Data I/O Corp (DAIO) 2018 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Data I/O first quarter financial results conference call. (Operator Instructions)

As a reminder, the conference is being recorded. I'll now turn the meeting over to our host, Investor Relations Manager, Jordan Darrow. Please go ahead, sir.

Thank you, and welcome to the Data I/O Corporation First Quarter 2018 Financial Results Conference Call. With me today are Anthony Ambrose, President and CEO of Data I/O Corporation; and Joel Hatlen, 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 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 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 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, and welcome, everyone. I'd like to comment on 2018's first quarter results and our outlook on the overall market. Then I'll turn it over to Joel Hatlen for some more detail on our specific numbers.

Our first quarter highlights include revenues of $7.6 million, up 5% over Q1 last year. $6.2 million in bookings, reflecting our seasonal performance and predicted softness in programming centers. We also had major new announcements on the SentriX platform, including NXP, Infineon, Cypress semiconductor, Arm Holdings and IAR Systems.

We also signed up another major programming center partner on SentriX and anticipate their major -- their public announcement in Q2.

We also had some nice wins in competitive accounts. We continue to look forward and capture market share expansion that customers are currently buying from competitors or who are bringing in automated programming for the first time. We're focused on our target markets, automotive, Internet of Things and programming centers.

Moving now towards the outlook. Over the past 5 years, we've almost doubled the company revenues from 2012 to 2017 full year and changed from a wireless-focused tool to an automotive-focused company.

2017 automotive represented just over half of our revenue, and programming centers were about 1/4 of our revenue. In the call, last quarter, we discussed 2018 will start with programming center demand lagging our last year's rate due, in part, to the strong growth of about 150% over the past 2 years.

As expected, we did see programming centers lag in Q1 and expect the programming center segment to lag as well and stay soft in Q2. We also discussed our intention of increasing operating expenses in R&D and marketing to strengthen our leading position in the automotive electronics market and establish the SentriX platform.

Our long-term thesis about automotive growth remains unchanged. Industry forecast of leading automotive OEMs show a 10% to 15% growth rate for semiconductors in cars and a much larger increase of 30% to 40% growth rate in the flash memory market share in cars.

Leading suppliers such as Mercedes and industry suppliers such as Toshiba are forecasting growth to over 1 to 2 terabytes of flash memory in cars in the next 7 years. Along with this growth, leading flash suppliers are planning to migrate from the technology standard known as eMMC to the next generation standard called UFS in their automotive products.

We're continuing our investments in automotive technology in all areas of our business, programming technology, handling technology, systems integration, factory automation software and global service and support.

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

For Internet of Things, we believe that market continues to grow, but the main problem is the lack of real security solutions for the vast majority of customers. The opportunity for Data I/O is to simplify the security provisioning process and make solutions available to customers of all sizes. To do this, we've developed the SentriX Security Provisioning Platform. We're continuing to invest to lead the industry here in a potential market of nearly 4 billion units of authentication ICs, embedded secure elements and secure microcontrollers in the next 5 years.

Those numbers are courtesy of ABI Research.

Regarding SentriX, we had a very big event in February at the Embedded World, where we won Best of Show in our category and demonstrated real operation of the SentriX system with our partners Infineon and NXP. We've been extraordinarily successful partnering with these leading silicon suppliers of authentication ICs and secure microcontrollers.

At the show and preceding the show, we made several announcements of support in this area, including Renesas, Infineon, NXP, Arm, Cypress Semiconductor, IAR Systems, Secure Thingz, Maxim, EBV, Silica and Avnet. We expect more announcements in Q2.

We're well aligned to take full advantage of our silicon partners design-win and design-in efforts, as they launch these new products into their distribution channels.

As I mentioned earlier, we also signed a contract with another leading programming center in Q1 and expect that name to be public in the second quarter. We continue to work with the 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 deployments.

With that, I'd like to turn the call over to Joel Hatlen, our CFO, for a more detailed review of the numbers.

Thank you, Anthony, and good day to everyone. Revenues for the first quarter of 2018 increased to $7.6 million, another multiyear high for the first quarter as compared with $7.2 million for the first quarter of last year.

The nearly 6% year-over-year increase was primarily a result of automotive electronics demand from OEMs, many of which have been placing orders for our PSV family of automated systems.

As previously expected and discussed, programming center business was down. Revenues from adapters increased to approximately $1.7 million, up $74,000 or 5% from the year-earlier period. Total revenue was comprised of capital equipment, 67%; adapters, 23%; and software, 10% in the first quarter.

By geographic basis, international revenue represented approximately 95% of total revenue for the first quarter of 2018 as compared with 90% in the first quarter of 2017. Revenue growth was strongest in Asia, which increased 38% from last year. In Americas, sales grew by 3% year-over-year, while Europe experienced a 10% decline.

Order bookings were $6.2 million in the first quarter of 2018, down from the prior year period, but seasonally remaining in a higher range than that of a few years ago due to our presence in the automotive sector.

The variation in revenue percentages versus order percentages relates to exchanges in backlog, deferred revenues and currency translation. I'll speak to more to -- about currencies in just a moment.

Data I/O had $1.7 million in deferred revenue at the end of the first quarter of 2018 compared with $1.8 million at the end of the fourth quarter of 2017.

Backlog at the end of the first quarter of 2018 was $2.7 million compared with $4 million at the end of the fourth quarter of 2017 and $4.9 million at the end of first quarter of 2017.

For the first quarter of 2018, gross margin as a percentage of sales was 57.9% compared to 57.7% in Q1 of 2017.

This margin profile remains within our target range of mid- to upper 50s. The increase in gross margin as a percentage of revenues was primarily due to favorable product mix during the quarter as well as the impact of higher sales volume, which resulted in better factory -- fixed factory utilizations. Gross margin was $4.4 million for the first quarter, an increase of 6% as compared to $4.2 million in the prior year period.

Operating expenses were $4.1 million in the first quarter of 2018 compared to $3.6 million in the fourth quarter of 2017 and $3.4 million in the first quarter of last year. Operating expenses as a percentage of sales were 53.4% in Q1, up from 44.2% in the fourth quarter of '17 and 46.6% in the first quarter of '17, amid our planned continued investments in automotive electronics in our next generation SentriX Security Provisioning Platform.

The operating expense increase in Q1 of '18 over the Q1 of '17 was attributable to additional engineering and R&D spending of approximately $334,000 associated primarily with our new Security Provisioning or SentriX Platform and other automotive-related technology innovations.

R&D increased 22% for the first quarter year-over-year. Sales, general and administrative expenses increased from $1.8 million to $2.2 million for first quarter year-over-year comparisons. Included in the sales and marketing were increased variable sales channel commissions and incentive compensation, reflecting the channel mix and higher sales, the increased business development efforts associated primarily with our SentriX Security Provisioning Platform along with trade shows and other marketing activities.

In accordance with generally accepted accounting principles, GAAP, net income in the first quarter of 2018 was $130,000 or $0.02 per diluted share compared with net income of $979,000 or $0.12 per diluted share in the first quarter of 2017. Included in nonoperating income for the first quarter of 2017 was a gain of $210,000 from the sale of non-core Internet domain assets.

Included in the nonoperating expense for the first quarter of 2018 was a charge of approximately $176,000 associated with the devaluation of the U.S. dollar against foreign currencies during the first quarter. This was primarily related to the China RMB. We've taken additional actions to reduce our exposure to U.S. dollar amounts in our foreign subsidiaries that are required to be translated into their local functional currencies.

EBITDA or interest -- earnings before interest, taxes, depreciation and amortization, a non-GAAP measure, was approximately $397,000 in the first quarter of 2017, compared to EBITDA of $1.1 million in the first quarter of 2017.

Equity compensation expense, a noncash item, during the first quarters of 2018 and '17, was $177,000 and $97,000, respectively. Adjusted EBITDA excluding equity compensation was approximately $574,000 in the first quarter of 2018 compared with $1.2 million in the first quarter of 2017.

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

Moving on to the balance sheet. Receivables of $4.4 million at the end of the first quarter of 2018 were up from $3.8 million at the beginning of the year but down from $5.3 million at the end of -- the first quarter of 2017.

Despite our higher percentage of international sales during the quarter, DSO or day sales outstanding, a measure of collections, was very good, averaging 45 days down from 55 days for the first quarter of last year.

The company's cash position at March 31, 2018, was $16.8 million, down from $18.5 million at December 31, 2017, and up from $10.5 million at the end of the prior fiscal year quarter.

From the end of the fourth quarter, cash was used to pay a large portion of our annual accrued incentive compensation and 401(k) matching pension contributions due for 2017, which were larger than in the prior year reflecting the strong 2017 performance.

With these annual payments out of the way, we expect our -- to grow our cash balance throughout the balance of the year. $10.2 million of our cash was in the United States and the balance in the foreign subsidiaries.

Note that no actual subsidiary cash movement has yet taken place as part of the tax reform repatriation deemed dividend discussed on our last call. Working capital was $20.1 million, up from $19.5 million at the end of 2017 and $14.6 million at the end of last year. The company remains debt-free and had 8,275,026 shares outstanding at March 31, 2018, and no debt.

That concludes my remarks. We'd now like to respond to any questions from our listeners on the call. So operator, will you please begin the Q&A segment?

(Operator Instructions) And our first question, from the line of James Anderson with R.F. Lafferty.

I was just wondering obviously, you guys are seeing continued strong demand from the automotive sector and there seems to be a little bit of digestion going on in the programming center segment. I wonder how long you expect that to persist. I know you said that Q2 was likely to be a little bit soft. Do you think that maybe that will be sort of the last quarter of digestion going forward?

We'll talk a little bit about how we see Q2. In general, we have several different kinds of customers. We get the best visibility from people that own their own factories. Just, it's the nature of how they plan their business. And probably, the least notice we get is from our programming center customers, that add capacity when they need it and sometimes they get deals that they weren't forecasting, and we need to respond very quickly. So in general, we don't see a great visibility in programming centers. Based on what we know right now, they're still digesting, but they can turn around faster than pretty much any of our other segments.

Okay. That's helpful. And in terms of the increase in operating expenses to speed along with the market development of the SentriX Security Provisioning Platform, is this sort of like a new run rate going through the rest of the year? I mean, I think, it's up 21%, 22%, from where it was, is this sort of how we should be looking at the rest of the quarters as you guys continually invest in medium and longer-term growth?

I think that that's pretty much the case. You know we have some variable things that are like different travel or different R&D materials that can be a little bit lumpy between quarters, but for the most part, I think that that's about as good a forward-looking piece as you can take.

Our next question, from the land of David Kanen with Kanen Wealth Mgt.

First question is the increase in OpEx of about $700,000, how much of that is related to your new growth initiative? And then how much is just general inflation and operating expenses? And as far as the comment in the prepared remarks about expecting meaningful revenue next year in your Managed and Secure Programming initiative, can you give us some sense -- can you quantify, what meaningful is? And do you expect any revenue this year? Next?

Yes, so Dave, let me start with the second question. Yes, we do expect revenue this year. And it's just that we want to set expectations about, I'll call it, the ramp into the revenue.

We haven't given guidance for 2019 yet, and we don't plan to do that on this call. I think on the question you had on the R&D or the contribution of the OpEx. It's -- R&D, probably a little bit maybe 50%, a little bit more than 50%, the rest is in the marketing and business development. It's not only to support the SentriX. Although, I think, that's probably a big chunk of that increase. It's also to support the growth in automotive, which includes not only the large flash which I've talked about, it includes microcontrollers as well and our ability to support customers also with service and support globally. So it's really a combination of supporting both of our initiatives, obviously the automotive is here and now, and growing, and then we've made a big bet on SentriX for the future.

So does OpEx go down at some point later this year after -- Is there a certain amount that you spend on R&D to get the products to where they need to be? Or is this of a recurring in nature?

I think the best forecast for that is probably flattish from where you see it right now. Okay, if business conditions change, we have leverage we can use to move it as it needs to, but I think for planning purposes, flat is the way to go.

And then as far as like, quote " meaningful revenue", is that like in excess of 15% of your total revenue now? I mean, would you consider 15% meaningful? Or could it be less than that?

I understand why you want me to quantify it, Dave, but I'm not going to do it on this call.

And our next question, from the line of Joe Vidich with Manalapan Oracle.

I guess I'm going to sort of approach the question from a different angle. I'm just kind of curious, in your press release you say that in the vehicles, the flash memory could go from being approximately 50 gigabytes today to 1 terabyte by 2025, and I was just wondering if you could sort of translate that into what does that mean dollar per car for you guys. And then also...

Sure. I think that's a great question. So if you looked at it, and I would encourage you to look at some of the materials we put up on our website for investor briefings, we've got a little bit more detail on there and some materials that we used, that were originally presented by Mercedes and also Toshiba. The flash is growing because people want more infotainment in their cars. That systems that you use today that are analog are moving to completely digital systems that look a lot more like a computer or video game than the old analog systems. And these are being developed by the traditional suppliers as well as some new entrants into the market. And pretty much all the semiconductor companies that have a microcontroller or a microprocessor or a graphics processor capability are going after automotive business. And all that increase performance demands more memory. What you find in computing generally is that you balance out I/O, so think of cars going to things like 5G, you might hear that. They're going to need more memory, and then they'll have more computing power to deal with all that data.

So what it means for us is if you assume that that's going to go up about 30% to 40% a year, that would be the growth in bits that would be available to us. Now we don't think that we're going to be able to hold the average, if you will, pricing per bit that we have to today. Given all that growth, we're going to have to come up with a very aggressive plan to provide increased performance to our customers. But we should be able to capture a reasonable portion of that 30% to 40%, that allows our customers to make the investments in data I/O in a very cost-effective way and allows us to participate in the growth. That's how we look at the flash market for automotive. And that's part of the reason why you've seen us continue to make the investments we've made in things like our UFS flash products, which I should've mentioned earlier, won -- just won an award in Shanghai -- at the Shanghai NEPCON Event, So that's why we're so excited about flash memory in cars, just that one piece of the automotive business.

Anthony, I'd like to just add that one of the other big trends in driving that is the ADAS, sort of the advanced driving assist systems, that sort of autonomous car type transition, that's going to be a big user of that memory and then the other piece is, we've been able to articulate to our automotive customers the roadmap that we have, particularly with our UFS strategy, and how our current PSV technology will be able to help them have a roadmap and path to go from today's production standards to that terabyte-type level of data.

Okay. That helps a lot. Now if you -- could you actually place your service by the bit? I mean, is -- an average price per bit you're going, is that how you guys actually (inaudible)

No, the customers -- when customers make a decision, we believe they look at the lowest total cost of programming. Because they can use our technology, they can use competitors' systems that fundamentally use a similar type of technology or they can use alternative methods to program parts. And the best way to evaluate those is to look at essentially what does it cost to you to put all the data into a part. We started using this several years ago with our customers, and it helped them understand why buying a Data I/O system might be more cost-effective than using end-off-line programming or programming off-site, and we continue to use those metrics with our customers.

What we're trying to say here is that we believe with this massive increase in the total amount of bits to be programmed, the customers will be demanding very cost-effective ways to program that. So on a per bit basis, the cost will come down, as it often does in semiconductors. We think that the total value of the programming segment will go up, given the substantial increase in capacity required.

And we'll go to Art Winston with Pilot Advisors.

I was curious what the relationship is with all of these partnerships you announce every month with the semiconductor companies to future sales and profits? What does this partnership mean exactly?

Well, Art, so if you look at what we've announced, that -- we have relationships that we've announced with essentially 3 different kinds of companies. So the first would be semiconductor companies. And the semiconductor companies are the ones that build the products that we provide the programming and security provisioning services on those products. Okay? I should say support on those products. So for example, Infineon has the Optiga Trust E and the Trust X authentication ICs. We provide the support for those, so customers of those products can get security provisioning done on a data I/O centric system. For NXP, for example, we support the A70 and A71 authentication ICs. For Maxim, we support the Deep Core family, and we just announced that we will be supporting the future Cypress Semiconductor PSoC 6, and we've announced support already for the Renesas Synergy family of secure microcontrollers. So those are products. And as those companies sell their products, they create demand in the market as they sell the products for those products to have security provisioning done, okay. So that's a very important partnership. The second set of partnerships are in, what we'll call, franchise distribution with programming centers. And we've announced publicly and can use their name, Avnet -- Avnet Silica and EBV, which is an Avnet company. They provide the design-win and design-in support for customers as well as the programming services that -- they actually do the programming work using SentriX equipment. And then the third set of partnerships is around companies that are, I call them, security experts and ecosystem partners. These are people that don't necessarily directly buy or specify data I/O but are very influential in the market. So that includes people like Arms Systems. We've announced that we're working with them to support their platform security architecture. This is a very important strategic announcement, because PSA is Arms methodology that they'll be deploying to the Arm licensees on the next generation of Arm Core microcontrollers. Now that's several years out, but our goal is to make sure that when that's gets deployed, those products can be provisioned on the SentriX system. We also work with companies like Secure Thingz, which is now part of IAR systems. IAR systems is a leading tools supplier. We work with them, because customers need to use design tools to get their board level products done and validated and by working with IAR, we greatly simplify the hand-off, if you will, from the design phase and the tools market to the manufacturing and first article phase and provisioning. So really the partnerships are designed as part of a comprehensive strategy to put together the entire ecosystem that's necessary to deploy security provisioning. You have the silicon suppliers, you have the distribution channels, and you have the security experts and fellow travelers, if you will, that allow us to make our product more effective.

In the case of the semiconductor partners, I don't understand what they get out of it? I understand what the sales in SentriX could be. What's the advantage to a Cypress or NXP?

Sure. The advantage to the semiconductor companies is really twofold. Number one, the current technology that you can use to provision security is really effective only at a wafer level, which means it's very good for markets that are highly concentrated and customers that have very high predictable volumes. It's not really effective for smaller customers, customers with unpredictable demand or customers that have special use cases.

So we provide them with a way to offer the security capabilities they've already built into the silicon to an expanded set of the market that happens to be the market profile that fits the Internet of Things, a lot of smaller customers. It is very different, for example, than the mobile market, which is highly concentrated. So we're offering access to allow the silicon suppliers to sell more value on the silicon they've already designed and enable a service for security provisioning through their channel partners that allow them to create a much higher value product within their existing channel.

(Operator Instructions) Our next question, from Jaeson Schmidt, Lake Street Capital Markets.

I apologize if this has already been addressed, but just curious if you could take a step back and look at kind of the big picture market, if you could comment on how and if your visibility has changed over the past 3 months through the year as a whole?

I think our visibility is -- I wouldn't say it's changed dramatically other than we're 3 months into the year. As I mentioned earlier on the call, programming centers tend to be the least predictable and demand that we respond on a shorter leash. Automotive can be a bit more predictable, but you see this across all the industries in capital equipment. For the most part, people are booking and shipping within the quarter. You see this not only in programming systems but increasingly in the tester market, and so we build our business around that capability. So we like to have things, visibility is something that's -- we don't have a whole lot of visibility outside of the -- maybe the current quarter.

Okay. That makes sense. And then, wondering if you've seen any significant changes in the competitive landscape at all?

Changes, I think, the competitive landscape, what we see is, thanks to us talking about automotive for years on these calls, we do run into people in automotive, most of the opportunities for us are -- we're well known in that industry, but everybody's trying to go after that space right now. We're focused on making sure that we can continue to be the preferred supplier across automotive. And we're also running into situations now where we are able to get into places that, maybe, we haven't been in before, because they understand that Data I/O offers such a compelling product in automotive. As I mentioned earlier, we do have a focus on not only supporting our current good customers, but also maybe educating the customers that have not yet purchased the Data I/O system or customer locations that have not purchased the Data I/O system, why that would be a really good thing for them to do. So our market is very competitive today. I anticipate it will stay very competitive in the future.

We have a question from Avi Fisher from Long Cap Advisors (sic) [Long Cast Advisors.]

Could you talk a little bit about when the SentriX systems, you see the revenue ramp? As I understand, the way you recognize revenue is going to change a little bit. Can you just talk about, what that looks like next year?

Yes, so Avi, I think, as we get revenue, I know there's some new accounting rules, Joel, is it 606? I don't think that's going to be a big change for us...

It really isn't going to be -- I think the real change is whether or not the current go-to-market strategy, which is to say, we'd like to make sure that there is almost no barriers to adoption. So we're placing these machines out there, as opposed to selling them like a cap equipment sale and trying to go on a pay-per-use model to take the customers' risk out, but that also has a benefit to us, if that's something that's able to take hold, greatly increasing our recurring revenue streams. So that is the process by which we're looking at, trying to get the revenue ramp done over the next year, 1.5 year.

And when will we know if that's kind of working? Or if you're going to stick with this test or strategy or is it going to change?

No, I mean, we have contracts right now. So it's working right now.

So you're -- the revenue you're seeing from the SentriX model is not coming from the capital sales, it's coming from per-chip, per-unit sale?

Well, we get per unit, but we also -- we might be able to charge maybe some NRE.

Consumables.

Consumables, things like that. So I think you're, seeing it -- just the CapEx contribution of SentriX would be substantially lower and the recurring piece would be substantially higher.

Got it. And now finally, I appreciate the answer there. Can you talk a little bit about any substantial uses for your cash? Any appetite from the board to resume the buyback?

Yes, the -- as -- I think most of the people on the call know, we've done buybacks in the past. We have no buyback plans right now. And I think that's probably the best thing I can say on the cash.

So in regard to that, we do have a policy that we actually don't comment about that until we actually have something to say. So I think you just have to stay on board and listen.

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

Okay, great. Thank you very much, operator. I just like to thank everyone for joining us, and before we close the call, I'd just like to remind everyone that our Annual Shareholders Meeting will be May 21 at 10:00 in the morning here at Data I/O in Redmond, Washington. Please come by, if you can. And please vote your shares prior to that meeting. With that, I'd like to close the call. Thank you very much.

Thank you. And ladies and gentlemen, this conference call will be made available for a replay, that begins today, April 26 at 7 p.m. Eastern. The reply of the conference runs until May 10 at midnight, Eastern. You can access the AT&T Teleconference replay system by dialing 1 (800) 475-6701, and entering the replay access code 446996. International participants may dial 1 (320) 365-3844 with the access code 446996. And that concludes our teleconference for today. Thank you for using AT&T Executive Teleconference. You may now disconnect.