Data I/O Corp (DAIO) 2017 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Data I/O Fourth Quarter Financial Results Conference Call.

(Operator Instructions) And as a reminder, this conference is being recorded.

I would now like to turn the conference over to Jordan Darrow, please go ahead.

Thank you, and welcome to the Data I/O Corporation fourth quarter and year-end 2017 Financial Results Conference Call.

With me today are Anthony Ambrose, President and Chief Executive Officer of Data I/O Corporation; and Joel Hatlen, Vice President and Chief Financial Officer and Chief Operating 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, markets economic conditions, estimated impact of tax reforms, 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 level 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 Form 10-K and 10-Q with the Securities and Exchange Commission, public 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.

Good afternoon, everyone.

I'd like to start by commenting on 2017's fourth quarter and full year results, and our outlook on the overall market, and then I'll turn it over to our CFO, Joel Hatlen for more detail on the numbers, including some more detail specifics on the recent tax law changes and their impact to Data I/O.

2017 fourth quarter highlights include $7.6 million in bookings which represent an 11-year high for us in the fourth quarter.

Revenues were $8.1 million, another multiyear high for us in the fourth quarter.

We had continued strength in our automotive and programming center segments, and also realized our first revenue from the SentriX security provisioning platform.

Once again, our operations delivered a very strong performance, supporting backlog in new orders as well as collecting on receivables.

We ended the year with $18.5 million in cash.

We also received our ISO 9001-2015 certification for both our Redmond and China manufacturing locations.

Net income for the quarter was $1.5 million, including the onetime benefit from tax reform, and again, I'll let Joel talk more specifically about the tax benefits later on.

When we look at the full year for 2017, it was one of those years where everything aligned very well for us.

We had strong market conditions, the right products and outstanding execution across the company.

These results that we enjoyed in 2017 are the result of our multiyear plan and the hard work of all of our Data I/O employees and partners.

For the full year, revenues of $34 million were the highest level in 17 years, and this represents our fifth consecutive year of revenue growth.

We also had $34 million in bookings, which also represented the highest level in 17 years.

Net income for the year tripled to $5.4 million, and this represents about $0.65 per diluted share, including effects from the recently passed tax legislation.

Automotive bookings for the year were up 46%, and now represent over half of our orders at 54%.

Programming centers grew 20% in 2017, following a very strong 2016.

24% of our orders went to the programming center market.

We also continued our growth in our new products.

We've shipped over 180 PSV family automated programming systems through 2017, and our operating model continued to perform exceptionally well.

Our gross margins for the year were 58.5%, growing substantially over the last 4 years.

Switching now to our long-term outlook.

When we sat here 2 years ago and discussed results, we reviewed our long-term market forecast, which at the time showed us looking at a doubling of our available market for Data I/O in 5 years, or about 15% per year compounded from 2016 through 2020.

We discussed how this was driven by automotive electronics, the Internet of Things and factory automation.

I think it's time to update our -- look at that and take a look at our progress on that long-range outlook.

From 2015 to 2017, our revenue increased by about 55%.

Our bookings in automotive more than doubled during this time, and our bookings in programming centers also more than doubled during this time period.

We grew substantially faster than our industry in the past 2 years.

And as I mentioned earlier, automotive now represents over half of our revenue and programming centers represent about 1/4 of our revenue.

Our long-term thesis about automotive growth is unchanged.

As we said before, we're in the midst of new and exciting electronic content, including automotive infotainment and instrument cluster applications, Advanced Driver Assist Systems that come and support both autonomous driving and connected car strategies from all of the leading automotive OEMs.

We plan continued investments in the automotive space in all areas of our business: Programming technology, handling technology, systems integration, factory automation software, global service and support, marketing and sales.

Industry forecast from leading automotive OEMs show about a 10% to 15% compounded annual growth rate for semiconductor content in cars, and a larger increase of about a 30% compounded annual growth rate in the total market for flash memory in cars, growing to about 1 terabyte or more of flash memory in the next 7 to 8 years.

Leading-industry flash memory suppliers are also planning to migrate from the current standard called eMMC to UFS interfaces in cars.

We recently announced our UFS solution for automotive and have already earned our first customer.

We've also mapped out a multiyear strategy to maintain industry leadership in automotive and keep our customers competitive as their flash demand sharply increases.

The IoT market continues to grow but is lagging today in security solutions.

The opportunity for Data I/O is to simplify the security provisioning process and make solutions available to customers of all sizes.

To simplify security provisioning, we've developed the SentriX security platform.

We're investing to lead the industry here in the potential market of nearly 4 billion units in the next 5 years according to ABI Research.

We've been very successful partnering with the leading silicon suppliers of authentication ICs and secure microcontrollers.

As you probably noticed, we've made several recent announcements in this area, and expect more in the next week as part of the Embedded World event in Germany.

We're also working with leading tools and security software suppliers in this ecosystem to simplify and streamline the security process for IoT devices.

Given the traditionally long lead times for new designs, 2018 will continue to be primarily a market development year for SentriX.

We're very pleased with the progress made to date, which includes our first deployment and initial revenue generation from this SentriX system.

We're continuing to see automation replacing manual programming in most global markets.

This is driven by labor costs, reduced component size and increasing quality demands worldwide.

We're investing in software and systems integration capabilities to accelerate the move to automation and support major global initiatives, such as Industry 4.0 and the China Smart Factory.

For our 2018 growth outlook, we see signs that our largest programming center customers are still absorbing capacity purchase last year and will not be adding new capacity at the same rate as the past 2 years.

The test industry, which may also provide some useful comparisons, is forecasting a moderation of growth as well in 2018.

Furthermore, we saw a return to more seasonal patterns at the end of Q4 and the start of 2018, and our order patterns can be lumpy from time to time.

We start the year with about $4 million in backlog and we anticipate the systems in backlog will become revenue in 2018.

We also expect gross margins this year will remain in the mid-to-high 50% range, depending on revenue mix, factory utilization and sales channels.

We expect an increase in our overall spending, primarily in R&D and marketing, to support our automotive and Managed and Secure Programming initiatives.

At the same time, we remain vigilant in looking at ways to reduce our ongoing operating costs.

We have kicked off internal programs to reduce material COGS by another $500,000 over the next 2 years, with some of that benefit planned for 2018.

We start the year with over $18 million in cash and no debt.

As it was discussed on my blog at www.dataio.com, 2018 will be the year of security and the year the UFS starts the transition in automotive electronics.

We plan to extend our lead in both.

I'd like to now turn over the call to Joel Hatlen, to discuss our -- in more detail the numbers.

Joel?

Thank you, Anthony.

Good day, everyone.

Revenues for the fourth quarter of 2017 increased to $8.1 million as compared with $6.4 million for the period last year.

As Anthony noted, the 26% year-over-year increase was primarily a result of automotive electronics demands from both OEM and programming centers, primarily related to our PSV family of programming systems.

Revenues from adapters increased $212,000, or 14% from the year-earlier period.

Total revenue was comprised of capital equipment, 70%; adapters, 22% and software, 8% in the fourth quarter.

On a geographic basis, international revenue represented approximately 92% of total revenue for the fourth quarter of 2017 as compared with 88% in the fourth quarter of 2016.

Revenue growth was the strongest in the Americas, which increased 59% from the prior year.

In Europe, revenue grew by 24% year-over-year while Asia experienced a 12% increase.

Order bookings were $7.6 million in the fourth quarter, which is an 11-year high for the company, and an increase of 4% from the same period of the prior year.

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

Data I/O had $1.8 million in deferred revenue at the end of the fourth quarter of 2017 compared to $1.6 million at the end of the third quarter, and compared to $1.9 million at the end of the prior year.

Backlog at the end of the fourth quarter of 2017 was $4 million compared to $4.6 million at the end of the third quarter of 2017, and $3.2 million at prior year end.

For the fourth quarter of 2017, gross margin, as a percentage of sales, was 58.5% compared to 56.3% in the fourth quarter of 2016.

The increase was primarily due to sales volume, which resulted in better fact -- fixed factory cost utilization, along with a favorable product mix, a favorable channel mix, and reduced unfavorable factory variances.

Throughout the year, our manufacturing teams in both Redmond and China continued to demonstrate operational excellence in execution in a virtually investment-free delivery of increases in capacity during the year.

Operation -- operating expenses were $3.6 million in the fourth quarter of 2017 compared to $3 million in the same period of 2016.

The increase was due to additional engineering and R&D spending of approximately $356,000 associated primarily with our new security provisioning or SentriX platform, and other automotive-related technology innovations.

R&D increased 25% for the fourth quarter year-over-year, although as a percentage of sales, the expense category was marginally lower.

Sales and marketing expenses increased $204,000, or 27% for the fourth quarter year-over-year, which reflects higher sales levels as well as our heightened efforts in promoting our new security provisioning solution.

Included in sales and marketing are variable incentives, sales and commission compensation, along with additional trade show and other marketing activities.

General and administration expenses in the fourth quarter of 2017 were $851,000, essentially flat with $850,000 in the prior year period.

As a percentage of revenues, operating expense categories were lower this year as compared to the prior year period.

As compared to the third quarter of 2017, total operating expenses in the fourth quarter of 2017 declined, due in part to revenue level and a return to more normal channel mix, resulting in less commissions and incentive compensation.

In accordance with U.S. generally accepted accounting principles, GAAP, net income in the fourth quarter of 2017 was $1.5 million, or $0.18 per diluted share compared with net income of $755,000, or $0.09 per diluted share in the fourth quarter of 2016.

Included in the fourth quarter of 2017 net income is a net benefit of $531,000 from the recent tax reform.

Included in nonoperating income for the fourth quarter of 2016 was a gain of $140,000 for sales of non-core internet domain assets.

Excluding the Q4 tax reform benefit and the Q4 '16 nonoperating income gain, non-GAAP net income was $1 million in the fourth quarter of 2017, an improvement of $390,000, or 63%, from the non-GAAP net income of $615,000 in the fourth quarter of 2016.

EBITDA, or earnings before interest, taxes, depreciation and amortization, another non-GAAP measure, was approximately $1.2 million in the fourth quarter of 2017 compared to EBITDA of $962,000 in the fourth quarter of 2016.

Equity compensation expense, a noncash item, in the fourth quarter of 2017 and '16 respectively, was $174,000 and $111,000.

Adjusted EBITDA, excluding equity compensation, was approximately $1.4 million in the fourth quarter of 2017 compared to $1.1 million in the fourth quarter of 2016.

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

Now let's move on to the discussion of our annual financial performance.

For the year ended December 31, 2017, net sales were $34.1 million, increasing $10.7 million or 45% compared with $23.4 million in 2016.

International sales were approximately 92% of total revenue in 2017 compared with 87.5% of total revenue for 2016.

For the entire year of 2017, bookings were $34.3 million compared to $26.9 million in 2016.

These increases are due to the same factors discussed previously for both the fourth quarter and in Anthony's discussion.

Gross margin of $20.1 million, or 58.9% as a percentage of sales for all of 2017 increased from $12.9 million, or 55% in the prior year.

Operating income for 2017 was $5 million, an increase of approximately $3.6 million or 254% from $1.4 million for all of 2016.

The balance of our income statement and non-GAAP performance measures on a comparative annual basis are included in our press release.

In summary, our expense categories, while up in dollars as a percentage of sales, were each down in 2017 compared with 2016, and our operating and net profit on a dollar basis tripled.

Now I would like to talk about the tax reform impact for Data I/O.

As you know, on December 22 of 2017, the U.S. government signed into law, the Tax Cut -- the Tax Cuts and Jobs Act, which among other things reduced the federal statutory corporate tax rate from 35% to 21%, effective January 1, 2018.

The impact from tax reform may differ from our estimates due to, among other things, changes in interpretations and assumptions or further guidance that maybe issued.

Our initial assessment is complete, and we recorded a $531,000 net benefit in our fourth quarter of 2017 results.

This was made up of $67,000 of additional tax relating to the deemed repatriation of previously deferred foreign subsidiary, post-1986 earnings and profits and recognizing a tax benefit of $598,000 relating to refundable alternative minimum tax credits and carryforward.

We have approximately $13 million of U.S. net operating losses in carryforward at December 31, 2017, as well as other credit carryforwards in the United States 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, particularly amid the recent tax reforms.

On other balance sheet performance matters, receivables of $3.8 million at the end of 2017 were reduced from $5.2 million at the end of the third quarter, as well as from $4.7 million at the end of 2016.

Day sales outstanding were very good at 45 days, down from 61 days at the end of the third quarter.

The company's cash position as a result, at December 31, 2017, was $18.5 million, up $7 million from the end of the prior year as compared with the $15.2 million at September 30th of 2017.

$12.4 million of our cash was in the United States and the balance in foreign subsidiaries.

No actual cash movements took place as part of the tax reform deemed dividend.

Working capital was $19.5 million at the end of 2017, an improvement from $18.4 million at the end of the third quarter and $14.6 million at the end of last year.

As a reminder, in the first quarter of each year, Data I/O typically pays a good portion of its annual public company operating cost as well as satisfying any cash payments from annual year-end accrued incentive compensation, 401(k) matching contributions.

The company remains debt-free and had 8,276,813 shares outstanding at December 31st of 2017.

With that, I'll turn the call back to Anthony.

Thank you, Joel.

Before we open up for questions, I just like to remind everyone that we will be at 2 trade shows next week.

If you're in the San Diego area, please come see us at the IPC APEX EXPO.

And if you're in the Nuremberg, Germany area, please come see us at Embedded World.

We'll also be attending the ROTH Investment Conference, March 12 in Orange County, California, and you can talk to Jordan if you want more details on that.

So with that, I would like to turn it over now for questions and answers.

Go ahead, operator.

(Operator Instructions) Our first question is from Jaeson -- excuse me, Jaeson Schmidt with Lake Street Capital Markets.

The first one for me, really just wondering if you could comment on your visibility for the year, and if you've seen any improvement in that visibility over the past 3 months or so?

Jaeson.

Yes, the visibility for the year, we typically don't have great visibility for any period 12 months in advance.

It's just the nature of our business.

We tend to be closing a significant amount of book and ship within one quarter.

We -- so I'll leave that as the comment for 2018.

I'd just bring your attention back to what I said earlier about, we like the long-term trends in automotive and security for IoT, and we think some of our programming centers might be digesting some capacity that they brought in 2017.

Okay.

That's helpful.

And then just following up on those comments.

It does sound like you're incrementally more bullish on the bigger-picture trends in the industry.

Just curious if you think the general tailwinds are stronger in the industry, or some of this increased bullishness is really due to you guys' ability to gain share.

Well, I think -- two years ago, we said we liked the automotive industry.

We even kicked off a program internally called Automotive First to align our processes top to bottom to being very successful on automotive, and growing 126% or so in a couple of years, I think, shows we had our eye on the right market there.

Everything that I read and see and talk to our customers about indicates that the fundamental long-term trends in automotive are still present.

They need more flash memory across the car.

Mercedes-Benz highlighted this at an investor and technology event last summer, where they talked about getting to 1 terabyte per car by 2025.

I've seen numbers even double that number.

You back that out, you get about a 30% compounded annual growth rate in the flash demand in a car.

We've talked about the Internet of Things, security markets, talking about authentication ICs growing as well as a new category of products called secure microcontrollers.

There's been some new research published there by a company called ABI out of the U.K., and that's where we get our 4 billion unit TAM in about 5 years.

You've also seen some of the announcements and relationships we've made.

Recently, including this week, we'll also have additional announcements to make around Embedded World, so stay tuned to the channel.

So we've hitched our wagon to those 2 markets long term.

And so that's where we're bullish.

In our business, there is never anything that goes up in a straight line, but we think we're in the right markets long term, and we're investing accordingly.

Okay.

And then the last one for me and I'll jump back in the queue.

I know you mentioned you expect to increase some spending this year, given the initiatives in the pipeline.

Just curious, should we be thinking about building off the depressed Q4 level of OpEx?

Or the higher Q3 level?

Joel, go ahead on that one.

I basically look mostly at the Q4 level.

That's pretty much the best fact produced from an extrapolation standpoint.

We go now to James Anderson at R.F. Lafferty.

I had a question about the cash position of the company.

You guys seem to be pretty heavily cash flow-positive at this point and are accumulating quite a hefty amount of cash at $18.5 million.

Do you guys have any plans to put this to use in terms of creating values for the shareholder or initiatives you guys might have in the near- to mid-term?

Joel, I guess I wanted to say to start off by saying that I'm really pleased at our cash level.

But we believe that we actually collect receivables and liquidated inventory much better than we traditionally have been able to do, so I'm expecting that we'll have to deploy some more cash as working capital.

The other piece is we do have fairly hefty amounts of accrued expenses that we're reading into year-end incentives and accrued pension and things like that.

So I'm expecting a couple of million dollars to go out in the first quarter relating to that in particular.

So -- but beyond that, we wouldn't really comment with regard to our planned uses of cash until we actually have something to say.

Okay, great.

And then on the NOLs, with the $13 million of American NOLs, can you guys give any color on how you plan to use it?

Obviously, you guys are still digesting the new tax code and the implications of that.

But the rate at which you're planning to apply it, would that be similar to 2017?

Or significantly different?

I'm not sure if I exactly know how to answer this question but the answer from my standpoint is that we continue to expect that we will use NOLs to offset our income, and we will continue to have similar taxes being generated in our foreign subsidiaries.

So we'll have a continued blended tax rate as a result.

We now no longer have the alternative minimum tax, which has driven part of our U.S. taxes in the past.

So that's going to be something good.

We have not figured out too much how the GILTI or other international tax things from tax reform really are going to impact our 2018 results yet.

So that's a wait to come, and we'll talk about that more at the first quarter results.

Okay.

And with the development of the UFS flash capabilities, you mentioned that you'd seen some interest from your customers.

Obviously, you guys do business with the top automotive manufacturers.

Can you give a little bit more color on what that's been like, on their interest level?

Sure, James.

So when you look at it -- just step back so the -- without getting into too much on technology -- the memory market for the technology is used in a lot of infotainment, navigation systems, things like that in cars that tend to be the big consumers of flash capacity.

They've used the technology interface, which is called eMMC.

It's just the abbreviation for the current technology standard.

The new technology standard is called UFS.

And so you're beginning to see new designs look at UFS.

And this is not something that happens overnight, nobody snaps their fingers and suddenly everybody migrates.

But UFS has some benefits, especially in terms of overall performance and I'll call it snappiness of the interface.

And so we would expect more automotive customers to be investigating that.

We also are in constant discussion with memory companies about what they think their marketing mix is going to be.

And obviously, they have a pretty good idea of what they're going to sell.

So over time, I think you'll see the migration to UFS.

It's very important for us to be out in the market now, because as customers go in their early designs and take months to take a design from production -- sorry, early production to pilot production to full production -- we can be there with them the whole step of the way or every step of the way with their design process.

So we like the technology.

We're very happy to have a product.

We're very happy to have earned our first customer in UFS, and we'll be there with the market for both eMMC and UFS solutions in automotive.

New products and rollouts, you mentioned that you're still sort of in the market development phase for the SentriX, IoTC -- the IoT secure provisioning.

As the IoT marketplace develops that -- the need for security will become apparent fairly quickly and then, as a result, the SentriX's demand will be fueled by that.

Can you give us a little bit more of an idea of how we should expect SentriX to affect revenue in 2018?

Or is that something we should be looking at for 2019?

That's a good point.

The -- so if we look at SentriX, what we're doing is we're giving customers the opportunity to provision the security credentials into their products one unit at a time.

What that effectively means is that they can take a technology that's very useful today in things like smart cards or cellular phones, and now they can deploy that key and certificate technology into IoT devices.

The way that works is each semiconductor company lets you put those keys and certificates in, in slightly different ways.

So what we've been doing, at first, is to work with the leading suppliers in these markets for authentication ICs and secure microcontrollers to make sure that we support their products.

And it's substantially more complex to do that support than it is for a data-only programming support.

Given that and given that there is some new products coming out -- and I'd encourage all of you to look and see what comes out of Embedded World next week in the silicone industry -- we're well positioned with those firms in the silicon space, but they have to go get design wins and began shipping products to their customers.

And the embedded cycles are just anywhere between 6 and 18 months.

So that's why my comments earlier reflected that we still think 2018 from a modeling standpoint is still predominantly a market development year for SentriX.

And you should treat it that way in your models.

(Operator Instructions) Our next question is from Robert Anderson with Penbrook.

Joel, can you hear me?

Yes, I can.

I just had a question on how we should look at earnings per share in the quarter.

Obviously, you have that $500,000 benefit.

So from a security analyst point of view, you really earned $0.12 in the fourth quarter, backing that out.

And I just want to make sure I understand the comparison: The prior year was $0.09, but that had an extra in it of $140,000.

So was $0.12 versus $0.08 a reasonable comparison on an operating basis?

If you're looking at the quarters, those are correct.

If you're looking at the year, then 2017 actually had $366,000 of those same internet at risk sales that represented $140,000 in 2016.

So just a little bit more of a difference there but you have the right idea.

And so then what would be the adjusted earnings per share for the year, backing out these one timers?

Let me calculate that for you, and I'll get right back to you.

(Operator Instructions) There appears to be no more questions.

Okay.

Well, operator, I'd like thank you for -- and thank everyone for being on the call for joining us here for our 2017 earnings call.

I'd like to close the call at this time, and thank you all for attending.

And that does conclude our conference for today.

Thank you for your participation and for using AT&T teleconference.

You may now disconnect.