Data I/O Q1 2023 Earnings Call Transcript

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Provided by Quartr
April 27, 2023

There are 9 speakers on the call.

Operator

Good day, and welcome to the Data IO First 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 note this event is being recorded. I would now like to turn the conference over to Jordan Darrow, Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you, Betsy, and welcome to the Data IO Corporation Q1 2023 Financial Results Conference Call. With me today are Anthony Ambrose, President and CEO of Data IO Corporation and Joel Hatlen, Chief Operating Officer and Chief Financial Before we begin, I'd like to remind you that statements made in this conference call concerning COVID-nineteen, future revenues, Results from operations, financial position, markets, economic conditions, silicon chip shortages, supply chain expectations, Estimated impact of tax and other regulatory reform, product releases, new industry partnership and any other statements that may be construed as predictions 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 COVID-nineteen, including outbreaks in China, Russia and the war with Ukraine, including any related international trade restrictions, along with continued reopening recovery efforts Within the relevant global supply chains and among our customer base, level of orders for the company and the activity level of the automotive and semiconductor industry overall, The ability to record revenues based on timing of product deliveries and installations, market acceptance of new products, changes in economic conditions and market demand, Parts shortages, pricing and other activities by competitors and other risks, including those described from time to time in the company's filings 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 And now I would like to turn the call over to Anthony Ambrose, President and CEO of Data IO.

Speaker 2

Well, thank you very much, Jordan, and welcome, everyone. I'll begin my formal remarks by addressing our And then I will turn over the call to our CFO, Joel Hatlen, for a more detailed look at the numbers. Q1 was an excellent quarter. We reported 46% top line growth with quarterly revenues reaching Highest Q1 level since 2018. Gross margins were also at the high end of our range and were profitable in a traditionally challenging quarter.

Speaker 2

Year over year financial comparisons did include and reflect the fact that we returned to more normal operating conditions compared to the challenges we faced last year in Q1 and Q2. Our worldwide installed base of PSV systems increased to more than 4 50 machines, aided by 10 new customer wins during the quarter. This is also helping to create a more sustainable revenue profile through recurring and consumable sales, which accounted for 44% of our total revenue in the quarter. We continue to lead in automotive electronics and we're also seeing strong industrial market growth globally. Regionally, we forecasted and observed some softness in China in the Q1 due to the COVID shock in December January, as well as some upcoming changes in the automotive emissions regulations.

Speaker 2

We expect China to be a little bit stronger in the second half of the year. As I mentioned earlier, we acquired 10 new customers in Q1 and our sales funnel is very strong and we're reiterating our annual projections that we made in our last call. We believe demand is being driven fundamentally by several factors. Number 1 is the long term secular growth in the automotive electronics market, and that includes a more short term tactical Improvement in the supply of silicon products to our automotive electronics customers. This is across a range of applications, including, 1st and foremost, the accelerating adoption of electric vehicles, the growth in active safety systems or ADAS, automotive The second major demand driver for us is 3rd is the acceptance of our products and services that contribute to our consumable and recurring revenue growth.

Speaker 2

4th is the onshoring to North America. There's also the recovery going on in Europe, the overall creation of demand for security and security enabled products everywhere, And that finally is built upon by the impact of government policy and regulation for not only the security requirements, but onshoring for content into North America. Now I've talked quite a bit about the dynamics of the automotive electronics industry and long term growth prospects there. This call, I'd like to share some insights from recent third party announcements and earnings call transcripts to give you some context on why we are so excited about the long term opportunity. First, Teradyne announced Projected a testing market that would be down about 20% this year.

Speaker 2

On the surface, that sounds extremely difficult environment for everyone in What Teradyne said was they're seeing very, very weak conditions in PC and mobile versus what they were seeing in automotive and industrial. It's really a tale of 2 markets. Because PCs and smartphones represent about 2 thirds of their market And Automotive and Industrial is only 1 third. The overall market was down quite a bit, but they did say that they saw strength in Automotive and Industrial, And they were pretty bullish on that overall segment. 2nd announcement that was interesting for us was made by General Motors, not on their earnings call, but you may have seen the fact that they said that they were going to be designing And supporting and managing their own software for their instrument clusters and infotainment systems and no longer supporting Apple CarPlay.

Speaker 2

Now what this means for us is we'll have an additional demand stimulus rather in instrument clusters, And we've already been in discussions with the customers that have won this business or at least one part of the business about their outlook for the next 1 to 3 years. And we've seen before that this one OEM decision alone could have a material impact to demand in programming in this segment. And on top of this, the announcements you've seen in automotive about lowering prices to stimulate EV demand, Obviously, that's going to be good for suppliers into the automotive electronics industry. Shifting to IoT, I'd like to talk more about impact of regulations and government policy and a little bit less about the technology. For years, we've been talking about why you want to have security in your hardware, The benefits for managing your devices, securing your supply chain, securing your software, protecting your data, which is And what we've seen right now is increasingly governments are stepping in and acting.

Speaker 2

We're seeing a heavier hand from government around the world, demanding better products, better software and security and more accountability from manufacturers. The latest here is the policy document that was recently issued titled The National Cybersecurity Strategy of the United States that was published in March of this year. It's a very comprehensive plan to improve cybersecurity across the board for U. S. Corporations and consumers.

Speaker 2

There's some very interesting specific sections related to device security that I think would be of interest to you. I'd encourage all of you to look at this. We'll put a copy up on our website, but look at Sections 3.23. Section 3.2 is titled Driving the Development of Secure IoT Devices. This is a clearest description yet of what we've been advocating for years.

Speaker 2

Manufacturers will need to develop better products, which includes stronger security and there will also be a labeling requirement going forward. Section 3.3 focuses on creating better software and software security and also discusses liability Impacts for those who produce poorly designed and insecure software. Now this sounds onerous to manufacturers and The good news is with our SentriX platform and our use cases that are specifically designed to address the 2 items I mentioned earlier, We're very well positioned to support customers that have needs to improve their products in these areas. Talking a little bit more about SentriX, we continue to have a strong pay per use revenue in the Q1 and we made 2 significant partnership announcements as well in the Q1. We announced our relationship with Noah Leading to establish the 1st Sentriq security provisioning service in Japan, and we had a separate collaboration formed with Our work with Novoton enables OEMs to design solutions such as building automation, metering, medical and many other applications that are protected In addition to these activities, we had a very strong marketing momentum in the Q1.

Speaker 2

This included our trade shows both at Apex In San Diego and Embedded World in Nuremberg, Germany. In fact, we had a tremendous Embedded Trade Show with a Real reawakening of the engineering community and product management community after 3 years of playing defense. People are eager to start new product development. They're eager to start that with better security in mind, and they're very excited to talk to Data IO about how we could help them. We met with a number of companies, potential partners and had a very substantial bump in the number of qualified leads to our SentriX platform as well as our traditional data programming business.

Speaker 2

Combined with these marketing leads, our sales funnel remains robust as we benefit from these secular and regulatory growth trends and look forward to an exciting second quarter. With that, I'll turn it over to Joel Hamlin for a more detailed look at the numbers.

Speaker 3

Thank you, Anthony, and good day to everyone. The Q1 had strong revenues, gross margins and profitability as well as balance sheet growth in cash and working capital. I'll start by discussing the balance sheet and move to the income statement. Datto's financial condition improved from the end of last year. We ended the Q1 with $11,900,000 in cash, up $400,000 from $11,500,000 at December 31.

Speaker 3

As we typically note each year, the Q1 has certain public company costs and payment of annual accrued Items that typically use more cash than other quarters. With continued strength in our business and other operational disciplines, we were able to actually grow our cash In the Q1, net working capital increased from $17,600,000 at December 31 to $18,000,000 at March 31. Days sales outstanding or DSO, a receivables collection was at 51 days as of March 31, 2023. This is on track within our target range. Inventory of $7,000,000 was up slightly from $6,800,000 on December 31.

Speaker 3

During the last several quarters, the increase in inventory related to our decisions to hold additional inventory to address shortage risks, improve our resilience as a and support our robust bookings and backlog levels. Our backlog on March 31, 2023 was 3,200,000 down from $4,800,000 at December 31 and reflecting a return to more normal levels and normal operations. Now on to the income statement. For the Q1, revenue of $7,200,000 was up from $5,000,000 in the Q1 of 2022 and flat sequentially. This reflected strength across the board and was up 46% from Q1 of last year and drove us to profitability in Q1.

Speaker 3

Automotive Electronics orders were 63% of 2023 1st quarter bookings and continues to be our primary addressable market. 1st quarter revenue breakdowns This breakdown was consistent with the percentages for all of 2022, which were 57%, 30% 13%, respectively. On a geographic basis, International sales represented about 87% of revenue for the Q1. 1st quarter 2023 bookings were $5,700,000 down from $6,800,000 in the 4th quarter and $6,200,000 in the Q1 of 2022. We saw expected softness in China as they recovered from COVID and prepare for new automotive emission regulations effective July 1.

Speaker 3

Europe was softer in Q1 coming off a very Strong Q4 for bookings. Gross margins were at 59.5% in the Q1 of 2023 And we're up from 55.5 percent in the 4th quarter and 46.4 percent in the Q1 of 20 was primarily due to more favorable currency exchange rates, channel and product mix and favorable factory variances. Operating expenses for the quarter were $4,100,000 in the first quarter compared to $3,400,000 in the 4th quarter and $3,700,000 in the Q1 of 2022. The primary differences in year over year operating expenses are higher channel commissions, trade shows, incentive compensation and recruiting related costs. As you know, we have substantial seasonal Q1 public company and audit costs.

Speaker 3

Funding our R and D continues to be a priority. R and D expense was $1,600,000 in the 1st quarter compared to $1,500,000 in the Q4 of 2022 and $1,600,000 in the Q1 of 2022. Selling, general and administrative expenses were $2,500,000 in the 1st quarter as compared with $1,900,000 in the 4th quarter and $20,000,000 in the Q1 of 2022. Taxes in the Q1 consists of foreign taxes on the profits of our overseas subsidiaries and U. S.

Speaker 3

State income tax. The company had net operating loss carryforwards of approximately $20,000,000 on March 31. Net income in the Q1 of 20 23 was $95,000 or 0 point 0 $1 per share as compared with 4th quarters of 20 22's $510,000 or $0.06 per diluted share and the first quarter's net loss was 1,800,000 or $0.21 per share back in 2022. Adjusted EBITDA earnings $502,000 in the Q1 of 2023 compares with the adjusted EBITDA earnings of $831,000 in the Q4 2022 and negative adjusted EBITDA of a loss of $932,000 in the Q1 of 2022. We had 808,008,818,076 shares outstanding on March 31, 2023.

Speaker 3

Overall, we remain very strong financially and continue to have no debt. Looking forward, With the continued strong sales funnel, as Anthony addressed in his remarks, we continue to plan for double digit revenue growth in 2023. We continue to expect relatively flat operating expenses throughout 2023 with the exception of primary variations due to sales and incentive compensation and the impact of currency changes. Gross margins are expected to continue to be in a range

Operator

We will now begin the question and answer session. In the interest of time, please limit yourself to one question and one follow-up. If you have additional questions, please reenter the queue. The first question today comes from David Marsh with Singular Research. Please go ahead.

Speaker 4

Hi, good afternoon. I guess I wanted to 0 in first on Q1 gross margins, which came in really close to 60%, which is a little above the guidance for the year and really up pretty substantially year over year. Could you just talk about How you're able to tease that gross margin level in the Q1 and how that plays into your expectations for the balance of the year?

Speaker 3

Yes. I think the number one thing that I would say is good revenues And a more normal operating environment really enabled this. It had our factories Working to get all the backlog that we could out, so it's down at a more normal level. We had the tailwind of A better currency exchange rates in there compared to the Q4 in particular. And Then we had very favorable factory variances as well as a channel mix that in particular was helpful.

Speaker 3

So in gross margins, we either have distributor discounts or we have sales commissions down in selling costs. This quarter, we had stronger sales in the Americas, which typically are an area where we pay a channel Commission as opposed to a distributor discount mostly internationally.

Speaker 2

So Joel, what you're saying is because that's of the reasons why spending was up in SG and A. Yes. But and the margins were higher because of where we sold, which channel determines that mix. The net impact Profitability is sort of a wash, but you'll get higher margins and higher spending with what the mix we had in Q1. Correct.

Speaker 4

Got it. That's really helpful. And then, I guess, my second question, I wanted to focus on Your comments around the Cybersecurity Act and just discuss a little bit about what Type of a timeline would we expect in terms of where we might start to see meaningful shifts In purchases to kind of reflect this new legislation and how long might it take to be reflected in your income statement going forward.

Speaker 2

Yes, Dave, I think nothing moves quickly when you're talking about the government, Except maybe the motion to adjourn for the summer vacation. But the I think the most important thing for us is people are seeing the handwriting on the wall and they know that they're going to have to design products now, Even if it takes 1 or 2 years to finalize regulations and all those other things, if you're designing embedded IoT products now, they're going to have What I think it's doing is forcing people who have been playing defense on new product design for a few years due to COVID, supply shortages, engineers not being in the office. They're coming back now for a new round of designs across a broad range of industries and they're coming back with The idea that they have to have security in mind with those new designs. So I think it's yet another Potential exposure for doing the wrong thing. Now they're going to have the folks from the government on their case if they do the wrong thing.

Speaker 2

So we see it as a long term tailwind for our SentriX business, just another factor that we like about that market.

Operator

The next question comes from Kevin Garrigan with Westpark Capital. Please go ahead.

Speaker 5

Yes. Hey, guys. Great speaking with you again. Let me echo my congrats on the results. Just a few questions from me.

Speaker 5

So the first part is Kind of a 2 part question. So the 10 new customer wins, are majority of those in automotive or are they kind of evenly split And then going off of Dave's last question on the National Security Strategy, Can you kind of give us a little more color on how those conversations are going with your customers? As in you said governments kind of move at a So are the conversations kind of like, yes, I mean, we'll wait until we need it or are these initial talkings kind of are they gung ho about potentially using SentriX?

Speaker 2

Sure. So the new wins, I think there were majority of the new wins in automotive. It might have been 6 automotive 4 others or maybe 7 and 3, but it was actually a really good quarter for us on new customers. We typically come in with 5 or 6 new customers in a quarter, And this one was unusual in that regard. On the second one on SentriX, we're seeing a lot more conversations starting because People are adding security capabilities to their products.

Speaker 2

And it's happening, It's broad based. As I mentioned, we had great conversations at our Embedded World Trade Show in Germany, which is a very influential Show in our target market. And the government regulations are one more factor for why people want to do security. The silicon is there, it's mature, it's available, and we like to think we're making the actual provisioning of the security capabilities with SentriX A lot easier. Frankly, I think one of the challenges we had with COVID was it's tough to get out It's pretty straightforward to say, we bought 4 machines from you.

Speaker 2

We can negotiate the 5th machine over Zoom and email. That's Pretty easy to do. What's hard to do is to sit down and walk someone through A change in process or a change in thinking, because it would have been tough to get everyone to actually sit down in a conference room and be available. And I think that's changing this year. We certainly saw a lot more people at our trade shows.

Speaker 2

We're having much better access to people. I'm certainly paying more for travel and entertainment to get my sales and applications teams out the door, which is what I want them to be doing. So again, I think the regulation is a piece that I want to make investors aware of. It's finally gotten to the point where the government's figured out this needs to So that probably says it's beyond the Lunatic fringe and is entering at least the mainstream of the market.

Speaker 5

Okay, got it. Yes, that makes a ton of sense. Okay, great. And just as a quick follow-up. So you have 1 quarter of 2023 in the books, but as you kind of look out to the rest of the year, what are the 1 or 2 things that you're excited about and then what are the

Speaker 2

Every time I turn on the TV news, it's distressing. So I don't do that much anymore. Rather watch a Kraken hockey game. They're doing pretty well, by the way. But the general business concern is, let's pick your poison.

Speaker 2

Inflation, Maybe it's deflation. Maybe the Fed is too tight. Maybe the Silicon Valley Bank collapse has caused the credit crunch. Maybe the government is going to not pay investors because they can't raise the debt limit on and on and on and on. If you want to follow those macro variables, you'll get depressed pretty fast.

Speaker 2

The reason I wanted to call out Specifically, some things that I think are more relevant to our industry is when you go to the micro view, What are people that buy our products? What are they doing? The answer is they're buying our products. And When I read the Teradyne script, I think they did an excellent job of articulating that, yes, the overall market could be soft, Okay. Which is the headline news version that you're going to get.

Speaker 2

But within that, there are pockets of weakness in PC and smartphones, which are continuing, And pockets of strength in Automotive and Industrial. And so, I guess the number one message to investors and what I'm trying to pay attention to is Not the headline news version, but digging beneath the cover story and into what's really going on in automotive. And I mentioned also in automotive, cutting prices to stimulate demand, that's good. Nothing wrong with that. When GM says, You know what, Apple, thanks very much, but we're going to do our own infotainment system, we're going to have to have a pile of flash memory In the consoles and the monitors, because we're supporting our own software because we want to have our own customer experience, Well, that's great too for Data IO, because we don't provision a lot of stuff in the commercial tablet space.

Speaker 2

We provision a ton of stuff in the automotive infotainment So again, these are things that are not macroeconomic variables that are very, very bullish for us As we look out over the mid and long term.

Operator

The next question comes from Chris Baccosti, Lou is a Private Investor. Please go ahead.

Speaker 6

Hello and congratulations from me on the great quarter as well. I wanted to ask about the automotive sector in China. There's all kinds of news that Production might be not as high as hoped because of the stop of subsidies. And there's also news that Tesla is cutting off prices and is basically Tesla is going to all the suppliers asking for price reductions from the suppliers. So can you talk about what's happening there?

Speaker 6

You said already that there will be you're expecting improvement later in China and what gives you confidence for that?

Speaker 2

Yes, sure, Chris. I'm really glad you asked the question because I think it gives me a chance to expand on remarks that I probably should have said earlier. The way we see the situation in China is there's a lot of turbulence after the reopening in December January. And I think it revealed they had some inventory in Q1 and we certainly saw that in Q1. Business was soft in China in Q1.

Speaker 2

What gives us confidence going forward are really a couple of things. Their March numbers look pretty good. We keep an eye on some of the automotive weekly trends in China. It looks to be improving. And then there's also this thing about they're changing their emissions regulations on July 1.

Speaker 2

And it's my understanding that the way they do that is, you're able to sell the cars that under the old admissions where I think a 30 day grace period, But after that, you can't sell it. So when they make these emissions changes, if they have any cars that are the old standard, They need to get rid of them now. And so it does create some localized disruption on the supply chain as they say, all right, I'm Not building any of the old models anymore. I have to switch over to the new models. And but at the end of the day, The demand is still there.

Speaker 2

China has a tremendous EV market. We're very well positioned in China. As I think I mentioned on these calls before, I don't think you can buy a production automobile anywhere in the world that has real volume Without having at least some Data IO content in it, it would certainly be very hard to find 1. And so for us, we think the China auto market definitely had a hiccup and it should be back to normal and continue growing. And then our suppliers, they ask for a haircut pretty much all the time.

Speaker 2

I don't know what the big deal is about Tesla asking for a haircut of their Buyers. That's pretty much typical behavior in the auto industry. And they buy from us because on a total quality and cost

Operator

The next question comes from Matt Winthrop with Equitable. Please go

Speaker 7

ahead. Good afternoon. I'm a retail broker and fair disclosure. I've been following you guys for a little while. Nice to see you're making good progress.

Speaker 7

I wanted to ask a double sword. You mentioned commissions once in a while. Do you rely more on an in house sales force Versus a local distributor for most of the products. And also in looking at the last couple of quarters, there's a good amount of consistency In terms of bookings and backlog, yet you seem to feel like things are really picking up. Is there something in the marketplace other than corona that gives you so much

Speaker 2

Well, thank you very much, Matt, so on the sales process, we have a different model depending on what region we're in. We have direct sales people, and that's certainly our preferred model in places like Europe. We also do a lot of business through Distribution in Asia for a variety of reasons. Local language support, local service are very good. We have some very strong distributors in Asia.

Speaker 2

And in the U. S, we have a mix of Reps and servicing reps in North and South America. So it really depends on the region. We've tried to optimize our sales capabilities to be what's available in the region that best serves our needs and our customers' needs for Not only reliable sales engagement, but also great service. So that's a sales question.

Speaker 2

On the second one on the business, I just keep coming back to the fact that long term, there's just more silicon going into cars And it needs to be programmed. And we are by far the leading supplier in the automotive programming market. I can expand on that for probably 2 hours, but that's the 32nd version of why I'm excited about Data IO. And you tease that out, more programming, more security, more capability. People need worldwide presence.

Speaker 2

They need Global support and service, if they open up a factory in a new country, a new low cost region, which people are doing, they know that Data IO has a presence there, And on and on and on. And then some of the midterm factors, you talk about getting rid of the silicon shortages, The China unique items that I just addressed in the previous caller's question, yes, So that's what we're excited about. So let's just keep going.

Operator

The next question comes from Michael Cooper, who is a private investor. Please go ahead.

Speaker 8

Hi, guys. Good solid quarter. I wanted to understand the SentriX product or service line a little bit more how Your sales cycle is, I know that product designers come in and do maybe a proto And then maybe it's 2 years until they go into production. So are you able to influence that, bring that Sales cycle down. Can you give us some kind of sense on are you seeing more product designers Coming in on the front end of the funnel.

Speaker 8

And I think in the last quarter, you indicated maybe you had a few Customers doing production, is that number up today?

Speaker 2

Yes. So, on the production one, let me answer that first. So, we had good pay per use Revenue in Q1, we had several customers start production in Q4 and they continued production in Q1. On the design cycle, I think you've got very good understanding of the market. If we're going customer by customer, Then we need to talk to them as they're designing or during new product introduction phase, which they could take 6 to 12 to 18 months to go into full production.

Speaker 2

One of the reasons that we're excited about what we announced with Nuvoton is we sat down with them and we figured out How to enable their products in a way that we do all the work upfront, so that they can go to their customers With not only the silicon sale, but here's how you do the security provisioning. And Data IO or Data IO's partner can work with you with an algorithm and a security use case that's already completed for you to go into production. And by doing it that way, it reduces the time between our engagement and to the customer going into production. It allows us to catch up to them a little bit later in the game and still have a design win. But you're right, overall, SentriX will require a little more time between when we engage,

Operator

The next question comes from Avi Fisher with Longcast Advisors. Please go ahead.

Speaker 7

Hi, thanks for taking my question. Two quick ones. Could you describe what a customer win is? I Is that a new client buying a new PSV or something else?

Speaker 2

Yes. Customer win, Avi, is when we sell A system usually it's an automated system, some customers a small amount might be a manual system or a SentriX win. And it's they don't have any Data IO equipment at that site. So, for example, if we've been working with a new With a customer for years and they open up a new location and we win that, that's a customer win. If it's a brand new customer opening up a factory, that's a Customer win.

Speaker 2

If it's a new SentriX customer, that would be a customer win. If it's the 4th Okay. Well, thank you very much, operator. Before I close, I'd like to just remind everyone that we will be Having our Annual Shareholder Meeting on May 18th. I will also be doing a couple of conferences in Q2, May 24th for Singular Research Spring Select Conference, and I believe that will be virtual, and then June 22 for the Singular Research Summer Solsys Conference.

Speaker 2

And I guarantee you that, that will be on the longest day of the year. So with that, I'd like to conclude today's call and thank everyone very much.

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