Data I/O Corporation (DAIO) on Q1 2023 Results - Earnings Call Transcript
Operator: Good day, and welcome to the Data I/O First Quarter 2023 Financial Results Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Jordan Darrow, Investor Relations. Please go ahead.
Jordan Darrow: Thank you, Betsy, and welcome to the Data I/O Corporation's First Quarter 2023 Financial Results Conference Call. With me today are Anthony Ambrose, President and CEO of Data I/O Corporation; and Joel Hatlen, Chief Operating Officer and Chief Financial Officer of Data I/O. Before we begin, I'd like to remind you that statements made in this conference call concerning COVID-19, 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 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 COVID-19, including outbreaks in China, Russia war with Ukraine, including any related international trade restrictions, along with continued reopening and 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 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-K and 10-Q with the Securities and Exchange Commission, press releases and other communications. The accuracy and completeness of forward-looking statements should not be unduly relied upon. Data I/O is under no duty to update any of these forward-looking statements. And now I would like to turn the call over to Anthony Ambrose, President and CEO of Data I/O.
Anthony Ambrose: Well, thank you very much, Jordan, and welcome, everyone. I'll begin my formal remarks by addressing our 2023 first quarter financial and operational performance, 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 the highest first quarter level since 2018. Gross margins were also at the high end of our range, and we're profitable in a traditionally challenging quarter. Year-over-year financial comparisons did include and reflect the fact that we return 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 450 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 forecast and observed some softness in China in the first quarter due to the COVID shock in December and January as well as some upcoming changes in the automotive emissions regulations. 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 one 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, first and foremost, the accelerating adoption of electric vehicles, the growth in active safety systems, or ADAS, automotive connectivity, infotainment systems and increased security. The second major demand driver for us is strength in the industrial sector, including factory automation advancements and increased demand for security within factories. Third is the acceptance of our products and services that contribute to our consumable and recurring revenue growth. Fourth 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. But 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 and projected a testing market that would be down about 20% this year. On the surface, that sounds extremely difficult environment for everyone in the capital equipment business. But if you look beneath the headline number beneath the overall average, you see some very interesting trends. 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 2/3 of their market and automotive and industrial is only 1/3, the overall market was down quite a bit, but they did say that they saw strength in automotive and industrial, and they're pretty bullish on that overall segment. The second 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. 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 and programming in this segment. And you add 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 the 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 what you're monetizing with an IoT device. And what we've seen right now is increasingly governments are stepping in and acting. 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. Now it 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. 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 Section 3.2 and 3.3. Section 3.2 is titled, Driving The Development Of Secure IoT Devices. This is a clearest subscription yet of what we've been advocating for years. Manufacturers will need to develop better products, which include 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 potentially could be. 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 first quarter, and we made 2 significant partnership announcements as well in the first quarter. We announced our relationship with Noa Leading to establish the first SentriX security provisioning service in Japan. And we had a separate collaboration formed with Nuvoton Technology Corporation Japan to enable security deployment services across their IoT microcontroller product lines. Our work with Nuvoton enables OEMs to design solutions such as building automation, metering, medical and many other applications that are protected for high security and simplified process for deploying IoT security using Data I/O's SentriX product creator software tool. In addition to these activities, we had a very strong marketing momentum in the first quarter. 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 I/O 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. 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 Hatlen for a more detailed look at the numbers.
Joel Hatlen: Thank you, Anthony, and good day to everyone. The first quarter had strong revenues, gross margins and profitability as well as balance sheet growth in cash and working capital. I'll start with by discussing the balance sheet and move to the income statement. Data I/O's financial condition improved from the end of last year. We ended the first quarter with $11.9 million in cash, up $400,000 from $11.5 million at December 31. As we typically note each year, the first quarter 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 first quarter. Net working capital increased from $17.6 million at December 31 to $18 million at March 31. Days sales outstanding, or DSO, a receivables collection measure, was at 51 days as of March 31, 2023. This is on track within our target range. Inventory of $7 million was up slightly from $6.8 million on December 31. 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 supplier and support our robust bookings and backlog levels. Our backlog on March 31, 2023, was $3.2 million down from $4.8 million at December 31 and reflecting a return to more normal levels and normal operations. Now on to the income statement. For the first quarter, revenue of $7.2 million was up from $5 million in the first quarter 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. Automotive electronics orders were 63% of 2023 first quarter bookings and continues to be our primary addressable market. First quarter revenue breakdowns were capital equipment 56%, consumables were 31% and software and services revenues were 13%. This breakdown was consistent with the percentages for all of 2022, which were 57%, 30% and 13%, respectively. On a geographic basis, international sales represented about 87% of revenue for the first quarter. First quarter 2023 bookings were $5.7 million, down from $6.8 million in the fourth quarter and $6.2 million in the first quarter of 2022. We saw expected softness in China as they recovered from COVID and prepare for new automotive emission regulations effective July 1. Europe was softer in Q1 coming off a very strong Q4 for bookings. Gross margins were at 59.5% in the first quarter of 2023, and were up from 55.5% in the fourth quarter and 46.4% in the first quarter of 2022 when there were significant issues negatively impacting normal operations. The increase from the fourth quarter was primarily due to more favorable currency exchange rates, channel and product mix and favorable factory variances. Operating expenses for the quarter were $4.1 million in the first quarter compared to $3.4 million in the fourth quarter and $3.7 million in the first quarter 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. Funding our R&D continues to be a priority. R&D expense was $1.6 million in the first quarter compared to $1.5 million in the fourth quarter of 2022 and $1.6 million in the first quarter of 2022. Selling, general and administrative expenses were $2.5 million in the first quarter as compared with $1.9 million in the fourth quarter and $2 million in the first quarter of 2022. Taxes in the first quarter consisted of foreign taxes on the profits of our overseas subsidiaries and U.S. state income tax. The company had net operating loss carryforwards of approximately $20 million on March 31. Net income in the first quarter of 2023 was $95,000 or $0.01 per share as compared with fourth quarter of 2022's $510,000 or $0.06 per diluted share and the first quarter's net loss was $1.8 million or $0.21 per share back in 2022. Adjusted EBITDA earnings of $502,000 in the first quarter of 2023 compares with the adjusted EBITDA earnings of $831,000 in the fourth quarter of 2022 and negative adjusted EBITDA of a loss of $932,000 in the first quarter of 2022. We had 8,818,076 shares outstanding on March 31, 2023. 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 of mid- to high-50s throughout the year. That concludes my remarks for the first quarter of 2023. Operator, would you please start the Q&A process?
Operator: [Operator Instructions] The first question today comes from David Marsh with Singular Research.
Operator: The next question comes from Kevin Garrigan with WestPark Capital.
Operator: The next question comes from Chris Bakowski, [ph] who is a Private Investor.
Operator: The next question comes from Matt Winthrop with Equitable.
Operator: The next question comes from Michael Cooper, [ph] who is a Private Investor.
Operator: The next question comes from Avi Fisher with Long Cast Advisers.
Operator: Ladies and gentlemen, this will conclude our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.
Anthony Ambrose: 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 18. I'll also be doing a couple of conferences in Q2, May 24 for the Singular Research Spring Select Conference, and I believe that will be virtual. And then June 22 for the Singular Research Summer Solstice Conference. 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.
Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
