Data I/O Corp (DAIO) 2017 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Data I/O Second Quarter 2017 Conference Call.

(Operator Instructions) As a reminder, the conference is being recorded.

I'll now turn the meeting over to our host, Jordan Darrow.

Please go ahead, sir.

Thank you, operator, and welcome to Data I/O Corporation's Second Quarter 2017 Financial Results Conference Call.

With me today are Anthony Ambrose, President and CEO of Data I/O Corporation; and Joel Hatlen, Chief Operating and Financial Officer of Data I/O.

Before we begin, I'd like to remind you that statements made in this conference call concerning future revenues, results from operations, financial position, economic conditions, product releases 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 levels of orders, ability to record revenues based upon the timing of product deliveries and installations, market acceptance of new products, changes in economic conditions and market demand, 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.

I would now like to turn the call over to Anthony Ambrose, President and CEO of Data I/O.

Thank you very much, Jordan.

As usual, I'd like to comment briefly on the current quarter's results, our outlook on the market, and then I'll turn it over to Joel for detail on the specific numbers.

2017 Q2 financial result highlights year-over-year, as noted in our release, our sales of $9.1 million were a 17-year high.

Also, a 17-year high were our bookings of $10.1 million.

And these 2 together generated net income of $1.2 million or $0.14 a share, and that's up sharply from the same period last year.

With just an outstanding Q2 and amid our growth year, it's important to note, really, we're focused on 2 things for the company: the first is operational excellence; and the second is innovation for our future.

On the operational excellence side, basically, we had a fantastic quarter led by our operations team.

We hit on all cylinders in Q2.

The bookings and revenue were extremely strong and above our internal forecasts.

The system shipped, adapter shipped were all up, and our operations team has substantially increased our automated systems capacity to support our customers' ramp, while maintaining on-time delivery performance and our quality targets.

Overall, this strong performance was driven largely by the PSV family of programming systems, including the LumenX and FlashCORE programming technology, which continues to set new standards in performance, technical innovation and the total cost of ownership.

We're happy to announce we built and shipped over 150 total PSV family systems since they were introduced less than 4 years ago.

Looking at our markets, the long-term market trends we've talked about for several quarters now, remain intact in our opinion.

Automotive, electronics, the Internet of Things and factory automation are driving adoption of Data I/O products worldwide.

Six quarters ago, we talked about how we thought the total available market for our products and capabilities would double from 2016 to 2020.

And we still believe that forecast.

Automotive market is booming, due to a sustained secular growth in electronics per car and semiconductor content per car.

This includes automotive infotainment, instrument cluster applications, Advanced Driver Assist Systems, increased use of electric and hybrid engines and powertrains and the overall connected car initiatives.

This has led to our install base growing.

That install base growth with strong system sales and new customer projects also leads to increased sales of our adapters and consumable products.

In Q2, our adapter revenues were at $2.1 million, up sharply from $1.6 million in the first quarter and $1.2 million a year ago.

While we continue to experience high demand and interest in our products, our second quarter bookings of $10.1 million were unusually strong.

Second quarter bookings are likely to be the peak level of bookings for the year due to this unprecedented demand in the first half and our normal seasonal sales funnel.

The second key thing that we look at besides operational excellence would be innovation for our future.

And as many of you know, we've talked about the turnaround of the company that began over 4 years ago.

That's largely complete.

We'll, of course, always have continuous improvement activities associated with the core business.

But we're focused now as a growth company on our opportunities in automotive and securing the Internet of Things with our R&D initiatives.

The IoT markets are growing, but face a fundamental challenge with very poor security.

The semiconductor industry is responding with a new generation of security solutions.

Authentication devices, other secure elements and secure microcontrollers have been introduced by all the leading suppliers and are expected to gain share over the next several years.

These trends in silicon technology and OEM demands to create a much more secure platform give us a tremendous opportunity in what we call managed and secured programming.

We're investing to lead the industry in this category that has a potential market of 4 billion units of secure microcontrollers and secure elements in 2021 based on estimates from ABI Research.

Our goal simply is to democratize security for the Internet of Things.

This means we're taking proven technologies that previously were only available to the highest-volume customers that enjoyed special relationships with semiconductor companies, and making these security capabilities is much more broadly available.

Provisioning keys and certificates at wafer level can be achieved for high-volume applications, but up until now could not scale down to the high mix, midsized or smaller players that don't have the volumes, lead times or stability of demand necessary to directly engage semiconductor companies on their security needs.

As a global leader in firmware provisioning, we're partnering with the leading suppliers of secure elements and secured microcontrollers as well as industry experts to develop our high-volume, cost-effective security provisioning solutions.

In Q1, we've previously announced key partnerships with Renesas, Infineon, EBV and Secure Thingz.

In Q2, we contracted to support another secure elements supplier's architecture.

We can't announce the name publicly at this time, but stay tuned.

We plan to support additional devices and release the production-centric platforms to support our Managed and Secure Programming later this year.

To support this, we've increased our R&D spending on the SentriX platform and other development efforts in Managed and Secure Programming.

As we've discussed before, we view the next 9 to 12 months as the market development phase to establish key design wins, relationships in the industry, with meaningful revenue to follow later on.

Ultimately, our goal is to get a much larger share of the $4 billion unit market that we have in the current microcontroller market.

Q2 has some other important events.

Due to the increase in our market value from our 4 consecutive years of revenue growth, we're pleased that in June, the Data I/O shares were included in the Russell Microcap Index.

Membership in the Russell Microcap Index is based upon market capitalization.

That means automatic inclusion in the appropriate growth and value style indices.

Approximately USD 8.5 trillion are in assets benchmarked against the Russell U.S. Index -- Indices.

We believe that this will help enhance investor awareness in Data I/O as the leading global provider of Managed and Secure Programming technology to the automotive and Internet of Things markets.

Our company has also been recognized locally.

Data I/O was ranked among the fastest-growing, publicly traded technology companies in Washington State in an annual survey published by the Puget Sound Business Journal.

This marks our 3rd consecutive year to have be named in the list and solidifies our place among the many exciting high-growth technology companies in our region.

Data I/O's rapid growth in size and recognition locally and worldwide would not have been achieved without our incredible team.

So I'd like to personally thank all of our employees worldwide and credit them for their outstanding efforts and just an outstanding impressive level of execution over the past several quarters.

In light of our anticipated continued growth and formal introduction of a new and potentially game-changing solution in our Managed and Secure Programming platform, we announced several organizational changes in June to strengthen our management team and position us for growth.

Sean Riley has joined the company as Vice President of Marketing and Business Development to focus primarily on driving our Managed and Secure Programming initiatives into the global marketplace.

Sean has a wealth of experience in strategy and market development, and we're very excited to have him on the team.

Joel Hatlen, who's been with Data I/O for over 25 years, serving most recently as Vice President of Operations and Finance, Chief Financial Officer, Secretary and Treasurer, was appointed to the newly-created position of Chief Operating Officer, and will continue to serve as our CFO.

These changes create the structure and capability to better support our programming business, our core business and accelerate the growth in MSP.

That concludes my remarks, and I'll pass the call over to Joel now to talk about our specific results.

Joel?

Thank you, Anthony.

Good day to everyone.

Net sales in the second quarter of 2017 were $9.1 million compared to -- compared with $5.8 million last year and $7.2 million in the first quarter of 2017.

As Anthony noted, automotive electronics and the Internet of Things demand from both OEMs and programming centers drove increased revenues, primarily related to our PSV family of automated programming systems.

Revenues from adapters and consumable were up 72% year-over-year.

Total capital equipment sales grew $6.5 million or 71% of total revenue, and adapters were $2.1 million or 23% of consolidated revenue.

International sales represented approximately 90% of total sales for both the second quarter of 2017 and 2016.

Demand in all regions was robust.

Order bookings were $10.1 million in the second quarter of 2017, a 17-year high compared to $5.7 million in the second quarter of 2016, a growth of 77%.

The variation in revenue percentages versus order percentages relate to the change in backlog, deferred revenues and currency translation.

Backlog at the end of the quarter was $4.7 million compared to $4.9 million at the end of the first quarter and $3.2 million at December 31, 2016.

Deferred revenue at the end of the second quarter was $2.8 million, which included 3 systems that were not able to be recognized until after the end of the quarter.

For the second quarter of 2017, gross margin percentage -- gross margin as a percentage of sales was 56.9% compared to 53.2% in the second quarter of 2016.

The increase was primarily due to the sales volume resulting in better fixed factory cost utilization and a favorable product mix.

I, too, would like to complement our manufacturing team in both Redmond and China for operational excellence in execution and a virtually investment-free delivery of a significant increase in capacity during the quarter.

Operating expenses were $3.9 million in the second quarter of 2017 compared to $2.7 million in the same period of 2016.

The increase was primarily due to additional engineering and R&D spending of approximately $600,000 associated with our new Managed and Secure Programming platform and other automated -- automotive-related technology innovations as well as variable incentive, sales and commission compensation along with additional trade show and marketing activity.

As we mentioned during the first quarter conference call, the higher level of R&D and engineering expense will continue and increase as we add engineering resources in the second half of 2017 in preparation for product launch and revenue generation for the new MSP platform in 2018.

However, our growth from current business lines has more than offset the increased spending on generation development and other growth initiatives.

Looking forward, total operating expenses for Q3 are expected to be similar to Q2.

In accordance with U.S. Generally Accepted Accounting Principles, GAAP, net income in the second quarter of 2017 was $1.2 million or $0.14 per diluted share compared with net income of $444,000 or $0.06 per diluted share in the second quarter of 2016.

EBITDA, earnings before interest, taxes, depreciation and amortization, was approximately $1.5 million in the second quarter of 2017 compared to EBITDA of $584,000 in the second quarter of 2016.

Equity compensation expense, a noncash item, in the second quarter of 2017 and 2016 was $270,000 and $205,000, respectively.

Adjusted EBITDA, excluding equity compensation, was approximately $1.7 million in the second quarter of 2017 compared to $789,000 in the second quarter of 2016.

Please see our press release for a discussion and a reconciliation of these non-GAAP financial measures.

We have net operating loss, NOL carryforwards of approximately $17 million in the United States as well as other credit carryforwards that are available to continue to offset our future U.S. net income.

And we will continue to analyze and manage taxes to take advantage of these tax attributes.

The company's cash position at June 30 was $12 million, with $7.9 million in the United States and the balance in foreign subsidiaries.

The cash balance increased by $1.5 million from the end of the first quarter of 2017.

Working capital increased to $16.9 million at the end of the second quarter from $15.5 million at the end of the first quarter.

The company remains debt-free and had 8,172,000 shares outstanding at June 30, 2017.

At this point, I'll turn the call back to Anthony.

Thank you very much, Joel.

At this point, I'd like to turn it over to Jordan and -- or the operator, excuse me, and we'll open it up for Q&A.

(Operator Instructions) And our first question is from Robert Anderson with Penbrook.

My question relates to the second part of your talk, Anthony.

And that was about innovation for the future.

And I'm wanting to understand a little bit better the timing on this.

When will this research reach the point that you will be shipping products that have all these security features?

I suspect you started to, but I don't know that, for sure.

So maybe you could summarize when this research and development will be completed and you'll start shipping these very secure features?

Yes, Bob.

Thank you for the comment.

As we talked about in the prepared remarks, we'll be shipping the products in the second half of this year.

As you know, I don't like to be too specific on these earnings calls about new products, but we said that clearly, it'll start in the second half.

And we'll begin with the products that we've announced relationships with.

And then we'll have an expanded list, with again more to say, when we're ready to announce the products specifically.

And as you look at the market going forward over the next multiple years, do you believe that the various security features that we had talked about will almost be a basic requirement for automotive and Internet of Things?

The short answer, Bob, is yes.

And the longer answer is, if you look at the news, you've talked to OEMs, they are looking for a way to update and enhance the security for their automotive and Internet of Things devices.

Certainly, in automotive, it's an absolute basic requirement to be shipping products.

And with Internet of Things, you just keep hearing about devices that are not secured causing all sorts of trouble for themselves and also for the basic Internet infrastructure.

The good news is the semiconductor companies have all responded, the ones that are in the microcontroller business, the ones that are in the secure element business.

They have an excellent selection of products targeted multiple different markets to provide for the capability to secure the supply chain and also manage firmware integrity through the life cycle of the product.

And those 2 key attributes could be satisfied by our approach in Managed and Secure programming.

So as we bring the products into the market, we have to work with customers, we have to get qualified, we have to work through their design cycles.

That's why we said consistently that it's going to take -- 2017 as a market development year, and we'll begin to see meaningful revenue in the 9- to 12-month horizon.

But we expect that this becomes the way people do products going forward.

And our next question from David Kanen with Kanen Wealth Management.

If I could take liberty to break the rules slightly and maybe ask 2 questions and then 1 follow-up, would that be okay?

All right, just this one time, Dave.

As far as the growth in the quarter based on the intel you have, how much do you think was market share gain versus just overall growth in the market?

I think because we don't get the data from our top competitors, it's always challenging to look at market share, especially on a narrow time horizon.

But we did mention specifically that we got an order from a large multinational automotive company.

Those were all competitive situations where we prevailed.

We don't prevail 100% of the time obviously, but we like the fact that this customer showed the trust in us when they clearly evaluated multiple different systems.

So I think it's very clear to me that there's growth in the automotive segment.

I think we're extremely well positioned in the automotive segment because our product is just better.

We've talked about it before.

Everybody thinks their product is better, but we have the data from a very thorough evaluation that was publicly disclosed last year with Bosch, where they flat out made it clear that our product was better.

So that's -- to answer your question there, I believe we're gaining share partly because automotive is on a very rapid growth cycle and we have, I would say, a much higher market share in automotive than we have in the general market.

And automotive includes the sales directly to automotive electronics OEMs as well as the programming center partners for the automotive industry.

Okay.

And then you pointed out in the press release that there was a certain amount of investment for your Managed and Secure Programming technology for which we have yet to receive revenue.

Can you quantify how much we sacrifice for the quarter, for the future?

And then you referred to generating meaningful revenue in 9 to 12 months, can you just qualify that a little bit better?

I'm assuming that means 7-figure type of contribution, but any detail you can give there would be appreciated.

Sure.

As we mentioned in the prepared remarks, the increase in our R&D was about $600,000 year-over-year.

And that was predominantly to support the Managed and Secure Programming.

There were some other automotive initiatives in there as well.

But most of that goes to MSP.

And again, those investments are going to capture what we consider to be a very meaningful opportunity.

I haven't quantified it specifically for you in dollar terms, but I use the term meaningful deliberately.

(Operator Instructions) And we'll go back to Robert Anderson with Penbrook.

Yes, you had a sentence in which was while we continue to experience high demand and interest in our product platform to a second order bookings of $10.1 million, were unusually strong.

And then you suggest that bookings going forward will probably be less.

Should we be anticipating a substantial drop-off in booking based on that sentence or just kind of a leveling in bookings?

I think it's more of the latter, Bob.

We put that in there because we wanted to make sure investors didn't just do a straight-line extrapolation over the last several quarters.

And perhaps conclude in their own models a very unrealistic scenario for the future.

We just -- we think that $10.1 million was far ahead of our internal forecast for the quarter.

It was a result of some of the activities I talked about in automotive.

Some business that maybe we thought would happen in Q3 that came into Q2.

So I just wanted to calibrate people at this point on what we think is going to happen in the third quarter.

Right.

And do you have any way of measuring, take automotive for example, as to the degree of utilization of your equipment at the automotive companies?

I mean just, for example, if they were using the machines at 50% of capacity, that might mean one thing.

Yet, if they were using the machines at 90% of capacity, that would mean something else.

Do you have any feel or it just too early in the game to know utilization rates on your equipment?

The short answer there is, no.

It's very difficult for us to get precise utilization indicators.

The best indicator that I can give you about the automotive growth is continuing a trend we saw in the first quarter where automotive customers are coming in well within their normal forecast time period and requesting delivery of systems.

I think they're struggling a little bit with their own forecast methodology and models, which normally are extremely precise.

And I've seen this happen before in other industries where the -- a large technological transformation tends to disrupt factory planning models.

And it takes them a while to figure out the new way of thinking about things.

And we think that's happened in the infotainment systems.

Customers come in.

They have a planning model.

And then they get a new software drop perhaps that significantly increases the code size.

Some have thought it would be a great idea to put a whole bunch of new features in.

And suddenly, their capacity, which looked adequate today, looks inadequate tomorrow.

I think that's probably the biggest driver we see.

We're in a secular trend in automotive in our opinion.

We think there's a lot of room to run.

And our customers continue to -- through Q2, surprise us on the upside.

Yes, a good example would be the self-driving car.

I'm a little skeptical about that, but maybe at some point that will be coming.

I mean, that would have just tons of code, and therefore, would be good for you, correct?

Exactly, Bob.

And I think we may have talked about it on the call here last quarter.

But when you look at all the systems that go into a self-driving car, the Advanced Driver Assist Systems, the LIDAR, the RADAR, the cameras, the sensors, the computers to manage all of that, those systems have to be in place before they'll go fully autonomous.

So whether or not you actually get the full autonomy or you just park, or they'll let you do cruise control on the freeway.

So it's sort of a limited autonomy.

All of the hardware, and therefore, a lot of the programming demand already has to be in place there.

So again, we think that's favorable for us and our customers.

I mean, wouldn't you presume that at least maybe with high-end cars, this self-parking feature may become fairly popular and a fairly standard feature in top-end cars?

Yes, based on the way I see people parallel park all the time, I think it'll become a quite popular feature.

Absolutely.

Fewer dents in the car, right?

Exactly.

And we have a follow-up question from David Kanen with Kanen Wealth Management.

The question is, if we can analogize to baseball, and I've asked this question before.

As far as IoT and automotive electronics, what inning of the game would you say we're in?

And then, do you believe over time, meaning 3 to 5 years from now, your MSP initiative could be similar in size to the core business?

Yes, Dave.

You asked me these innings questions.

We haven't changed the innings too much from I think the last quarter.

I still think on the automotive analogy, we've hit a lot of the high-end cars in some of the Western markets.

I think we still have growth in the midsized cars.

The latest forecast I've seen are for 30% or so increase in the semiconductor content in cars over the next several years.

So I don't -- we're certainly not in the late innings on that one.

On IoT, again, we quantify it, we're going after a 4 billion unit market.

We believe that, that methodology for securing systems has to get adopted.

Otherwise the IoT business model doesn't work.

And I'm not just talking about securing devices.

I'm talking about all the people that want to monetize data.

So I think it's a significant business opportunity for us.

And we wouldn't be investing the way we are if we didn't think it was a very big opportunity.

Okay.

And then, the other part of it was, do you believe that your MSP initiative over time can be equal to or greater than your core business right now, 3 to 5 years down the road?

Yes, I haven't given a quantitative estimate.

And I will be doing so in an the upcoming call.

So I'm going to hold that one for now.

But I'll just say that it's extremely meaningful for us.

I'll turn it back to our speakers for any closing remarks.

Thank you, operator.

If we're done with questions, I'd just like to maybe remind people that we will be participating at the Dougherty & Company Institutional Investor Conference in Minneapolis on September 19.

And we'll also be exhibiting and presenting at the Shenzhen NEPCON trade show in China.

For those of you in the Shenzhen area, we'd be happy to host through the Data I/O booth.

And that will be highlighting some of our current products and systems initiatives.

With that, I'd like to close this call and thank everyone for participating.

Thank you, ladies and gentlemen.

This will conclude our teleconference for today.

Thank you for your participation and for using AT&T Executive Teleconference.

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