Q2 2021 Data I/O Corp Earnings Call
<unk> thousand and 7000, and the field and are extending the reach of centric to new and exciting applications and channels.
While Q2 is outstanding and we continue to believe and our long term growth drivers. This is double digit semiconductor growth and the automotive market over the next decade, we also see strong market growth and <unk> artificial.
And industrial Iot.
This is consistent with others and our industry and the semiconductor test industry are also reporting.
We're also believe we're and attract and continuing to increase our recurring revenue and absolute and percentage terms as adapters and services business grow across a very growing and large installed base.
Intelligence.
Moving over to our operations performance and a resilient supply chain, we're seeing some of the most demanding conditions and supply chain and at least 20 years. This is not a data io unique issue and cuts across multiple markets regions and companies. We're also seeing challenges and freight movement predictability.
Based on cost.
Our strategy was to get in front of and expected upturn late in Q4 last year by extending our purchase commitments on key components and assemblies. This has been very successful and helping us meet our customer demand across the PSV family of handlers and programmers and our associated adapters, we are experiencing some.
Some modest delays on custom orders and specialty items, where we could not prepare the supply chain well in advance.
Chip shortages may actually be contributing to revenue growth and some cases as customers order adapters and new device supports as they qualify second sources and new designs and reaction to the supply chain challenges.
And.
Despite all the challenges we had an excellent quarter and we're on track to ship the vast majority of the $5 million backlog, we have entering Q3.
And finally talking about Covid compliance and other items, our staff is safe and our facilities are fully operational overnight.
Over 94% of the Redmond.
He was fully vaccinated against the COVID-19 virus or.
Our strategy from maintaining our workforce without layoffs and the depths of Covid a year ago is paying off now and a rapid turnaround.
Because we maintain our talented and experienced workforce across our functions, we've been able to step on the gas pedal and.
<unk> surge that you're seeing today.
Moving forward data Io be formerly converting to a hybrid work model and the Redmond office.
With more permanent fully and partially remote positions as we bring back more people into the office. We've discussed this with our team members over the past several months and think we've developed the right balance we.
Expect to implement this model starting in September assuming COVID-19 restrictions are not re imposed by local governments.
Moving forward to the rest of the outlook, we bounce back from the depths of covered 1 year ago and increased orders by approximately 79% year on year.
We're very excited for the first half progress.
Yes, where we booked over $14 million of business and enter Q3 with very good backlog.
We have been and continue to be ready.
To deliver this backlog.
As the bounce back from Covid sales settles out we look forward to the longer term growth trends of double digit growth more security and growing share globally.
Data remains extremely well positioned to deliver disproportionate improvement and profitability and cash flow as we continue our cyclical recovery within this framework of our long term growth market.
And our <unk> performance really helped us advance toward this goal.
With that I'll turn it over to Joel Heartland and Joe. Thank you Anthony and good day.
And everyone.
As our financial performance clearly has advanced with growth and revenues bookings and backlog. It is a good time to review our financial model.
While we do not give revenue guidance, we try to provide information helpful and modeling our business.
On the gross margin side, we believe mid to upper.
<unk> 250 range is what will be maintained although the margin profile may improve depending on the product mix and channel mix on.
Operating expenses will be fairly consistent for the balance of the year with variances largely pegged to sales commissions R&D.
R&D should be <unk>.
<unk>.
Approximately $1.7 million per quarter since we intend to continue to invest towards extending our lead as an industry innovator.
Taxes are expected to consist of foreign income taxes with no U S taxes expected due to U S Nols and carry forward.
Turning.
At our second quarter results net sales and the second quarter of 2021 were $6.7 million up 12% sequentially from $6 million and Q1 of this year and up 45% from $4.7 million in the second quarter of 2020 of 2020.
We had the highest level of.
Turning to our and King quarters, the increase and the prior period reflects primarily the higher overall demand for equipment and compares to Q2 of 2020 reduced business activity amid the COVID-19 conditions.
Revenue growth has also benefited from higher adapter sales associated.
Revenue increased usage, our growing installed base of machines throughout the world and customers addressing the semiconductor supply chain challenges as Anthony just discussed.
On a geographic basis international sales represented 93% of net sales for the second.
When compared with 94% and the 2020 period.
Second quarter of 2021 bookings were $8.9 million up 65% from $5.4 million in the first quarter and up 79% from net $5 million in the second quarter of the prior year.
Quarter adapter bookings for the second quarter of 2021 of $2.2 million reached the highest quarterly amount over a decade.
Backlog at June 30 of 2021 was $5 million up from 3 million at March 31, and 2021.
And.
And $3.9 million at December 31 of 2020.
And as well as up from $2.3 million at March 31 of 2020.
We entered the third quarter with a higher than typical backlog and have a strong sales funnel as well.
Gross.
Gross margin as a percentage of sales and the second quarter of 2021.
Was 57% as compared with 52, 4% in the prior year period.
The difference is due primarily to greater factory floor efficiencies on the higher capital equipment sales.
Operating expenses were 3.
And with $7 million and the second quarter.
2020, 1 as compared with $3.3 million in the earlier year period.
And for comparisons between 'twenty, and 'twenty and the current year, our COVID-19 actions, including executive and board pay cuts that.
Vacation mandates and foreign governments.
Assistance with furloughs or benefits lowered costs by approximately 200000 in the second quarter of 2020.
Within operating expenses this year selling general administrative expense in the second quarter increased by approximately 350000 and from.
From the prior year period, primarily due to the higher sales commissions associated with the higher demand for programming equipment and the recording of performance based incentive compensation as the company and returned to an operating profit.
R&D expenses remained stable between 1.6 to $1.7.
And each quarter.
And in accordance with generally accepted accounting principles GAAP net loss was for the first quarter.
Actually I'm, sorry, net loss and the second quarter of 2021 was 29000 or zero cents per share and reflects our continued efforts to control.
<unk> expenses as our revenue climbed back.
Moving onto the balance sheet day sales outstanding or DSO, a receivables collection measure at June 30 of 2021 was below our target measure at 59 days.
Net working capital at June 32021 edged up slightly.
To $18.2 million from $18.1 million at the end of the first quarter.
Inventory of $5.6 million at June 32021 was approximately 478000 and higher than at the end of March.
<unk> for the fulfillment of the $5 million backlog.
Deferred revenue at the end of the second quarter was $1.4 million up from $1.3 million at the end of March.
Data <unk> financial condition remains strong with cash of $13 million at June 30 of 2021, which is down from $13.6 million at the end of the first quarter primarily.
Slightly funding the receivables growth and inventory associated with our much higher backlog going into the third quarter overall.
Overall, we remain very strong financially, which has positioned us to be part of our customers' resilient supply chain and allowed us to invest in our business during the downturn.
And now finance that resumption of growth the company continues to have no debt.
Finally, we had shares outstanding of $8 million 619522 as of June 32021.
That concludes my remarks, I will turn the call back to the op.
To begin the question and answer segment operating will you. Please start the Q&A process.
We will now begin the question and answer session.
To ask a question you May press Star then 1 on your telephone keypad.
If you are using a speakerphone please pick up your handset before pressing the keys to withdraw.
Operator, Please press Star then 2.
At this time, we will pause momentarily to assemble our roster.
Our first question comes from Jason Schmidt with Lake Street. Please go ahead.
Hey, guys. Thanks for taking my questions and just wanted to start with.
And why Youre quiet change and it sounds like in your prepared remarks, you guys did not see any significant impact just curious if that was truly the case and if you're expecting any sort of impact here in Q3.
Jason Thanks for the question I think your assessment is correct we haven't.
Haven't seen any substantial impact the impact we have seen is the amount of effort. It's taking from the operations team to keep the machine running.
And the babysitting, a supply chain, the babysitting and freight forwarders.
You know things like that we took some very proactive steps before right at the beginning of the year.
And to make sure that we had key components lined up because we were expecting a bounce back I don't think were expecting quite as large a bounce back.
So we were protected in that sense, but it's just a lot of effort going in.
And.
You know a lot of work under the covers to keep the well oiled machine going.
Okay. That's helpful and I know you mentioned or expedited freight costs, but just curious and general if you're seeing other sort of inflationary pressures and if so if you're passing along those increased costs to customers.
Yes, we're starting to see some price increases in the supply chain.
And we.
We evaluate that and we do price increases from time to time as the costs go up and we will keep that tight.
Tight eye on that.
Okay, and the last 1 from me and I'll jump back into queue early nights.
Accomplishment with that for centric system.
And just curious how long you had been engaged with this customer from kind of initial conversations to them formally kind of going with the system.
I'd say, it's probably been from the time, we started talking to the time, we got the purchase order I'd say, it's on the order of 2 quarters.
And if you're a little bit less maybe a little bit more but that's about it.
Okay.
Thanks, a lot guys.
Thank you.
Again, if you have a question. Please press Star then 1.
The next question is from Jeff Thompson with Austin Capital. Please go ahead.
Thanks, Anthony and Joel guys for taking my questions.
Walk us through your financial model I believe you have really strong operating leverage so I wanted to see how that could come through.
Yeah, we expect as I started with the conversation on the on my section to have gross margin stay in the midterm.
<unk> <unk> <unk> percent range and.
We actually think that that could be better than that depending on our mix of channel and product during the quarter.
I think our operating expenses will be pretty much in line with where we've been this quarter with the exception of.
<unk> out what the selling commission amounts will be relative to the higher sales volume.
R&D, we expect to really be pretty stable.
Brown and the $1.7.
Range.
We don't forecast.
Ever any.
Positive or negative.
Foreign currency piece and that was an unfortunate item this quarter, but.
We do think that.
Our income taxes will be again, consisting entirely of foreign taxes with no U S taxes because of Nols.
So that's really the basics of it.
Thank you.
That's helpful. When you start generating excess profits and cash flow as you did during your last run up and around 2017, you implemented the share buyback what.
What can we expect this time around and and have you given any thought.
As to what cash level, you want to have or what is the stock price you would repurchase shares.
That's for sure.
For those of you who might be relatively new the company has a history of.
Buybacks going back.
8 or 9 years, and I think we bought back just a little over $8 million to date and the last decade.
And as a cyclical business as you generate I'm not sure it'd be excess profits.
But you may end up with cash.
Exceeding what we think we need to run the business effectively across a normal cycle.
And with some safety buffer.
And obviously being a little bit conservative on cash helped us out quite a bit.
During the past year with Covid.
Or can there are a number of other factors to consider not just total cash, but where the cash resides but if we get to that point, where we have what we believe is a surplus of cash and I'm sure. That's a discussion we'll have with the board.
Okay.
And what is what is different and how.
And then the business now as opposed to 2017.
And when you had you know how to run. It back then is there anything you learned from since that time that positions you to perform better or that would prolong your growth period.
Well that's a good question I think 1 of the things, we did really well and 2017.
We're also.
You are right now and that's having the operational excellence that our manufacturing.
Manufacturing and service teams here and Redmond and also on our Shanghai office have demonstrated.
You know 1 of the things we learned I guess has to do with Covid and the semiconductor shortages, we learned how to operate much more remotely.
Which I think will give us a little more leverage and our standard operating procedure and multiple functions on the company.
As we go forward I don't think we'll be traveling as much.
We will be investing more and tools and infrastructure to enable that flexibility and pulling back as I mentioned on the travel.
So doing reps and most interesting thing for the investment community investment community comparing now to 2017 was the profile of our revenue is geared much more towards recurring revenue now than it was back then.
Joel help me out here, but I think and 2017, we had about 29% of our revenue from recurring revenue.
Revenue and <unk>, 1% Capex and.
And right now, we're about 44% recurring revenue and 56% Capex. So the larger recurring revenue and gives us a little bit less.
Less volatile earnings profile.
And that'll be helpful. As we go through the business cycle.
Thing I'd, probably add to that is we've strengthened our manufacturing operations. So that we have the ability to produce some of the equipment and both our Shanghai factory and our Redmond factory. So that helps us manage tariffs it helps us with flexibility for where the demand is and.
And it gives us some supply.
Supply chain extra resilience with having local sources.
Sure.
Both of our factories.
Great. That's helpful. Thanks, and on 1 last question.
Back in 2017, you were funding <unk> as a startup.
How is this security provisioning platform involves since that time and does the market now see more receptive or in need of this solution as compared to when you were initially funding it.
Well, that's a great question, Jeff and it's important to the company's future.
And in general and redevelop the products and engage with.
And hammers and learn more about the market we've kept 2 major goals in mind or simplify and scale.
And we've learned that our early product was too complicated it really didn't allow for easy upgrades and the installed base and <unk>.
Our customers told US you know make it easier to use and make it so that we can leverage that large.
And cost all based on PSV equipment.
We did that and the second generation product that we're supporting now we simplified the tools we simplified the overall system, we simplified the customer experience and we've demonstrated now that we can successfully upgrade existing PSV systems in the field to centric capability.
This.
Large and just grow the business within the current programming Center channel and also gives us and expanded opportunity outside of programming centers with Oems and EMS suppliers, and we only see 1 or 2 centric opportunities early on.
That and I think winning a big deal and artificial intelligence.
And we'll be game changing for us as it shows.
And there are additional applications, where centric as appropriate and a great fit.
Thanks, and that is all of our questions at this time.
Thank you Jeff.
The next question is from Orin Hirschman with AIG investment partners. Please go ahead.
Yes.
It will help.
So on San.
Rick.
And this turning point you feel finally really beginning to get traction and I also noticed you mentioned and your recurring and actually mentioned centric as part of the recurring.
And I think it's first time, you haven't really mentioned it.
Tiny that mean and recurring.
Becoming more notable would still pining and you just wanted us to begin to be focused on.
Oh, Hi, Orin.
And if I, if I admitted centric from the recurring revenue. It's just you know.
Simplicity.
But to get back to your first question.
We think it's a big win for us.
Because we were able to engage directly with an end customer are very demanding and customer.
Again, and the artificial intelligence space, we don't have permission to use their name but.
They understood the benefits of centric very very quickly, we're able to work with them on tailoring the product to exactly.
Actually to meet their needs and their very specific application and they had a unique model where it was better off for us to actually sell them a system and create a license rather than the historic pay per use model that we've had with other customers and so we were able to work with them on that as well so I think.
<unk> opened.
Exactly and is that needs to new applications.
Go ahead.
I'm, sorry, Keith so disfigured idea on.
Yeah.
Orange, the evident and additional question or a clarification there.
Yes.
And our apologize I didn't wanted to up the idea, but just does that mean that there couldn't be paying recurring and this particular.
And there's there's a recurring element to it but it's more around our licensing and then a pay per use model.
Okay.
Is that because of the magnitude of the size.
And they wanted.
Hi.
And again I don't want to get into too many details, but that's basically what the customer insisted upon and we were able to come to something that worked for both of us.
Okay.
And just.
Going back to the basic question in terms of the.
Yes.
What was it.
Centric that you've won.
Type of competition.
And for this customer.
And Brian it's possible terms the way we compete with Centrex has as we compete on the data business people can inject data and security information.
A number of different points in.
Whats lie chain you can do it at a semiconductor backend Assembly test operation you can do it when the product is completely manufactured at the end of the line and you can do it with pre programming technology as we have with Centrex, where you have access to the component prior to placement on and SMT.
And the benefits are are it's a little bit more secure when you're able to make sure. The chip is fully secured before it's even put on a manufacturing line.
Less of a concern if you own the factory, but it's a it's a much more secure method and waiting till the end of the line.
Line, because you have a much larger threat surface. If you wait until everything is done through the SMT process.
And you can always do it at the semiconductor house, they tend to have challenges with lower volumes and.
And some customers don't want to have.
Anyone else have access.
As to their code.
And so in this particular case I think the benefits were.
We had a very flexible solution, we could tailor the product to meet their needs.
And it met their needs to have control over all of their intellectual property.
Within their own factory.
It was a great win for our for all concerned.
And again just to reiterate I apologize on the terms.
We are centered on place is it is it only and that pre programming before F. N T or you could also play them.
And the Pope's manufacturing semi itself and the factory the semi factory itself and there really borne on the thing.
I think we've always.
And the data Io technology that we have has always been a pre programming technology on the data side and also on the centric side.
Over time, it's possible that centrica could evolve outside of that the capabilities for centrex on.
Our substantially broader.
Broader from a security management perspective than the data programming engine.
But right now the centrex technology as our PSV technology does supports the pre programming model.
And this win.
And then award not even that win per se, but just what's going on for you.
See other do you see a bigger pipe of Centrica, because it's been a long time and coming and like obviously the swing is it's a big deal for you have you seen the pipeline begin to break open and all for centric. Besides this win.
The pipeline and the first half of the year has been much stronger than it was last year.
Q I think for some of the smaller customers they've actually they're interested but they've been held back a little bit by the supply chain.
And just simply getting parts. So I think when the supply chain breaks loose I think that'll actually be a net positive for centrex with some of our <unk>.
Potential new customers.
But yeah and overall the interest is there again the product is better it's easier to use it's more straightforward and.
And.
And hopefully we get a little momentum out of this win.
Okay, and just shifting to data to the base business from a minute.
On the bookings obviously.
And anything.
Has the book.
Bookings momentum continued and you need some illusion look that's great.
Good morning.
Yes, I think the.
The bookings momentum to get Q3, exactly Q2, I think would be a challenge.
And we decide people on a tear from pretty.
Pretty much on the first of March through the entire sector.
Quarter Q3, historically is 1 that where it tends to be more backend loaded anyway, you have vacations and things like that and that's modeled into our forecast. So I think we've got a good funnel for Q3.
And we were excited about the prospects, but I think Q3 is always a different beast and Q2.
Yeah.
Okay, great. Thank you.
The next question is from David Cannon with Cannon wealth management. Please go ahead.
Yeah.
Hi, guys congratulations nice progress thank.
Thank you Dave.
So.
First question on some of them have actually been answered.
I'm going to keep it brief.
What percent of your P. S V installed base do you think is a high likelihood candidate for centric upgrade if you could quantify that.
So the right now we have north of 370, or so PSV family systems deployed globally and.
And.
I would say.
Okay.
About half of those are probably candidates for centrica.
On paid at 1 point or another and I arrived at that number by looking at all of our automotive business.
And.
A fraction of the programming center business and.
And also a fraction of the EMS business.
Okay.
Upgrade 185, if I split and house and then what is the ASP.
And on centric and then if you could just speak to the margin profile of the new centric sale versus a traditional TSV.
Yes, Dave we haven't disclosed.
And so the average selling price on the centrex.
For competitive reasons, because we have a lot of competitors on this call.
I'd like to wish them, all very well.
And then on the.
And sorry, your second question.
The margin profile on it.
Margin profile is better.
Close.
Yes, you should assume that the margin profile on the centric business is a little bit better than the base business.
Okay like 10 points.
And so we'll just we'll just go into a little bit better for now.
Okay and then.
Have you.
You guys run through the exercise of the.
And the centers expand your your total addressable market and if so by.
By how much does it get you and to doors that you wouldn't have gotten into ordinarily if you could.
Sure a little bit on that sure I think it clearly has expanded our.
And the Tam because.
And just where we're able to program devices that we weren't able to program before like Oh.
<unk>.
Okay.
Security.
Secure elements and secure Microcontrollers and increasingly there is a new category of emerging of secure memory devices.
Now what youre going to <unk>, So that's a tam expansion and as I've indicated on the call before.
We also see the whole market moving to embrace security and we've talked about that is and 10 years, we don't think there'll be a microcontroller market without security.
And we're starting to see a lot of the memory.
Buyers come out with secure memories.
And there are some interesting things, they're trying to do there in very high volume verticals, where we play and.
And then I think it will be interesting business opportunities as we go forward. So there is an immediate Tam expansion now and then.
As the market evolves the shape of the market will become much more secure security oriented overtime.
Okay. So I mean traditionally your core.
The market has been relatively small how would you quantify.
Very simple spansion with centrex is at a 25% expansion and 50%.
If you could just take a guesstimate as to what the incremental opportunity is with sensors.
You don't want rather and shoot from the hip on this 1 day at all.
I'll follow up with you and the rest of the investors on on that 1.
Okay, and then did I hear correctly like in terms of the backlog and $5 million to Joel say that you expect the majority of that to be shipped during Q3.
That's correct.
Okay and then.
And I know Europe is a good chunk of business things kind of shut down and the summer as everyone goes on holiday.
From your experience.
And I understand how like the pace of orders and in Q1.
It's not you know it is not possible.
Follow.
And to July with vacations, and so forth, but when does it typically when when does the flip the switch get flipped so to speak when people come back and all of a sudden and you know you see.
The order pace pick up and are in a typical Q3, if you will.
Well I think Q3 is a lot like.
Follow up from and in the sense that.
You tend to make the quarter.
In the last months most.
Most of our business nearly half of our business I should say typically comes and last month of a quarter anyway. When you average it out over.
Years, and years and quarters and quarters and I think.
In Q1, and Q3 tend to be more exaggerated in that regard.
Mhm.
Okay, Alright, congratulations and.
Good luck and I'll tune in next quarter. Thank you.
Dave.
This concludes our question and answer session I would like.
Q1 conference back over to Mr. Ambrose for any closing remarks.
Operator, thank you very much.
Since there are no further questions I'd like to conclude the call at this time and thank everyone for joining us.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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