rates, people coming back for vacation, It appeared that customers wanted to take another look at their capital purchase decisions and did so by pushing from September into Q4. Now what's interesting is Q4 is starting out extremely well as we booked 5 systems already in October. Several of these systems Originally, we planned for Q3 bookings actually had the bookings occur in October. I was also Happy this morning to see the news that Ford and the UAW have reached a tentative agreement, likely ending their strike.

Speaker 2

This will remove some uncertainty in North American market. When we look at Q4, given all the puts and takes, we have a strong sales funnel that supports a much stronger bookings than we saw in Q3 And operations that support stronger revenue than we saw in Q3, provided we get the orders in time to ship this year. Despite the short term gyrations, the driving forces and long term growth thesis for Data IO remain intact.

Speaker 3

Advanced semiconductors and microcontrollers are finding their way

Speaker 2

into more products and Controllers are finding their way into more products and impacting virtually every business in immeasurable ways. Programming is becoming more complex and the amount of code is continuously increasing. Our plan is to grow revenues in growing markets, including automotive and industrial, continue to drive more revenue from consumables, software and service, and deliver 40% operating leverage on that revenue growth. Automotive represented about 3% of the bookings in the Q3 consistent with our year to date numbers. Within automotive, we continue to see strength In EVs globally, and we like EVs not just because they're electric vehicles, but because the platforms are newer And they tend to have more electronics per car as they have comprehensive IVI, ADAS and other features.

Speaker 2

With this, Content in EVs is estimated to be about 2 to 3 times that of semiconductor content in other vehicles, and the programming requirements continue to require Continue to grow in these EVs. Regionally, we continue to see strength in North America. We have seen softness in EMEA. China is recovering from a soft first half, recovering slowly and steadily, which we believe will continue based on our channel checks. In the Q3, we added 4 new customers, which now brings us to 19 for the 1st 9 months of the year compared to 20 of all last year and the prior year.

Speaker 2

Within those 4 new wins, we had 2 new EFE factories Internationally, and one of the new customers in the Q3 represents a major win for us on SentriX. We're excited to move further into expanding the SentriX market by winning our 1st major solar energy customer on our SentriX This continues to make progress for SentriX as a leading technology platform, now including AI, EV, data center, utilities, industrial and now solar markets. That's a nice bridge here as we go from solar to sustainability and ESG. Green power, ESG and climate disclosures are becoming Increasingly important for public companies like Data IO. For us, we see 3 basic requirements for our environmental strategies.

Speaker 2

1st, As a leading supplier to the automotive industry, we must comply with purchasing requirements set forth by our largest customers. Many of our large EMEA based Tier 1 automotive customers and many industrial customers Have put forth their own ESG plans, calling for a significant reduction in greenhouse gas emissions from their suppliers. 2nd, as a public reporting company, we must comply with appropriate rules and regulations set forth by the SEC and NASDAQ. There are new disclosures required for companies starting next year. As a smaller reporting company, these will become effective for starting next year and continue to increase in disclosure requirements over the next several years.

Speaker 2

And finally, as a good corporate citizen, we need to look at smart ways be more environmentally friendly, consistent with a good use of cash. The importance of ESG and how it impacts our business operations will be the first subject in our next fireside chat series. The session will be entitled Sustainability Strategies for the Auto Industry and will be released and available for viewing later this month. In that session, you'll hear how we've made outstanding progress in our Scope 1 and Scope 2 emissions, Well ahead of regulatory and supply chain requirements and are in the programming industry and sustainability.

Speaker 4

In the months that follow, we

Speaker 2

plan to release 5 additional fireside chat sessions covering global perspectives on critical topics and emerging market trends from automotive to Semiconductor Growth Opportunities. In addition to the fireside chats, we've expanded our investor communications, content and channels with new technology discussions on LinkedIn, And we also recently joined the WeBull Corporate Connect service platform to enhance our communications with tech savvy retail investors. Weibo will provide us direct exposure to the 2nd largest app based investment and trading platform. You can tell, we're excited for the future growth of Data IO and look forward to sharing our progress and perspective with you and also with these new channels. This will include some fresh ideas from Jerry that goes well beyond our operational spending discipline that he demonstrated in the 3rd quarter.

Speaker 2

He is focused on our ability to drive margins, improve cash flow and invest in future growth. With that, I'll turn the call over to Jerry For a little bit more detail on the numbers, Jerry?

Speaker 4

Thank you, Anthony, and good day to everyone. I look forward to my First and future earnings update have been taken over as CFO on August 16. I will start with the balance sheet and then move to the income statement. My commentary today will focus on specific points of interest and allow you to review the earnings release for a more detailed understanding of our financials. Data IO's financial condition remained strong at the end of Q3, with $11,900,000 in cash, up $357,000 from $11,500,000 Receivables at $4,900,000 increased $175,000 from the previous quarter.

Speaker 4

Daysales outstanding Or DSO was at 59 days at the end of Q3. Past due receivable balances Greater than 30 days remained very low at less than $30,000 on September 30. Payables at $1,100,000 decreased by $468,000 from the previous quarter. Moving on to inventory, we finished at $6,400,000 a decline of $476,000 from the previous quarter. Inventory had been intentionally elevated in 2020 to address potential shortage risk.

Speaker 4

Earlier this year, We went to a more neutral supply chain strategy, improving supply chain conditions, Disposition and material for end of life products and our lean operational initiatives contributed to our overall reduction. Optimizing inventory levels remain a top priority, while balancing anticipated customer demands Going forward, moving to the income statement, revenue at 6,600,000 declined 6 51,000 from the prior year on lower bookings performance in the current quarter and Strong shipment recovery in Q3 of the prior year due to the supply chain disruptions that occurred in the first half of the prior year. Revenue through the 1st 9 months of this year was $21,200,000

Speaker 5

UP $4,200,000

Speaker 4

or a 25 percent increase from the prior period. Our Q3 ending backlog was 2,500,000 Primary addressable market at 63% of year to date bookings. Gross margin 54% in Q3 was down from 59% in Q2, due primarily to lower sales volume, Lower inventory levels and related absorption are relatively fixed costs for our manufacturing and service operations. Good news is direct material and other variable costs declined in line with revenue change. Operational expenses at $3,600,000 increased 5% from the prior year, Great strides were made in reducing our Q3 costs with a decline of $626,000 from the prior quarter.

Speaker 4

A critical review of spending was performed, non critical costs reduced or eliminated and of course Operational efficiencies increased. Excluding costs related to sales volume changes, we expect to maintain With $15,000 loss compared to a $307,000 gain in the prior year from of course a strengthening dollar. Net loss of 53,000 in Q3 compared to a net income of 847,000 For Q3 of 2022 was due largely to the change in revenue and lower FX gain from the prior year. Net income remains positive, however, at $342,000 through 9 months compared to a net loss of $1,600,000 for the similar period in 2022. Adjusted EBITDA was $400,000 in Q3 and increased to 1,800,000 through 9 months of this year.

Speaker 4

This represents a year over year improvement of 1,300,000 Overall, we remain very strong financially with no debt and in good position to navigate market dynamics. We'll have returned to profitability on a consolidated basis, but we will be able to take advantage of our NOLs, which stood at 15,000,000 on September 30. I am excited to be part of the Data IO team and look forward to working partnering with Anthony and our global team to continue improving our operational and financial performance. This concludes my remarks for the Q3 of 2023. Operator, would you please start the Q and A process?

Operator

Ladies and gentlemen, we'll now begin the question and answer session. We do also ask that you please limit yourself to one question and a single follow-up. If you do have additional questions, you may reenter the question Our first question today comes from Kevin Garrigan from Westpark Capital. Please go ahead with your question.

Speaker 6

Yes. Hey, good afternoon everybody and thanks for letting me ask a question. On the EV front And congrats on the new EV factory customers. Not saying that you'll supply every EV factory out there, but is it A safe assumption that you'd supply kind of 1 system per factory or is there a possibility that multiple Factories would use one system such as like a programming center or something like that?

Speaker 2

Yes. So Kevin, good to hear from you. In general, I would say on average, we supply more than 1 system per factory in the automotive space. And that's just based on an analysis. I mean, it ranges from we have a number of customers of 1 factory or 1 system per factory.

Speaker 2

I've been in places that have 10 systems in a factory. So the average is certainly going to be more than 1. For us, we see the growth in automotive coming from, again, the focus on new factory acquisition As customers expand in certain areas of the world, we want to be their choice as they put programming capacity in place in those new factories. We think that's a good predictor of what their future demand will be in that factory. And then, of course, people that have been with us for years are placing additional capacity orders As again, they have more and more electronics going into their cars and they need to add capacity.

Speaker 2

So it's really a combination of both.

Speaker 6

Okay, got it. Got it. That makes sense. And then are you getting a lot of prior customers that already have PSV system that are asking to add SentriX capabilities?

Speaker 2

The customers The short answer there is most of our SentriX demand today continues to come from people that have The system already. That includes our programming center partners and a handful of non programming center customers.

Speaker 6

Okay, perfect. And then just one last quick question. So looking at your customer additions, you had Started out the year adding 10 customers in Q1 and then that number has kind of come down as we've gone through the year, but you're Still on pace to surpass your 2022 customer additions, what is kind of keeping some potential customers on the sideline?

Speaker 2

I think the numbers in any quarter are going to have some lumpiness to it. That's the nature of our business. That's why we give you the date on the quarter and then also try and provide some context with the year to date numbers as well. For us in Q3, we probably would have had more new customers if People have bought more systems. As I mentioned, it seemed like people just didn't want to place any orders towards the end of the quarter.

Speaker 2

And then once the quarter flipped over, it's like the spigot turned back on. I don't know why they didn't want to have it on their books. I don't know whether it was The uncertainty created by the factors I described earlier, strikes, other stuff as well, Interest rates. But at the end of the day, we believe that there will be more capacity demand because there is more Silicon going into cars and it needs to get programmed. It's not really any more complicated than that.

Speaker 6

Okay, perfect. Thank you very much.

Speaker 2

Thanks, Kevin.

Operator

Our next question comes from David Marsh from Singular Research. Please go ahead with your question.

Speaker 3

Hey, guys. Thanks for taking the questions. I guess, I'm just trying to Anthony, I'm just trying to read the tea leaves here a little bit on Comments on China, it sounds like there is some sort of recovery taking place, but doesn't sound like it's a robust and fast paced recovery. I was just hoping that you could provide us a little bit more Granularity there and just help us understand.

Speaker 2

David, I think tea leaves is probably an appropriate Metaphor for the future forecasting there. I think you nailed it. That's exactly what I'm trying to say. We've had continuous improvement throughout the year, but it's at a level of business that's lower than last year. We still haven't gotten to that level.

Speaker 2

I think it will you can continue to see more recovery there. And consistent with the fact that China produces and consumes an awful lot of cars And 30% of them are EVs.

Speaker 3

Right, right. That's Yes, it's helpful. I guess it's just it'd be really helpful to get a better sense Of what that pace is going to look like going forward, but I guess it's really very difficult to predict.

Speaker 2

Yes, I think there's a lot of third party information there. I mean, you can sort of pick the A lot of people are nervous about the property market in China. A lot of people are nervous about Our people continuing to still build there. We just had a trade show there, very well attended, Probably the best attendance in 3 or 4 years. And as I said, I would expect Continuous steady improvement.

Speaker 2

I don't think you're going to get a massive sudden uptick, but I think it will be better as we go forward.

Speaker 3

Got it. Got it. That's really helpful. And then just as my follow-up, I guess, one of the things that Took me a bit by surprise and I think you addressed it a little bit, but I just kind of wanted to pull the thread on it. Your backlog is down from 3.8 at the end of Q2 to 2.5 at the end of Q3.

Speaker 3

But based on your commentary, it actually sounds like Bookings have picked up as we've entered the new quarter. So just with all of that information, I mean, I'm reading into your commentary that Q4 could be sequentially better, but I just was wondering if you might just help us With the information that you have today, just kind of get a better understanding around that.

Speaker 2

Yes. I think the tough thing for as we don't give the quarterly guidance, but as I indicated in my remarks, I certainly think the bookings will be better Q4 and Q3. And the revenue, given our sales funnel that we still have in the funnel that have not yet booked, We have an opportunity to have a strong revenue quarter as well, provided the timing is such that we can book and ship some of those systems. So the funnel looks good. We just have to deliver on it and we're off to a good start.

Speaker 3

Great. That's helpful. Thanks, Avan.

Operator

I'll get back in the queue.

Speaker 4

Thanks a lot, Dave.

Operator

Our next question comes from David Cannon from Cannon Wealth Management. Please go ahead with your question.

Speaker 7

Hi, thanks for taking my questions. I've got a few. So if it's okay to bend the rules a little bit, I'd appreciate that. The First one is in regards to, you said, 5 system orders so far in the quarter. What are ASPs on Systems?

Speaker 2

Not going to get into that, Dave. They're consistent and typical with Prior quarters, nothing strange either way.

Speaker 7

Okay. And for the quarter, what were adapter sales?

Speaker 2

The exact number we'll put in the queue, but I know the bookings were up Pretty well quarter on quarter. Jerry, do we have the exact adapter numbers? Jerry will take a look at that and we'll let you know what's the next question?

Speaker 7

Okay. On operating expenses, we're up year over year, Revenues are down year over year, gross margins are down. It seems like an unsustainable posture going forward. Can you talk about opportunities to trim costs and to be more efficient so that When we do report good revenues, we can get some leverage to the bottom line and if possible quantify that. I'm assuming this is in the works, but If not, I would be quite disappointed.

Speaker 2

I think Jerry has clearly got some ideas on And he started implementing those in Q3. I'll let him talk about that in a moment. But I just want to clarify some things. The revenue is actually up 25% Year over year through the 1st 9 months. So, yes, spending is up.

Speaker 2

Frankly, spending is up more than we would like it to be up. And the focus on spending control is something that Jerry is clearly digging into and has already Got that started in Q3. But the whole concept is we want to we're delivering on our operating leverage of about 40%, pretty close to that, but we clearly want to do better. And I think your comments are how can we continue to get more efficient And deliver even better operating leverage to the bottom line? That'll be better.

Speaker 2

So I think, Jerry, what was our revenue on the adapters in Q3? $1,800,000 $1,800,000

Speaker 7

Okay. And then last question, this seems like an Inconsequential item, but it makes me question the seriousness and stewardship that you're approaching the business at the current time. Interest income for the quarter was $41,000 Now this may seem trivial, but what it Tells me if I annualize that on average, you're getting about 1.4%, a 3 month T bill is at 5.3, The 6 month T Bill, is it almost 5.6%. You can get a multitude of money markets paying 5.25%. Why is that?

Speaker 7

And going forward, is that something you're going to pay attention to? Because On an annualized basis, we're talking about giving away, according to my math, like $400,000 Am I wrong? If so, please correct me, but if you can give an explanation and what we're doing going forward.

Speaker 4

Yes, David, I can highlight that. As you know, we do have a fairly strong cash position. However, We do have operational needs both in the U. S, in our Shanghai manufacturing facility and in Germany. We do have a very active method of deploying unneeded cash to maximize the interest earnings, But it's not clearly the case where we deploy everything 100%.

Speaker 4

We are obviously looking at that and balance operational needs as well as the earnings opportunity.

Speaker 2

So Jerry, we're clearly looking at that, but also my understanding is that if you look outside the U. S, the interest rates available on cash deposits May not be the same as the current high rates that we enjoy in the U. S? Correct. So on a blended basis, we probably can't get 5%.

Speaker 2

But I think to Dave's We're certainly looking at it. Yes. And

Speaker 4

we are currently using nightly sweeps. We are also deploying some of our money into short term investments. So we are obviously looking at it and continuing to maximize the opportunity where we can.

Speaker 7

How much of the $11,900,000 is in the U. S?

Speaker 4

Approximately half.

Speaker 7

Yes. So even on that, we're not maximizing it. I mean, you can put your money in the money market and get 5.25%. I'm sure it's better than 1.4% in Europe and in China. I mean across the globe, There have been numerous interest rate hikes.

Speaker 7

So just pointing it out, it would make me feel better if you guys were

Speaker 2

Understood, Dave. Thanks.

Speaker 7

Thank you.

Operator

Our next question comes from Chris Puchowski. Actually, our next question comes from Michael Cooper. Please go ahead with your question.

Speaker 4

Good afternoon.

Speaker 3

Anthony, can you talk

Speaker 5

a little bit more about the SentriX funnel? I've been watching the sales progression of SentriX over the past few years as you've improved the product and that You've changed where you're going into the market, maybe more on the design side of things. But I'm still Each quarter comes and goes and I'm waiting for a nice big uptick in revenue from SentriX. And I'm not exactly seeing it, but what I'm hoping is that in the background, you guys are very Maybe and have been over the last 3 or 4 quarters on the design side and maybe that is Progressing through the funnel. I know that takes some time.

Speaker 5

But can you give us some metrics around That kind of dynamic, so that we can understand how the market opportunity on SentriX is performing.

Speaker 2

Sure. I'll start, Michael, by saying, we don't break out SentriX separately. But in my comments, our pay per use revenue This year from units running through machines that are under that type of contract is up pretty close to 100% year over year. So that's a good indicator on the revenue side. On the design inside, I didn't give you the size estimate of the win here in the solar market, but it's a pretty hefty win.

Speaker 2

Channel partner believes it's mid-six digits, okay, which would be a very, very nice Volume run rate for us on the SentriX platform. Having said that, we continue to refine Customers that we're engaged with now on SentriX opportunities in automotive, industrial and other markets. The key thing for us is to find the right person in the company to talk to about SentriX. And we've learned over the years that person He's not the person we usually talk to for data programming. And so part of the problem in the strategy is, okay, we have these relationships, How do we use them to find the right people in the company and talk about SentriX?

Speaker 2

And that's what we're doing on the marketing side.

Speaker 5

Okay, excellent. Thank you. And that $500,000 potential Number on your solar contract is very encouraging.

Speaker 2

Yes. I guess, at mid 6 digits.

Speaker 5

Sure. Understood.

Operator

And ladies and gentlemen, at this time, I'm showing no additional questions. That will conclude today's question and answer session. I'd like to turn the floor back over to the management team for any closing remarks.

Speaker 2

Operator, thank you very much. I'd like to thank everyone who joined the call and asked questions today. We look forward to sharing the developments with you As we go through Q4 and we'll be at the Productronica trade show in Germany in November in Munich. We also have an Investor Summit Group's virtual And the Singular Research Best of the Uncovered Conference in San Francisco in December, and we'd love to see you there. If you have any questions on that, please send a note to Jordan Darrow.

Speaker 2

With that, I'd like to conclude today's call. Thank you very much.

Operator

Ladies and gentlemen, with that, we'll conclude today's conference call and presentation. We thank you for joining. You may now disconnect your lines.

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