Data I/O Corporation (DAIO) on Q2 2021 Results - Earnings Call Transcript
Operator: Good afternoon and welcome to the Data I/O Corporation Second Quarter 2021 Financial Results. All participants will be in a listen-only mode. Please note, that this event is being recorded. I'd now like to turn the conference over to Jordan Darrow, Investor Relations. Please go ahead.
Jordan Darrow: Thank you and welcome everyone. This is the Data I/O Corporation second quarter 2021 financial results conference call. With me today are Anthony Ambrose, President and Chief Executive Officer of Data I/O Corporation and Joel Hatlen, Chief Operating Officer and Chief Financial Officer of Data I/O.
Anthony Ambrose: Well, thank you very much, Jordan. I'll begin my formal remarks by addressing our 2021 second quarter financial and operational performance and then I'll turn it over to Joel Hatlen for more detailed discussion of the numbers. 2021 Q2 adds to the momentum we began experiencing in the first quarter. We achieved the highest performance in years for a number of key metrics, and also reported several significant milestones on our technology platforms. In Q2, we had a surge in bookings and revenue growth. Bookings were $8.9 million, the highest level in nearly four years and up 79% from the same period last year. Revenues were 6.7 million, up 45% from the same period last year and 12% sequentially. We also ended the quarter with a backlog of $5 million. Automotive electronics were about 56% of our total and when you look at everything, 2Q is our strongest quarter in two years and continues the upward trend in automotive and industrial electronics demand that we've been seeing since the bottom Q2 a year ago. When you break it down, we're seeing excellent performance in all sales regions worldwide. We're seeing strength the new customer acquisition and new location wins, as well as repeat business for capacity additions at existing customers. Our ongoing recovery globally in the installed base is also driving a significant expansion and recurring revenue growth, with Q2 having the largest consumables quarter in recent memory.
Joel Hatlen: Thank you, Anthony, and good day to everyone. As our financial performance clearly has advanced with growth in revenues, bookings and backlog, it's a good time to review our financial model. While we do not give revenue guidance, we try to provide information helpful in modeling our business. On the gross margin side, we believe mid-to-upper 50 range is what will be maintained, although the margin profile may improve depending on the product mix, and channel mix. Operating expenses will be fairly consistent for the balance of the year with variances largely pegged to sales commissions. R&D should be remaining at approximately 1.7 million per quarter, since we intend to continue to invest towards extending our lead as an industry innovator. Taxes are expected to consist of foreign income taxes with no US taxes expected due to US NOLs and carry forward.
Operator: Our first question comes from Jaeson Schmidt with Lake Street. Please go ahead.
Jaeson Schmidt: Hey, guys, thanks for taking my questions. I just want to start with the supply chain. It sounds like in your prepared remarks you guys did not see any significant impact. Just curious if that was truly the case and if you're expecting any sort of impact here in Q3.
Anthony Ambrose: Jaeson, thanks for the question. I think your assessment is correct. We haven't seen any substantial impact. The impact we have seen is the amount of effort it's taken from the operations team to keep the machine running, the baby sitting of the supply chain, the babysitting of freight forwarders, things like that. We took some very proactive steps right at the beginning of the year to make sure that we had key components lined up because we were expecting a bounce back. I don't think we're expecting quite as large a bounce back. So we were protected in that sense. But it's just a lot of effort going in, a lot of work under the covers to keep the well-oiled machine going.
Jaeson Schmidt: Okay, that's helpful. And I know, you mentioned your expedited freight costs, but just curious, in general, if you're seeing other sort of inflationary pressures and if so, if you're passing along those increased costs to customers?
Anthony Ambrose: Yeah, we're starting to see some price increases in the supply chain. And we evaluate that and we do price increases from time to time as the costs go up. And we'll keep that tight eye on that.
Jaeson Schmidt: Okay. And the last one for me and I'll jump back into queue. Really nice accomplishment with that first SentriX system. Just curious how long you had been engaged with this customer, from kind of initial conversations to them formally, kind of going with the system?
Anthony Ambrose: I'd say it's probably been, from the time we started talking to the time we got the purchase order, I'd say it's on the order of two quarters, maybe a little bit less, maybe a little bit more, but that's about it.
Jaeson Schmidt: Okay, thanks a lot, guys.
Anthony Ambrose: Thank you.
Operator: The next question is from Jeff Thompson with Aston Capital . Please go ahead.
Unidentified Participant: Thanks, Anthony and Joel, guys, for taking my questions. Please walk us through your financial model. I believe you have really strong operating leverage, so want to see how that can come through.
Joel Hatlen: Yeah, we expect, as I started with the conversation on my section to have gross margins stay in the mid-to-upper 50% range. And we actually think that that could be better than that, depending on our mix of channel and product during the quarter. I think our operating expenses will be pretty much in line with where we've been this quarter, with the exception of what the selling commission amounts will be relative to the higher sales volume. R&D, we expect to really be pretty stable at around the 1.7 million range. We don't forecast ever any positive or negative foreign currency piece and that was an unfortunate item this quarter but we do think that our income taxes will be again consisting entirely a foreign taxes with no US taxes because of NOLs. So that's really the basics of it.
Unidentified Participant: Thank you. That's helpful. When you start generating excess profits and cash flows you did during your last run up and around 2017, you implemented a share buyback What can we expect this time around and have you given any thought as to what cash level you want to have or what is the stock price you would repurchase share?
Anthony Ambrose: Sure. For those of you who might be relatively new, the company has a history of buybacks going back eight or nine years. I think we bought back just a little over $8 million to date in the last decade. In a cyclical business, as you generate, I'm not sure if the excess profits or cash, but you may end up with cash that's exceeding what we think we need to run the business effectively, across a normal cycle with some safety buffer. And obviously being a little bit conservative on cash helped us out quite a bit during the past year with COVID. There are a number of other factors to consider not just total cash, but where the cash resides. But we get to that point where we have what we believe is a surplus of cash. I'm sure that's a discussion we'll have with the board.
Unidentified Participant: Okay. And what is different in how you're running the business now, as opposed to 2017 when you had at a run out back then? Is there anything you learned from since that time that positions you to perform better or that would prolong your growth period?
Anthony Ambrose: That's a good question. I think one of the things we did really well in 2017, we're also doing well right now and that's having the operational excellence that our manufacturing and service teams, here in Redmond and also in our Shanghai office, have demonstrated. One of the things we learned, I guess, had to do with COVID and the semiconductor shortages, we learned how to operate much more remotely, which I think will give us a little more leverage in our standard operating procedure in multiple functions in the company. As we go forward, I don't think we'll be traveling as much. We'll be investing more in IT tools and infrastructure to enable that flexibility and pulling back, as I mentioned, on the travel. But perhaps the most interesting thing for the investment community comparing now to 2017 was the profile of our revenue is geared much more towards recurring revenue now than it was back then. Joel, help me out here, but I think in 2017, we had about 29% of our revenue from recurring revenue and 31% CapEx.
Joel Hatlen: That's correct.
Anthony Ambrose: And, right now, we're about 44% recurring revenue and 56% CapEx. So the larger recurring revenue gives us a little bit less volatile earnings profile and that'll be helpful as we go through the business cycle.
Joel Hatlen: One thing I'd probably add to that is, we've strengthened our manufacturing operations so that we have the ability to produce some of our equipment in both our Shanghai factory and our Redmond factory, so that helps us manage tariffs, it helps us with flexibility for where the demand is, and it gives us some supply chain extra resilience with having local sources for both of our factories.
Unidentified Participant: Great. That's helpful. Thanks and then one last question. Back in 2017, you were funding SentriX as a startup, and how is the security provisioning platform evolved since that time? And does the market now seem more receptive or in need of this solution, as compared to when you were initially funding it?
Anthony Ambrose: Well, that's a great question, Jeff, and it's important to the company's future. In general, as we develop the product and engage with customers and learn more about the market, we've kept two major goals in mind, simplify and scale. And we learned that our early product was too complicated, it really didn't allow for easy upgrades to the installed base and our customers told us, make it easier to use and make it - so that we can leverage that large installed base of PSV equipment. We did that in the second generation product that we're supporting now. We simplified the tools, we simplified the overall system, we simplified the customer experience and we've demonstrated now that we can successfully upgrade existing PSV systems in the field to SentriX capability. This will help us grow the business within the current programming center channel and also gives us an expanded opportunity outside of programming centers with OEMs and EMF suppliers where we only saw one or two SentriX opportunities early on. That and I think winning a big deal in artificial intelligence will be game changing for us as it shows our additional applications where SentriX is appropriate and a great fit.
Unidentified Participant: Thanks. And that is all our questions at this time.
Anthony Ambrose: Thank you, Jeff.
Operator: The next question is from Orin Hirschman with AIGH Investment Partners. Please go ahead.
Orin Hirschman: Hi, how are you? So on SentriX, is this turning point to feel, finally, we're really beginning to get traction. And I also noticed you mentioned in your recurring - you actually mentioned SentriX as part of the recurring thing, it's first time, you never really mentioned that because it was so tiny. That mean, the recording is actually becoming more notable. It's still tiny and you just wanted us to begin to be focused on?
Anthony Ambrose: Hi, Orin. If I emitted SentriX from the recurring revenue, it's just simplicity. But to get back to your first question we think it's a big win for us, because we were able to engage directly with an end customer, a very demanding end customer, again, in the artificial intelligence space, we don't have permission to use their name. But they understood the benefits of SentriX very, very quickly. We're able to work with them on tailoring the product to exactly meet their needs and their very specific application. And they had a unique model where it was better off for us to actually sell them a system and create a license rather than the historic pay-per-use model that we've had with other customers and so we're able to work with them on that as well. So I think, it opened our eyes to applications. Go ahead.
Orin Hirschman: Sorry, finish your idea of thoughts.
Anthony Ambrose: Orin, did you have an additional question or clarification there?
Orin Hirschman: Well, yeah, again, I apologize, I didn't want to throw up the idea but just - does that mean that they're not going to be paying a recurring, this particular customer?
Anthony Ambrose: There's a recurring element to it but it's more around a licensing than a pay-per-use model.
Orin Hirschman: Okay. Is that because of the magnitude of the size that they want to?
Anthony Ambrose: I don't want to get into too many details but that's basically what the customer insisted upon and we were able to come to something that worked for both of us.
Orin Hirschman: Okay. And just going back to the basic question, in terms of what was it specifically about SentriX that you want, and what type of competition we were facing for this customer.
Anthony Ambrose: In broadest possible terms, the way we compete with SentriX is, is as we compete on the data business. People can inject data and security information at a number of different points in the supply chain; you can do it at a semiconductor back end assembly test operation, you can do it when the product is completely manufactured at the end of the line and you can do it with pre-programming technology, as we have with SentriX, where you have access to the component, prior to placement on an SMT line. The benefits are, it's a little bit more secure, when you're able to make sure the chip is fully secured, before it's even put on a manufacturing line. Less of a concern if you own the factory, but it's a much more secure method than waiting till the end of the line because you have a much larger threat surface if you wait until everything is done through the SMT process. And you can always do it at the semiconductor house, they tend to have challenges with lower volumes and some customers don't want to have anyone else have access to their code. And so in this particular case, I think the benefits were, we had a very flexible solution, we could tailor the product to meet their needs and it met their needs to have control over all their intellectual property within their own factory, so it was a great win for all concerned.
Orin Hirschman: Okay. Again, just to reiterate, in terms of where SentriX plays, is it only in that pre-programming before SMT or you could also play in the post manufacturing semi itself in the factory, the semi factory itself, are they're really one and the same.
Anthony Ambrose: I think we've always - the Data I/O technology that we have has always been a pre-programming technology on the data side and also on the SentriX side. Over time, it's possible that SentriX could evolve outside of that. The capabilities for SentriX are substantially broader from a security management perspective than the data programming engine. But right now, the SentriX technology, as our PSV technology does, supports the pre-programming model
Orin Hirschman: Is this win, , not even this win, per se, but just what's going on for you, do you see other - do you see a bigger pipe of SentriX because it's been a long time in coming and obviously this win is a big deal for you? Have you seen the pipeline begin to break open at all for SentriX besides this win?
Anthony Ambrose: Yeah, the pipeline in the first half of the year has been much stronger than it was last year. I think for some of the smaller customers, they've actually - they're interested but they've been held back a little bit by the supply chain, just simply getting parts. So I think when the supply chain breaks loose, I think that'll actually be a net positive for SentriX with some of our potential new customers. But yeah, in overall the interest is there. Again, the product is better, it's easier to use, it's more straightforward and hopefully we get a little momentum out of this win.
Orin Hirschman: Okay. And just shifting to the base distance for a minute, the bookings obviously were pretty amazing. Has the bookings momentum continued? You made some illusion like that in the prepared remarks.
Anthony Ambrose: Yeah, I think the bookings momentum, to get a Q3 exactly like Q2 I think would be a challenge. We just saw people on a tear from pretty much the 1st of March through the entire second quarter. Q3 historically is one where it tends to be more back-end loaded anyway, you have vacations and things like that and that's modeled into our forecast. So I think we've got a good funnel for Q3 and we were excited about the prospects but I think Q3 is always a different beast than Q2.
Orin Hirschman: Okay. Great. Thank you.
Operator: The next question is from Dave Kanen with Kanen Wealth Management. Please go ahead.
Dave Kanen: Hi, guys. Congratulations. Nice progress.
Anthony Ambrose: Thank you, Dave.
Dave Kanen: So, first question, some of them have actually been answered, so I'm going to keep it brief. What percent of your PSV installed base, do you think is a “high likelihood candidate” for SentriX upgrade, if you could quantify that?
Anthony Ambrose: So right now we have north of 370 or so PSV family systems deployed globally and I would say about half of those are probably candidates for SentriX upgrade at one point or another. And I arrive at that number by looking at all of our automotive business and a fraction of the programming center business and also a fraction of the EMS business.
Dave Kanen: Okay. So about 185, if I split in-house . And then what is the ASP on SentriX? And then if you could just speak to like the margin profile of a new SentriX sale versus traditional PSV?
Anthony Ambrose: Yeah, Dave, we haven't disclosed the average selling price on the SentriX for competitive reasons, because we have a lot of competitors on this call. I'd like to wish them all very well. And then on the - sorry, your second question.
Dave Kanen: The margin profile on it.
Anthony Ambrose: Sorry, margin profile.
Dave Kanen: Is it better?
Anthony Ambrose: Yeah, you should assume that the margin profile on the SentriX business is a little bit better than the base business.
Dave Kanen: Okay, like 10 points.
Anthony Ambrose: We'll just go as it is a little bit better for now.
Dave Kanen: Okay. And then have you guys run through the exercise of does SentriX expand your total addressable market and if so, by how much? Does it get you into doors that he wouldn't have gotten into ordinarily, if you could share a little bit on that?
Anthony Ambrose: Sure. I think it clearly has expanded our TAM because just we're able to program devices that we weren't able to program before, like security, secure elements and secure microcontrollers. And increasingly, there's a new category emerging of secure memory devices. Now, what you're going to see - so that's a TAM expansion. And as I've indicated on the call before we also see the whole market moving to embrace security. We talked about that as, in 10 years, we don't think there'll be a microcontroller market without security. We're starting to see a lot of the memory suppliers come out with secure memories and there's some interesting things they're trying to do there in very high volume verticals where we play that, I think, will be interesting business opportunities as we go forward. So there's an immediate TAM expansion now. And then I think as the market evolves, the shape of the market will become much more security oriented over time.
Dave Kanen: Okay. So I mean, traditionally, your core market has been relatively small. How would you quantify the expansion with SentriX? Is it a 25% expansion, 50%, if you could just take a guesstimate as to what the incremental opportunity is with SentriX?
Anthony Ambrose: You know what, rather than shoot from the hip on this one, Dave, I'll follow up with you and the rest of the investors on that one.
Dave Kanen: Okay. And then, did I hear correctly, like in terms of the backlog $5 million, did Joel say that you expect the majority of that to be shipped during Q3?
Anthony Ambrose: That's correct.
Dave Kanen: Okay. And then, I mean, I know Europe is a good chunk of business, things kind of shut down in the summer, as everyone quote goes on holiday. From your experience - I mean, I understand how like the pace of orders in Q1, it's not possible it could follow through into July with vacations and so forth. But when does it typically - when does the flip - the switch gets flipped, so to speak when people come back, and all of a sudden you see the order pace pick up in a typical Q3, if you will?
Anthony Ambrose: Well, I think Q3 is a lot like Q1 in the sense that you tend to make the quarter in the last month. Most of our business - nearly half of our business, I should say, typically comes in the last month of the quarter anyway, when you average it out over years and years and quarters and quarters. And I think Q1 and Q3 tend to be more exaggerated in that regard.
Dave Kanen: Okay. All right. Congratulations and good luck and I'll tune in next quarter. Thank you.
Anthony Ambrose: Thanks, Dave.
Operator: This concludes our question and answer session. I would like to turn the conference back over to Mr. Ambrose for any closing remarks.
Anthony Ambrose: Operator, thank you very much. Since there are no further questions, I'd like to conclude the call at this time and thank everyone for joining us.
Operator: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
