Data I/O Corp (DAIO) 2021 Q3 法說會逐字稿

Good day, and welcome to the Data I/O Third Quarter 2021 Financial Results Conference Call. (Operator Instructions). After today's presentation, there will be an opportunity to ask questions. (Operator Instructions). Please note, this event is being recorded.

I would now like to turn the conference over to Jim Fanucchi, Investor Relations. Please go ahead.

Thank you, and welcome to the Data I/O Corporation Third Quarter 2021 Financial Results Conference Call. This is Jim Fanucchi, filling in today for Jordan Darrow, who will be available starting tomorrow. 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, estimated impact of tax reform, product releases, new industry partnerships, and any other statement 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 the COVID-19 pandemic, along with continued reopening and recovery efforts within the supply chain and among our customer base, levels of orders for the company, and the activity level of the automotive and semiconductor industry overall, 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.

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

Well, thank you very much, Jim. I'll begin my formal remarks by addressing our 2021 third quarter financial and operational performance, talk a little bit about how we see the long-term future, and then I'll turn it over to Joel for a more detailed discussion of the numbers.

Company reported good results in 2021 third quarter, driven primarily by the substantial backlog developed during the first half of the year and continuing strong adapter demand. Adapter bookings in the third quarter of 2021 continued their strength that we've seen all year. Our increasing installed base of PSV machines provide recurring and consumable revenues, which supplement our capital equipment sales. Additionally, we've seen customers qualifying second sources for short semiconductor components, and this requires new design support and new adapter support from data IO.

Additionally, we've also seen increased software and services bookings year-to-date, which will transfer into increased revenue as it is recognized. Recurring revenue is about 40% of the total revenue this year-to-date, and our long-term goal is for this to continue to increase.

On the CapEx side, we had an excellent win rate on new systems, where customers actually ordered systems. We did see some customers push some orders out of third quarter until they had better visibility on their silicon supply chain to justify new capital investment. Earlier today, you may have heard that GM and Ford indicated the worst of the automotive-induced semiconductor shortage was behind them, with a full recovery expected sometime in mid '22.

Our resilient supply chain delivered extremely well in Q3. Our factories in Redmond and Shanghai were able to ship, despite the global shortages of semiconductors, shipping issues, and ongoing concerns with COVID-19 in many customer locations. Our strategy to extend our purchase commitments and create inventory for the PSV family late last year has paid dividends for us and our customers. As a result, we're able to maintain our lead times on the PSC family and are ready to respond quickly to the next uptick in orders.

So regarding COVID-19 and its associated impacts, all are still safe, and our facilities are fully operational. We're over 98% fully vaccinated here in Redmond, without any company mandate. Global operations are over 90% vaccinated and are working without interruption. Our strategy for maintaining our workforce without layoffs in the depths of COVID is continuing to pay off in our ability to rapidly support operations, as well as our continued progress in R&D. Data I/O has formally converted to a hybrid model for the workforce here in the U.S.A., where people work some of the time in the office and some of the time at home, unless, of course, they're on the operation floor, where they're here 100% of the time.

We are returning to more normalized activities, including participation in trade shows and more business travel. We recently participated in the NEPCON trade show in China, and next month, we'll be participating at the Productronica trade show in Germany.

Since October is when we review our long-term planning, I'd like to share with you some of our thoughts and the data we use to plan our business and how we see the future unfolding. As we've been talking about for a long time, at least 5 years, automotive electronics is our primary market, and we are very, very bullish about the short, medium, and long-term future in automotive electronics. The automotive semiconductor total available market is expected to grow from $33 billion in 2020 to $59 billion in 2025, representing about a 12% compounded annual growth rate over that period. That's according to IHS Markit, an industry analyst firm. This is right in the middle of the range we have used, which is a 10% to 15% compounded annual growth rate.

Recent Deutsche Bank research is very revealing and validates what we've been talking about and seen in also our own forecasts. In almost every quarter going back to 2017, growth in automotive semiconductor revenues has outperformed global growth in automotive production in terms of units by about 10 percentage points. So our main thesis for data I/O is that the automotive semiconductor market, which requires programming, is growing faster than the unit market, and ultimately, that's the source of our optimism in the market.

Today, about $300 to $400 of semiconductor content goes into a typical mid-range vehicle, according to Deutsche Bank, with the bulk of that in microcontroller and analog parts. IC Insights, another analyst group, reported that microcontroller sales in automotive this year surged 23%, despite the supply chain shortages. Again, we've all been talking about and hearing about shortages in the supply chain. We need to remember that it's shortage to the vastly increased demand, not necessarily short of where they were a year ago.

So what's behind the growth in the automotive silicon demand? So the catalysts for growth really are around several areas that we've talked about several times. Number one are electric vehicles and alternative energy vehicles; number two, autonomous driving; number three, inclusion of connected and secure vehicles with infotainment options; and number four, advanced safety features. So we dig into each of these. The major bets on EVs and alternative energy are well known to anyone, and this is all public information.

Toyota plans to spend about $13.5 billion on EV battery technology. Hyundai plans to launch hydrogen versions of all their vehicles by 2028. On October 16, GM announced plans to double their annual revenues by the end of the decade as it relates to all-electric vision. GM has already announced plans to invest $35 billion through 2025 in an all-electric, and autonomous vehicles, and launch more than 30 EVS. So as global light sales recover from bouncing around the sub 90 million units, the penetration of electric vehicles is expected to move from about 4% in 2020 to 30% by 2030, implying a global fleet of about 130 million electric vehicles. And again, this is interesting to us, because Deutsche Bank points out that an electric vehicle has a substantially larger silicon content than an internal combustion engine automobile. So again, when you factor this in, this is why we expect to see automotive silicon content continue to grow 10% to 15% per year for a very long time.

Moving away just from EVs, you also have silicon growth and advanced driver assist systems, or ADAS, also known as active safety. These are the systems that are necessary to enable autonomous driving. This includes a lot of sensors and a very large amount of flash memory, which we program. We also see file sizes in the number of bits, or code, in each device getting larger and more complicated, regardless of the vehicle type. This is especially true for the infotainment market, where hundreds of gigabytes of NAND flash memory are used in each car.

Additionally, we're also seeing interfaces changing, which represents a technology hurdle that Data I/O has already solved. Markets moved from eMMC to UFS, which we program, and that UFS performance gives customers an even better reason to add more and more content to the car. So with these new releases of UFS, it gives us good demand not only for capital equipment, but also upgrades the installed base and new adapter and device support revenue.

So in addition to these trends going on in automotive, there are other basic trends going on in how programming everywhere is being done. Number one, there's increased connectivity of programming systems to factory MES control systems. In other words, the programming system 10 years ago used to be a separate activity. Fifteen, 20 years ago, it was all manual. We've talked several times over the years about how manual has been moving towards automated programming, but it was still automated programming separate from the SMT line. Now we're hearing increased demands from customers to link the programming system to their MES shop floor control for better job control, enhanced yield, better asset utilization, and also, the ability to link the data that's produced from programming into their analytics platforms to better manage their entire process. We're starting to see this happen in automotive and also in leading industrial accounts as well.

And then, also, security. We've talked a lot about security in the Centrix platform, but we continue to see, across the automotive and industrial space, a growing demand to protect the supply chain and protect firmware intellectual property. We're continuing to see additional security requirements come to us in the automotive and industrial markets. Our Centrix platform and the ability to upgrade existing PSV family systems in the field is core to our security strategy.

So these market conditions and our strategies lead us to the following long-term goals. We believe double-digit silicon growth in automotive will lead to double-digit Data I/O revenue growth over a full business cycle. We'll continue to see cyclicality, especially acute until the semiconductor shortages are behind us. We believe our operating leverage and scale will drive adjusted EBITDA growth faster than revenue growth. And we also see increased recurring revenue in absolute and percentage terms from adapters and services across the growing installed base.

So I mentioned the industry market analysts are telling us they see a decade of 10% to 15% long-term growth rate in silicon for automotive electronics, and Data I/O is extremely well positioned in this space, with over 60% of our sales to the automotive industry and hundreds of programming systems in the installed base. While we expect some short-term turbulence in demand as silicon remains constrained, we're investing for this long-term growth trend.

With that, I'll turn it over to Joel Hatlen.

Thank you, Anthony. Good day to everyone. For the first 9 months of the year, our financial performance has advanced with meaningful year-to-date growth in revenues, bookings, and backlog. We continue to effectively manage our operating expenses and maintain a strong balance sheet. Now let's look at the third quarter results.

Net sales in the third quarter of 2021 were $6.7 million, up 13% from $5.9 million in Q3 of last year. The third quarter revenues, we believe, were constrained by customers' supply chain silicon part shortages and related order deferments by those customers, as described in Anthony's remarks. But yet, we still came in with revenues that were equal to or higher than the level achieved in the past 11 quarters.

The increase from prior period primarily expects the use of our higher backlog at the start of the quarter coming from this year's higher demand for equipment and compares to the third quarter of 2020's reduced business activity amid COVID conditions.

Revenue growth also benefited from higher adapter sales associated with increased usage and our growing installed base of machines throughout the world. On a geographic basis, international sales represented approximately 86% of net sales for the third quarter of 2021, compared with 93% in the 2020 period. Third quarter 2021 bookings were $5 million, down from $5.6 million in the third quarter of the prior year. We believe the second quarter benefited from an order pull-in, and we experienced order flow deferments, which impacted the current quarter.

Adapter bookings for the third quarter of 2021 continued to be strong at $1.7 million. Backlog at September 30, 2021, was $3.3 million, down from $5 million at June 30 and up from $2.8 million at September 30, 2020.

Gross margin as a percentage of sales in the third quarter was 60.7%, as compared with 55.1% in the prior-year period and 57% in the second quarter of this year. The difference from the prior periods is primarily due to the impact of higher sales volumes relative to fixed factory costs and favorable factory variances. On the gross margin percentage going forward, we have continued to model a mid- to upper-50s range, although the margin profile may improve or be very as we have seen this past quarter.

Operating expenses were $3.9 million in the third quarter of 2021, as compared with $3.4 million in the year-earlier period and $3.7 million in the second quarter of this year. Within operating expense, selling, general and administrative expense in the third quarter of 2021 increased by approximately $406,000 from the prior-year period, primarily due to higher sales volume commissions associated with the channel mix, and then the higher demand for programming equipment, as well as recording performance-based incentive compensation.

R&D expense remained stable, running at $1.7 million for both the third quarter and the second quarter of 2021, and $1.6 million in the third quarter of 2020. As we continue to invest and strengthen our products, operating expenses have been and are expected to be fairly consistent, with the variances largely pegged to sales commissions due to volume and channel mix and variable incentive compensation.

Taxes during the quarter consisted of foreign taxes, with no U.S. income tax. In accordance with GAAP, net income in the third quarter was $12,000, or $0.00 per share.

Moving on to the balance sheet, days sales outstanding, or DSO, a receivables (inaudible) measure at September 30, 2021, was below our target measure at 51 days. Net working capital at September 30, 2021, was $18.5 million, up from $18.2 million at the end of the second quarter. Inventory of $6 million at the September 30, 2021 date, was approximately $400,000 higher than at the end of June and reflects our continuing effort to de-risk our supply chain and potential part shortages by higher stocking levels for our key products.

Deferred revenue at the end of both the third and the second quarter was $1.4 million. Data I/O's financial condition remains strong, with cash at $14.2 million at September 30, which is up from $13 million at the end of the second quarter, primarily due to collection of a prior year's tax refund of over $600,000, and to increased accrued expenses not payable until after year-end, as well as our ongoing cash management and expense control practices.

Overall, we remain very strong financially, which both fortifies our brands as the most technologically advanced as well as capitalized supplier in the global programming industry. The company continues to have no debt. We had shares outstanding of 8,621,007 shares at September 30, 2021.

That concludes my remarks, and I'll turn the call back to the operator to begin the Q&A segment. Operator, will you please start the Q&A process.

(Operator Instructions). Our first question comes from Jaeson Schmidt with Lake Street.

I just want to start with the supply chain and some of your comments in the prepared remarks. Can you quantify the impact that the supply chain headwinds had in Q3?

Yes. Jaeson, this is Anthony. I think we spent a lot of time working on issues that were, I'd call it, months out in terms of making sure our supply chain was stable, as opposed to weeks out. I think that was certainly the case in our PSV family, where we, as we talked about earlier, leaned in a little bit on making sure we had adequate supply.

We did sell some RoadRunner systems in the quarter, and we did not do as much leaning in, if you will, on the RoadRunner, and so those actually took a little bit longer to build. I think we probably could have put one more out the door in Q3, if everything was perfect. So I guess, technically, that would be something that had a minor impact. But overall, I think on the supply for us, the supply chain issues have been very minimal in terms of observable performance.

Where I think it's a bigger factor is our customers need to get chips to build auto electronic components. And ultimately, if they're short of chips, they're not following through on some of their capacity expansions. So that's a short-term negative until they get that sorted out, which could be Q4, certainly no later, we think, than early next year. But it's also created some interesting dynamics where we're seeing a lot of demand for customers coming in to qualify second-source components for designs that they're redoing because they can't get support on the components that they were planning to use.

So a little bit of a mixed bag for us, and I think it impacts us more on the demand side than on the supply side.

Okay. No, that color is helpful. And just to clarify, you did mention some deferments, but have you seen any cancellations at all?

No.

Okay. Perfect. And then last one for me, and I'll jump back in the queue. Can you just update us what you're seeing from an inventory standpoint at the programmers and how that market is shaping up?

Do you mean programming centers?

Yes.

Yes. I think our programming center business was actually up a little bit in the quarter. Again, I think that's just reflecting the fact the industry has high utilization of the equipment they have. And that's about all I'd read into it.

(Operator Instructions). Your next question comes from [Jeff Peterson] with [Austin Capital].

In early September, the stock traded over 2 million shares in 1 day, and the trading was halted. What happened?

We had a situation where on that day, essentially, retail trading, we were told, took place that really pushed the volume way up, and that also moved the shares way up. It got hot enough where the NASDAQ actually shut down trading for a limited halt around [3:17], and we commenced trading about half hour later. So as a company policy, we don't comment on market speculation with regard to the trading of the shares, and NASDAQ was never able to notify us of any action that may have been involved in the trading. But it was something where the interday high and the close was up substantially, and we always try and keep an eye of unusual moves on our shares.

That was helpful. What -- we have seen some insider selling in Q3. Why, and what is the company's policy here?

Yes. We always have a policy about approving insider's trading activities. And we actually don't have a requirement, but we strongly recommend that insiders that want to get into a trading program actually get a formal 10b5-1 plan and have it regulated so that there isn't trading on any kind of suspected insider information that may be out there, so those are pre-arranged. We don't actually comment about the officers and other plans, but from time to time, officers will send -- sell stock to diversify their personal and individual portfolios.

We do have clear trading policies with regard to helping officers, directors, and employees. We have preclearance arrangements for entering into those agreements and any direct selling that takes place, and clear policies about what we need to have people do to trade in the stock. But we do not require the use of the 10b5-1 plans, as I mentioned. The plans have to be created in an open window, require a 30-day lag before effective and trading may take place. And that kind of trading is one where you have pre-arranged trading dates and/or stock prices and limitations according to those pre-arranged instructions. And we always file a Form 4 promptly after those trades to take place. And that will be noted as a 10b5 transaction.

The next question comes from Orin Hirschman with AIGH Investment Partners.

So a few questions. Do you think that this is a low in the bookings for you this quarter, or it could get worse next quarter?

We typically don't give a bookings forecast. The bookings on CapEx will be driven by customers' perception of their silicon availability, predominantly in the automotive space. And so, I think our best estimate right now is what we heard from GM and Ford publicly today, what people have been saying for a while, that they think the bottom for them was Q3, and they think it's largely resolved by the middle of next year. Now, I don't know if there's a straight line from the bottom to the top or it gets better selectively, but that's the best industry information we have.

On things like adapters, right, we've had unusual strength pretty consistently throughout the year. And on our services bookings, they've actually been up again, year-over-year, pretty nicely as well. And I don't think those will be too much impacted by the silicon shortage.

Okay. In terms of security, it looked like last quarter, you began to get some traction. What about this quarter? I didn't hear much about security or anything about security.

I think on the security side, we actually delivered the system we booked earlier that we talked about. And the -- that was in our numbers for the quarter. We continue to build a pipeline on Centrix. We continue to work with customers on that. We continue to have meetings where we talk about security and interesting applications -- had one this morning in automotive. That just has to work through the system. We continue to build on the base we have with Centrix, and we'll go forward from there.

So just one more question before I let you go. On Centrix, you had the big wins that you had mentioned. Anything to follow-up on those wins in terms of anything additional from those customers, or did that break open any demand from the additional customers when they -- when you highlighted those wins, or it didn't have that effect yet?

I think, Orin, the big thing for us is, when we have wins like that -- and we had the big win last quarter, we had our first automotive win earlier in the year, we continue to talk to customers about some very nice opportunities. So I think the word is getting out on Centrix. We've clearly established the proof points of the capability.

A security sell is a complex sell. That's definitely one thing we've learned over the past couple of years. And we're just trying to get more and more opportunities in front of us where we can sit down and talk to the customer in a very structured way and go forward in there. And we just have to continue to do what we're doing.

The next question comes from Robert Anderson with Penbrook.

As you said, 61% of your revenues were automotive electronics. What was the remaining 39%?

Joel, help me out, but I think it was about 21%, 22% industrial and then 17% programming center.

That's almost exactly it, yes.

Yes.

Okay. And do we have any idea, or can we indicate what percent of overall revenues is related to Centrix? My sense is it's still a pretty small number.

Yes, we include the Centrix software and services in with the rest of the software and services. The system that we did sell to support Centrix actually got counted as a system, so that's in the capital bucket. So a system is a system, but obviously, the Centrix revenue that got wrapped around it and was the reason for the deal gets counted in software and services. So you'll see the pure Centrix revenue in the software and services line, and then, as we do things like sell equipment to support a Centrix deal, that would go into the CapEx line.

And what was the size of the software and services line, Joel?

We actually have not published or put that information out at this point.

But it's basically the...

Centrix software license.

No, Centrix is separate, but at the total software and services, I think he was asking about.

Yes.

Oh, total software services was 11%.

This concludes our question-and-answer session. I would like to turn the conference back over to Anthony Ambrose for any closing remarks.

Well, thank you very much, operator. Before we close the call, I'd like to let everyone know, first of all, thank you for joining us on the call today. We look forward to seeing you at the Productronica trade Show in Munich in a couple of weeks. I'll also be in Boston and New York in a week and a half. And we've also been invited to present at the Ladenburg Thalmann Virtual Technology Expo on November 18, and the D.A. Davidson Semicap, Laser, and Optical Conference on December 15. If you'd like further information on that, please contact Darrow Associates, and we look forward to seeing you.

With that, I'd like to conclude the call. Thank you very much.

Thank you for attending today's presentation. You may now disconnect.