Q3 2021 Data I/O Corp Earnings Call
Good day and welcome to the data I O third quarter 2021 financial results conference call. All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing Star then zero.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on a touchtone phone.
Your question. Please press Star then two 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 <unk> Chief operating officer.
Or and Chief financial Officer of data, Idaho 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 factor.
These 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 semiconductor industry overall ability to record revenue.
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 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.
Adapter bookings in the third quarter 2021 continued their strength that we've seen all year.
Our increasing installed base of PSB machines provide recurring and consumable revenues, which supplement our capital equipment sales.
Additionally, we've seen customers qualifying second sources for short.
Conductor components and this requires new design support new adapter support from data I O.
Additionally, we've also seen increased software and services bookings year to date, which will translate into increased revenue as it is recognized.
Recurring revenue is about 40% of the total revenue this year to date and our long term goals 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 the GM and Ford indicated the worst of the automotive induced semiconductor shortage was behind them with a full recovery expected sometime in mid 'twenty two.
A resilient supply chain delivered extremely well in Q3, our factories in Redmond in Shanghai, we're 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 to 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 PSV 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 are 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.
<unk> was formerly converted to a hybrid model for the workforce here in the USA, where people work some of the time in the office and some of the time at home unless of course, they are on the operation for where there are 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 NEP Con trade show in China and next month, we'll be participating at the product chronic a trade show in Germany.
Since October when we review our long term planning I'd like to share with you some of our thoughts on 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 five 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 2000 $20 billion to $59 billion in 2025, representing about a 12% compounded annual growth rate over that period, that's according to IHS market and industry analyst firm.
It was 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 and also our own forecast.
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.
Our main thesis for data Io 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 midrange vehicle. According to Deutsche Bank with the bulk of that in microcontroller and analog parts.
I see insights another analyst group reported a 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 had shortage to the vastly increased demand not necessarily short of where they were a year ago.
So what's behind the growth in your automotive silicon demand so the catalyst for growth.
Really are around.
Several areas that we've talked about several times.
One are electric vehicles and alternative energy vehicles.
Number two autonomous driving number three.
Inclusion of connected and secure vehicles.
With infotainment options a number for 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.
<unk> plans to launch hydrogen versions of all their vehicles by 2028.
On October 16th GM announced plans to double their annual revenues by the end of the decade as it relates to all electric vision.
Jim has already announced plans to invest $35 billion through 2025, and an all electric and autonomous vehicles and launch more than 30 Evs.
So as global light sales recover from Iraq.
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.
And again this is interesting to us because Deutsche bank points out that an electric vehicle.
<unk> has a substantially larger silicon content than an internal combustion engine automobile.
So again, we factor this and 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 from Evs, you also have silicon growth in advanced driver assistance systems or Adas <unk> 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 and the number of bids are 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 were also seeing interfaces changing which represents a technology hurdle that data I always already solved markets moved from E. M. M C to U F S, which we program.
And that you have that's performance gives customers an even a better reason to add more and more content to the car.
So with these new releases of U F. As it gives us good demand not only for capital equipment, but also upgrades to 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 and how programming everywhere is being done.
Number one there is 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.
15, 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 lines.
Now we're hearing increased demands from customers to link the programming system to their M. S shop floor control for better job control enhanced yield a 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.
As happened in automotive and also in leading industrial accounts as well.
And then also security we've talked a lot about security in the centric 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 are centric.
That form 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 will 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 Hovland.
Thank you Anthony good day to everyone.
For the first nine 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.
13% from $5 9 million in Q3 of last year.
The third quarter revenues, we believe we are constrained by customers' supply chain silicon part shortages and related order deferments by those customers and is describing Nancy <unk> 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 2000, twenty's reduced business activity amid COVID-19 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 of 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 adapt.
Adapter bookings for the third quarter of 2021 continues to be strong at $1 7 million.
Backlog at September 32021 was $3 3 million down from 5 million at June 30th and up from $2 8 million at September 32020.
Gross margin as a percentage of sales in the third quarter was 67% 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 Fifty's range, Although the margin profile me.
Improve or.
Be very as we've 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 the operating expense selling general and administrative expense in the third quarter of 2021 increased by.
Approximately 406000 from the prior year period, primarily due to higher sales volume commissions associated with the channel mix and then the higher demand for our programming equipment as well as recording of 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 $12000 or zero cents per share.
Moving onto the balance sheet days sale outstanding or DSO, a receivables collection measure at September 32021 was below our target measure at 51 days.
Net working capital at September 30th of 2021 was $18 5 million up from $18 2 million at the end of the second quarter.
Inventory of $6 million at the September 30th 2021 date was approximately 400000 higher than at the end of June and reflects our continued effort to derisk, our supply chain and potential parts shortages by higher stocking levels for our key products.
Deferred revenue at the end of the both the third and the second quarter was $1 4 million.
Data <unk> financial condition remains strong with cash of $14 2 million at September 30th.
Which is up from $13 million at the end of the second quarter, primarily due to a collection of a prior year's tax refund of over 600000.
Two 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 technical logically.
Danced as well as capitalized supplier in the global programming industry. The company continues to have no debt.
We had shares outstanding of $8 million 621007 shares at September 30 of 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.
We will now begin the question and answer session to ask a question Press Star then one on a touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
The first question comes from Jason Schmidt with Lake Street. Please go ahead.
Hey, guys. Thanks for taking my questions I, just wanted 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, Hi, Jason This is Anthony.
I think we spent a lot of time working on issues that were.
<unk>.
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've talked about earlier leaned in a little bit on.
Making sure we had adequate supply.
We did sell some road runner systems in the quarter.
And we did not do as much leaning in if you will on the road runner and so those actually took a little bit longer to build.
I think we probably could've put one more you know.
Out the door in Q3 of everything was perfect. So I guess technically that would be something that you know had a minor impact.
But overall I think on the supply for us the supply chain issues have been very minimal in terms of the observable performance.
Well I think it is a bigger factor is our customers need to get chips to build at auto electronic components and ultimately if theyre 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.
You know it could be Q4, certainly no later, we think then 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 a second source components for.
<unk> 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's it impacts us more on the demand side than on the supply side.
Okay. No that color was helpful and just to clarify you did mentioned some deferments, but have you seen any cancellations at all.
No.
Okay, Perfect and then last one for me and I'll jump back into queue can you just update us what youre seeing from an inventory standpoint at the programmers and how that market is shaping up.
Do you mean programming centers.
Yes.
Yeah, I think our programming center business was actually up a little bit in the quarter again I think.
That's that's just reflecting the fact the industry is high utilization of the equipment they have.
And that's about all I would read into it.
Okay. Thanks, a lot guys.
Thank you.
Again, if you'd like to ask a question press Star then one to join the queue.
The next question comes from Jeff Peterson with Austin Capital. Please go ahead.
Hey, Thanks, guys in early September the stock trade at over 2 million shares in one 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 move the shares way up.
It got hot enough where the.
NASDAQ actually shut down.
Trading for a quick limited halt around $3 17, and we commenced training about a half hour later.
So as a company policy, we don't comment on market speculation with regard to the trading of the shares in <unk>.
<unk> was never able to notify us of any action that may have been involved in the training, but it was something where the inter day high end to close was up substantially and we.
We we always try and keep an eye of unusual moves on our on our shares.
Thank you that was helpful. What we have seen some insider selling in Q3, why and what is the company's policy here.
Yeah.
We we always have a policy about approving.
Insiders trading activities and we actually don't have a requirement, but we strongly recommend that.
Insiders.
Want to get into a trading program actually get a formal <unk> five dash one 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, you know officers will sent.
Sell stock to diversify their personal individuals' portfolios.
We do have clear trading policies with regard to helping officers directors and employees.
We have pre clearance arrangements for entering into those agreements and any direct selling that takes place and a clear policies about what we need to have people due to trade in the stock but.
But we do not require the use of the <unk> five wind plans as I mentioned.
The plans have to be created in an open window require a 30 day lag before effective in training may take place and.
That kind of trading is one where you have prearranged trading dates and or stock prices and limitations. According to those prearranged instructions and we always for file a form four promptly after those those trades take place.
And that'll be noted as it can be five transaction.
Thank you. Thank you for the context and that's all the questions I had at this time.
Yeah.
Thanks, Jeff.
The next question comes from Orin Hirschman with AIG H investment partners. Please go ahead.
Hi, how are you.
<unk> question Hi, two question do you think that this is the low and the bookings.
This quarter or it could get worse next quarter.
We typically don't give a bookings forecast.
The.
The bookings on Capex.
Will be driven by customers' perception of their silicon availability predominantly in the automotive space.
And so you know I think our best estimate right now is what we heard from GM and Ford publicly today when 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.
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 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 can't forget subtraction.
What about this quarter.
It's about security or anything about security.
I think on the security side, we actually delivered the system we'd booked.
Earlier, we talked about.
And.
That was in our numbers for the quarter, we continued to build a pipeline on centrex. We continue to work with customers on that we continue to have meetings, where we talk about security and interesting applications.
It had one this morning in automotive.
You know that just has to work through the system. We continue to build on the base, we have with Centrex and we'll go forward from there.
So just one more question, we'll let you go on Patrick do you have those.
Big win that you had mentioned.
Yeah.
To follow up on those wins in terms of you know.
But anything that those customers that did that break open and need the demand from the physical customer accordingly.
Highlight it goes when it didn't have that effect yet.
I think the big thing for US is when we have wins like that and we had you know 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 centrex.
We've clearly established a proof points of the capability.
Our security cell 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.
Opportunities in front of us, where we can sit down and talk to the customer.
In a very structured way and go forward on there and we just have to continue to do what we're doing.
Okay. Thanks.
Thank you.
The next question comes from Robert Anderson with Pembroke. Please go ahead.
Yes, good afternoon Anthony.
Hi, Bob how are you doing and Joel I'm fine. Thank you.
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 yeah yeah.
Okay and.
Do we have any idea or can we indicate what percent of overall revenues is related to centric. My sense is it's still pretty small number yes.
Yes, we include the centric software and services.
In with the rest of the software and services the system that we did sell to support centrex.
Got counted as a system. So that's in the in the capital bucket.
So our system is a system, but the obviously the centrex revenue that got wrapped around it and that was the reason for the deal gets counted in the software and services. So you will see the pure centric revenue in the software and services line and then as we do do things like sell equipment to support a centric steel 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 it's basically the centric software like snow centric as separate but at the total software and services I think he was asking about total yes for services it was 11% 11%.
Okay. Thank you.
Thank you Bob.
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 product Tronic, a trade show in Munich, and a couple of weeks I'll also be in Boston in 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 18th and the D. A Davidson semi <unk>.
<unk> laser and optical conference on December 15th 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.
Yeah.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
Yes.
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Okay.
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