Vertex Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 25, 2024

There are 7 speakers on the call.

Operator

Good afternoon, and welcome to the Data IO Second Quarter 2024 Financial Results Conference Call. Please note this event is being recorded. I would now like to turn the conference over to Jordan Darrow, Investor Relations. Please go ahead.

Speaker 1

Thank you, operator, and welcome to the Data IO Corporation's Q2 2024 Financial Results Conference Call. With me today are the company's President and CEO, Anthony Ambrose and Chief Financial Officer and Vice President, 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 on 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, parts 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 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'll begin my formal remarks by addressing our Q2 2024 financial and operational performance. Then I'll turn over the call to Jerry Ang for a more detailed look at the numbers. As we mentioned in the release, bookings and revenue were soft in Q2 and below our expectations. This wasn't monolithic, however, as we saw divergent business conditions across our sales regions and various markets.

Speaker 2

Throughout the first half of the year, Asia and EMEA sales regions are performing ahead of expectations as the Americas have substantially below plan. By market, we saw strength in programming centers, industrial IoT and EMS and weakness in the automotive sector. We continue to have strong traction in new customer acquisition with 8 new customer and location wins in Q2 for a total of 13 year to date. Most of these were in the IoT, Industrial and EMS markets supporting edge AI applications. This has contributed to our bookings of $13,700,000 in the first half of the year, increased slightly from $13,300,000 over the prior year period.

Speaker 2

At the same time we're winning new business, we saw significant push outs from existing automotive customers who are planning capacity additions, primarily in North America. While system capacity demand slowed, we still saw good bookings for adapters and software and services. Together, they reached 49 percent of our revenue year to date. Included in that is our SentriX security provisioning platform and that set a record for units processed by our programming center partners

Speaker 3

in the Q2.

Speaker 2

Moving along to spending, we made significant progress on spending controls, process efficiencies and reducing direct product costs. Jared will go into more details on the spending side, but we are pleased with the progress made in Q2. We are focusing on long term structural efficiency improvements, including deploying AI and machine learning capabilities and other tools to accelerate these efficiency gains. Our balance sheet remains very strong. We moved cash from China to the USA in Q2 and paid the associated dividend taxes.

Speaker 2

Having the cash in the USA gives us more flexibility on the balance sheet as well as an opportunity to earn more on our cash. Looking to Q3 and Q4, all of us are wondering when automotive demand returns. We still see a long term secular growth in electronics content in cars and view the recent softness as inventory corrections and a change in mix from EV to hybrid and internal combustion engine models. Automotive nameplates are recalibrating or at least taking a measured approach to their investments in EV development and related capital investments. An example of this is Ford moving their Super Duty production to Oakville assembly plant that was originally meant for EV trucks to Super Duty trucks, which is an internal combustion engine product.

Speaker 2

Political uncertainty around U. S. Policy as well as hopes for an interest rate reduction going forward may also be holding back capital additions in our customer base. Recent statements by automotive OEMs, Tier 1s, equipment suppliers and semiconductor companies do not indicate a snapback in automotive demand in Q3, however. Our historical experience shows auto electronics demand moves sharply once they decide to add capacity.

Speaker 2

We have the capacity in our manufacturing plant in place to move quickly once demand returns. We also have the right technology for our automotive customers as they begin to add more capacity. This includes recent new releases for our UFS programming technology as well as entry level programming trends. Our focus will continue to be on the things we can control: attracting new customers, making continued progress on spending and cost controls and being ready with the right products for customers as their capacity needs return. Despite the softness in North American Automotive, there's still a significant amount of contractual backlog that's expected to be shipped and recognized as revenue in the second half 2024.

Speaker 2

As we shift this backlog, we look forward to benefiting from the operating leverage in our model, especially given the progress made on managing costs and expenses. With that, I'll pass it over to Jerry Heng. Jerry?

Speaker 4

Thank you, Anthony, and good day to everyone. I look forward to outlining and elaborating our recent financial performance in more detail. My comments today will focus on key points of interest for the Q2 of 2024 and our perspective looking forward, including our progress on spending efficiencies, unit cost reductions and balance sheet management. Despite the current automotive market headwinds, Data IO's financial condition remained strong at the end of Q2. We maintained a strong backlog heading into the second half of twenty twenty four, a healthy balance sheet and a lower operating structure, which will contribute to improved financial performance as the markets recover, as Anthony commented on earlier.

Speaker 4

Despite the Q2 revenue shortfall, cash remained relatively steady at $11,400,000 as of June 30, down $559,000 from the $12,000,000 at the end of Q1. Cash benefited from continued strong customer collections and lower operating expenses, which were offset by a $337,000 tax related to a $3,400,000 cash dividend repatriated from our China operations. Accounts receivable at $3,300,000 as of June 30 is maintaining a steady day sales outstanding or DSO at 55 days and very low credit loss exposure. Inventory at $6,700,000 increased from $6,400,000 from the beginning of the quarter on lower Q2 sales volume and anticipation of higher sales volume and backlog reductions for system deployments in the second half of twenty twenty four. Overall, net working capital at $17,600,000 at the end of Q2 declined slightly from the $18,100,000 at the end of Q1 2024.

Speaker 4

The company continues to have no debt. Moving to the income statement. 2nd quarter revenue at $5,100,000 was down 32% compared with $7,400,000 from the prior year period, reflecting sluggishness in the Americas region and extended timing of our backlog conversion to shipments. 2nd quarter bookings were 5,700,000 opportunity conversion in Asia and Europe, as Anthony indicated. Our consumables, software and services at 49% of total year to date revenue have provided a steady base of recurring sales, helping offset the current CapEx system softness in the Americas region.

Speaker 4

Finally, ending Q2 backlog at 5 point $4,000,000 has increased by $2,600,000 from the beginning of the year. Moving on to gross margins, Q2 was at 55%, down 3 percentage points from the 2023 prior year level, due largely to lower sales volume. However, our Q2 margins were 2 percentage points higher than the preceding Q1 2024 quarter from improved product mix and favorable cost control efforts. The improvement reflects ongoing initiatives to reduce material, manufacturing and service costs. Product value reengineering, sourcing optimizations, quality improvements and process streamlining have all contributed to the overall improvement and sustainable impacts.

Speaker 4

Similarly, I'd like to address the progress we have made on operating expenses. 2nd quarter operating expenses were $3,300,000 down $886,000 or 21 percent from the prior year and down $757,000 or 19 or 19% from the preceding quarter. Core personnel, facilities, IT and other outside services costs declined through prioritization of critical initiatives and overall efficiency improvements. This lower and efficient cost structure has allowed the company to partially mitigate the current revenue decline and will contribute to improved financial performance when the overall market conditions and related system shipments improve. The company incurred a net loss of $797,000 for Q2 compared to a net income of $300,000 in the Q2 of 2023.

Speaker 4

Again, the decline was due largely to lower revenue. A foreign tax expense for cash repatriated from China, which was partially offset by significantly lower operating expenses and higher interest income. A foreign withholding tax of $337,000 was incurred in China from a $3,400,000 dividend paid from our China operations to our parent company in the U. S. This was undertaken to, number 1, optimize the cash position and operating needs of each operation, increase the interest earning potential of our overall cash holdings and ensure available liquidity in the U.

Speaker 4

S. To support future strategic and operational initiatives. Overall, we remain very solid financially with a strong cash position, no debt and the ability to navigate market opportunities and challenges. Looking ahead, our contractual backlog is expected to be shipped and recognized as revenue in the second half of twenty twenty four, as well as leveraging the progress we have made in managing costs that I have discussed earlier. That concludes my remarks for the Q2 of 2024.

Speaker 4

Operator, would you please start the Q and A process?

Operator

We will now begin the question and answer The first question comes from David Kanan with Kanan Wealth Management. Please go ahead.

Speaker 5

Hi, good afternoon guys. Thanks for taking my questions. Got a couple and then I'll go back into queue. Jerry, good job on the reduction of expenses and the cost efficiencies. And I'm assuming there's a sustainable benefit to gross margins on a go forward basis as volumes increase.

Speaker 5

My first question is, in theory, if revenues were to increase, let's say, from $5,000,000 to $7,000,000 With the various measures that you've taken in cost of goods, can gross margins get into the high 50s, even 60% based on significant volume increases?

Speaker 4

Yes, I believe we can. Let me give you a good example. Let me give you a good example. For our current quarter, our revenue was at $5,000,000 and our operating income was at $400,000 loss. We typically get a 60% fall through on revenue.

Speaker 4

To the extent that we can maintain our efficient cost structure, we should see again a similar future 6% fall through on revenue increases. So correspondingly, as our revenue goes from 5% to 6% to 7%, we should see a comparable and corresponding fall through to the bottom line.

Speaker 2

Yes. The only thing I would add there, Dave, is Jerry is right. It just depends on the mix, the location of the revenue. As you know, we have different margin structures and we sell through distribution versus selling direct. So just it assumes kind of a normal mix and then think comments stand.

Speaker 5

Okay. So the next question relates to that. And again, we don't know how much is going to be direct or through distributors, but assuming a normal mix as you put it, what is the Gerry, what is the variable expense on the next $1,000,000 of revenue? So let's say, for example, revenues were $6,000,000 instead of $5,000,000 on that incremental $1,000,000 what is the variable component? Is it 10%, 15%?

Speaker 2

Yes. So Dave, I'll interject on this. I think it's primarily going to be related to, obviously the sales expenses, and that's the primary variable component. And again, if we're in a situation where we sell directly, not going to not going to burn more electricity in the factory. There might be incremental travel.

Speaker 2

There might be some incremental other G and A to build stuff depending on how much not G and A so much as operations to build the product. But again, I don't anticipate that being very much.

Speaker 4

Yes. Just to add to that, again, material costs, freight, logistical costs, commissions, those are typical variable expenses associated with revenue activity. And again, if you kind of follow our typical leverage fall through on revenue, we should get a beneficial impact.

Speaker 5

Okay. So but what I'm trying to nail down is with the variable component assuming a normal mix on that on $1,000,000 delta in revenue, is it 10%, 15%? What is that approximately? Because SG and A will go up.

Speaker 2

Historically, we've always told people, Dave, that the operating leverage is 40%. Even where we are, it might be better. But we've always told people when you net everything out, that's where the operational leverage comes to.

Speaker 5

Okay. And then, guys, are there incremental expense reductions or efficiencies that we should see in the back half of the year or is everything complete at this juncture?

Speaker 4

It will be smaller as we continue to kind of work through the opportunities. A lot of these initiatives we have, have some short term as well as longer term benefits, particularly on material cost reduction that may have a longer term but more sustainable impact. So we expect some continued improvement as we move forward.

Speaker 5

Okay. And then final question, I'll go back into queue, I promise. A lot of hype around artificial intelligence. So, Anthony, if you could sketch out for us the impact of AI on your business. I know you guys are using it, but also can you talk about various enterprises using AI, their deployment of it and how that affects your business and the opportunity if any?

Speaker 2

Sure. And I would refer you and just all investors to our latest investor material on the website. I think it looks like Slide 8 has some of this conversation in a little bit better graphics. But in short, Dave, there's a series of applications that we've identified and others use the term as well called Edge AI. It's built around a set of products that will require AI implementations to become better, but they will not be able to leverage the AI capabilities in the cloud.

Speaker 2

And I'll give you an example. So for an automotive application, this would be ADAS, advanced driving assist. You're not going to go back with the latency and unpredictable connection to go to the cloud for directions whether you're going to take a right turn on Main Street or not. You're not going to teach the car from the cloud. It's going to have to come you're going to have to learn as you go.

Speaker 2

There are other applications around smart cities, industrial automation, a lot of the smart metering applications we've talked about, a whole set of other IoT applications, smart homes, etcetera. Now those applications benefit Data IO in a number of ways. We've talked a lot about automotive and ADAS and the demand increase that we see there. The code size gets bigger. The minute you add AI or machine learning components, right, you just increase the code size.

Speaker 2

It also ensures that you are developing newer platforms, replacing some of the older platforms that may have even smaller code size, which again is good for us. So the whole AI market that I think will benefit Data IO more directly is in this segment called Edge AI and the various segments that I just highlighted.

Speaker 3

Got it. Thanks guys. Good luck. Thank you, Dave. Thank you, Dave.

Operator

And the next question comes from David Marsh with Singular Research. Please go ahead.

Speaker 6

Hi, guys. Thanks for taking the questions. So I guess if we just start on the automotive side, I mean, you guys specifically said that the Americas is weak. Could you just kind of give us a little bit of a broader global landscape? I thought you guys had some pretty promising opportunities in China and perhaps India.

Speaker 6

Maybe you could just talk about those a little bit?

Speaker 2

Yes, Dave. So basically most of the promising opportunities in Asia closed as we expected. Asia is far ahead of their plan for the year and that's been on strength in Q1 and Q2, including some strength in China. The Americas, by contrast, it's gone from a Fiesta to a Siesta. We've seen I haven't seen any deals that we know of that got went to competition, but they just all got pushed out.

Speaker 2

And in my checks with other channel partners, other companies in similar industries, they're seeing a very similar set of activities. Automotive after really 2 big years for us in Mexico, They're just digesting the capacity and I think trying to figure out how much they're going to build in Mexico, how much they might have to build in the U. S. Depending on the election. And then also there's talk there's been talk of interest rate reductions.

Speaker 2

And corporate CFOs like to pay 4.5% for something instead of 5% for something if they can. And so I think that's also contributed to some of the potential waiting. You heard comments from Ford, Stellantis, NXP, some of the Tier 1s, really talking about also a product rotation. So I think all that contributes to, let's run the factory with what we've got as long as we can. And then as you know, our experiences with especially with the automotive guys, they always seem to come in when they're ready to buy with demands where I need it right away.

Speaker 2

We saw that in 'sixteen and 'seventeen. We saw it in 'twenty and 'twenty one. We had a little mini bump, I think 18 months ago. And so when it comes back, I think it will come back fairly rapidly. But I'm telling you, it was among the roughest quarters for a region I've ever seen, just in terms of everything got pushed out.

Speaker 6

Okay. That's really helpful. And then just obviously you got to wait for the Q for the breakdown on revenues, but maybe could you just give us some sense directionally with regard I guess, specifically with regard to the kind of software centric business, That's clearly the line you really want to see your growth in because it's kind of more recurring. Can you just talk a little bit about specifically what's going on there? I mean, there were I did catch some comments there, but I didn't get a lot of details.

Speaker 6

So just can you just give us a sense of how

Speaker 2

So a shipments perspective, we had record units processed by our programming center partners on SentriX, okay? And that continues a pretty steady upward ramp there. It's a question when you look at the SentriX and software overall combined with our consumable adapters. I don't know if it's a record, but it's pretty close to one if we I have to go back and look. But it was 49% of our revenue in the first half.

Speaker 2

And that's typically been running 43%, 44%, I think for the year last year. So we talk about a long term goal of fifty-fifty split between recurring revenue and systems. We almost hit that so far this year. Now admittedly that's because the systems orders were down a bit, but it indicates the strength we have in the consumables, which when you combine that with some of the things Jerry is doing on expense reductions, will help us continue to preserve cash when we have a systems divot and then be ready to have a couple of really good quarters when the demand turns around.

Speaker 6

Okay. And then just one quick last one. I mean, and I'm not trying to read anything into this. I mean, I understand that there was an opportunity there to repatriate that cash in China and get it, but that's not by any means kind of an indicator that you feel like your China business is slowing or you're not going to need as much cash over there to support the business operation, it's just you had an opportunity and took advantage of it. Am I reading that correctly?

Speaker 2

You got it. As Jerry indicated in his earlier comments, we have substantial operations in the U. S, China and Germany. And it's fundamental that we maintain working capital to support those operations flawlessly and we continue to do that. But as he indicated, the benefit for us, even though you have to pay the tax, is you get the flexibility of having it in the U.

Speaker 2

S. And opportunity to earn a little bit more on interest. And so when we just talked this with the Board, it's pretty clear let's go ahead and repatriate the cash and move on.

Speaker 6

Got it. Okay. Thanks, guys. I'll yield to other callers. Thank you very much.

Speaker 2

Thanks,

Operator

Dave. And the next question comes from Kevin Gergen with Westpark Capital. Please go ahead.

Speaker 3

Yes. Hey, Anthony and Jerry. Thanks for letting me ask a couple of questions. Anthony, just to clarify, so in Q1, you had said that your bookings had seen strong demand across all end markets. So compared to 3 months ago, automotive companies are just kind of waiting to see how things play out in the market like interest rates as you mentioned, are they noting a significant decline in demand at all?

Speaker 2

Yes, Kevin, I mean it just disappeared in Q2 in North America. I mean I can't I wish I could come up with a softer way of explaining it, but that's basically what happened.

Speaker 3

Yes. No, that makes sense. Okay. Yes, that's what I was kind of wondering. Okay.

Speaker 3

And then you sound pretty confident that you're going to fulfill back log orders in the second half of the year. So I mean does your backlog consist of non cancelable orders or what kind of gives you the confidence that these orders won't get pushed out or canceled?

Speaker 2

Some of the terms are non cancelable, some are not. But the way our industry has traditionally behaved is people don't cancel orders on us once they place an order, okay? We had one exception when COVID hit and shut down and literally one customer that canceled it 4 hours after they sent us the order. But knock on wood, we don't see behavior where customers come in and cancel. Now they have the right to do so under our standard terms up until we ship, but it's not something that's plagued us.

Speaker 3

Got it. Got it. Okay. That makes sense. And then just as a last quick question.

Speaker 3

On Dave's question earlier regarding Edge AI, I know automotive and ADAS are large markets for you guys. But I would say ADAS might be taking a little bit longer than expected. Is there another application that you're kind of seeing tick off more now for Edge AI?

Speaker 2

I went over the list earlier a little bit around certainly the smart metering, we've won a number of deals there. IoT, factory automation, we had a number of factory automation wins over the past couple of years. And on the new customer, new location wins, I mean, it's skewed more towards everything besides automotive and including Edge AI in Q2 with the 8 wins. I think auto was 2 of the 8. So, yes, I mean it's it has not displaced automotive.

Speaker 2

I'm not going to go that far. I think automotive will come back hopefully sooner rather than later. But it does represent some interesting growth opportunity for us and we're going to continue to dig a little deeper on that.

Speaker 6

Okay, perfect.

Speaker 4

Thank you.

Speaker 3

Thank you.

Operator

Thank you, ladies and gentlemen. This concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks.

Speaker 2

Well, operator, thank you very much. I'd like to thank everyone who asked questions. And at this point, I would like to conclude

Remove Ads
Powered by Quartr
Earnings Conference Call
Vertex Q2 2024
00:00 / 00:00
Remove Ads