Q2 2022 Data I/O Corp Earnings Call
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Good afternoon, and welcome to the data <unk> second quarter 2022 financial results Conference call.
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The conference over to Jordan Darrow Investor Relations. Please go ahead.
Thank you operator, and welcome to the data I O Corporation second quarter 2022 financial results Conference call with me today are Anthony Ambrose President and CEO of data I O Corporation, and Joel Holland, Chief operating Officer, and Chief Financial Officer of updated Io.
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 Silicon chip shortages of supply chain expectations yesterday.
Pact 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 the impact of COVID-19, including.
Including the 2022 outbreaks in China.
Russia War with Ukraine, including any related international trade restrictions, along with continued reopening and recovery efforts within the relevant global supply chains, and among our customer base level.
The levels of orders for the company and the activity level of the automotive and semiconductor industry overall ability to record revenues based on the timing of product deliveries and installations market acceptance of new products changes in economic conditions and market demand part shortages pricing and other activities by competitors and other risks, including those described from time to time in the company.
These filings on forms 10-K, and 10-Q with the Securities Exchange Commission press releases and other communications.
The accuracy and completeness of forward looking statements should not be unduly relied upon did I always under no duty to update any of these forward looking statements.
And now I would like to turn over the call to Anthony Ambrose President and CEO of data I O.
Thank you very much Jordan I'll begin my formal remarks by addressing our 2022 second quarter financial and operational performance and then I'll turn over the call to Joel Heartland for a more detailed look at the numbers.
Strong bookings through the first half of the year and encouraging business development pipeline and a record backlog at June 30th 2022 are expected to give rise to a significantly improved financial performance in the second half of 2022.
It appears as if the slowdown in the automotive industry. During the past three years is slowly beginning to unwind with semiconductor allocations gradually returning as consumer electronics and enterprise demand wanes.
For example, Bloomberg reported last month, the following Mercedes Benz Daimler truck holding and BMW are among automakers now getting enough of their high tech components to produce at full capacity after experiencing crippling outages for months.
BMW expressed similar optimism, saying all plants are up and running and the company is not experiencing any stoppages due to chip supplies.
Additionally, NXP announced a few days ago their quarterly results and highlighted strength in automotive and industrial markets.
We think there's a pattern here.
Data I always seen firsthand the same positive indicators for the third consecutive quarter, we've achieved bookings in excess of $6 million the second quarter bookings of $6 4 million, reaching the highest level within this nine months period.
Automotive electronics represented 50%, 58% of all of our orders so far in 2022.
Had six new customer wins this quarter alone.
Our new business success was distributed across automotive industrial medical at a new programming center customers.
Our sales funnel in the second quarter continued the momentum from the first quarter. When we added millions of dollars of new opportunities increased demand is coming primarily from customers in Asia and the Americas. This has been partially offset by weakness in Europe due to the war currency adjustments inflation and other factors.
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Bookings were back end loaded in the second quarter with nearly 50% coming in June contributing to our very high backlog.
Date, iOS Shanghai operations, partially reopened in May and fully reopened in June following the most recent COVID-19, lockdown restrictions imposed by the Chinese government.
From an operations perspective lead times are now back to normal, although we still see some spot shortages in parts and assemblies.
So from an operational perspective, we are nearly back to normal.
From a balance sheet perspective, we expect accounts receivable inventories and cash flow to return to more normal levels by the end of the current third quarter.
On centric. So we had a customer go into volume production and have orders for two centric ready systems. These are data programming customers looking to add centric capability in the future.
We also received patent extensions in the United States and in youth centric pattern from China.
Throughout the unusual circumstance of a pandemic and ensuing supply chain issues global economic gyrations, They Russia, Ukraine War I once again would like to acknowledge the great performance of our team, particularly in China, where many of our team members made personal sacrifices to support operations and customers from home while they were.
Locked down.
Yeah.
Turning now to our 50th anniversary celebration as you know we've been planning.
Planning to have celebration activities throughout the year.
We're conducting a series of interviews we've done fireside chat.
Formats are open in a formal focusing on specific topics with leaders and media finance and technology.
In June we published the first interview, which talked about data iOS opportunity as a business and an investment the guest house was Tim White trout of Alfa Wolf trading.
And then earlier this month, we published the second instalment entitled the future of semiconductors for automotive electronics.
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We like that it was had a lot of fun in the session was highly informative. During this session. We covered how data io or send it to become a leader in automotive technology for programming.
We talked about the long term growth rate, we've seen semiconductors are between 10 and 15% for automotive electronics semiconductors.
We talked about the growth catalysts, including electrification secure programming autonomous driving connectivity and other factors.
We also talked about how data <unk> PSV family of programming systems has become the platform of choice for automotive electronics manufacturers.
And then we also talked a little bit about the global semiconductor supply chain and capacity in automotive, which appears to be improving as I discussed earlier.
We have several additional fireside chats plan for the year and I look forward to that.
Yeah.
As we see the business looking out towards the second half there are really two competing global narratives.
First one is the weak macroeconomic picture you hear discussed daily in the business press.
Talking about inflation stagflation recession war in Europe , and all sorts of other negative indicators.
Yeah.
The other narrative as to what we see in our business. It's a very strong backlog with a strong sales funnel.
As we see data Io specific items that are much stronger than the general macro picture.
There's other companies that reported automotive and industrial which are our largest markets are strong relative to consumer and enterprise right now.
Automotive electronics supply chains are also benefiting from drops in demand elsewhere.
The ability of automotive electronics and industrial companies to be better supported with chips means they ultimately need more programming capacity.
Our plan is to stay very close to the market.
Continue to expand our available markets wherever possible and prepare our operations to build to demand we already have in backlog and that we see in our sales funnel.
Q3 orders tend to be backend loaded in September and that's what I have another structure and look at the second half demand overall.
To net it out supported by a very significant backlog, we're more optimistic for the second half than the general Stagflationary business conditions would indicate.
With that I'll turn it over to Joel <unk>.
Thank you Anthony and good day to everyone.
Like to start by providing a review of our second quarter of 2002.
Starting with cash in our balance sheet, and then moving on to the income statement.
Data <unk> financial condition remains strong with cash of $10 3 million.
June 30 of 'twenty two.
Down from $12 3 million at March 31.
'twenty two.
$14 million at the end of the prior year and $13 million at the end of the second quarter of 2021.
The change in cash from prior periods related primarily to the Shanghai Covid shutdown and one time, China dividend withholding tax of 442000 taken in the first quarter of 'twenty two.
As a part of our global positioning strategy.
The Shanghai Covid shutdown costs.
Caused working capital adjustment as we pulled through delayed shipments and make collections against them relating to the $1 million in order delays that we had announced last quarter.
This should be smoothed out by the end of the third quarter with most revenue recognized upon shipment inventory and receivable offsets followed by reductions based on shipping schedules and then cash collection.
Days sales outstanding or DSO, a receivables collection measure at June 30, 2021 'twenty.
'twenty two.
It was 74 days, reflecting the unusual quarter net working capital on June 32022 was $15 9 million down from $16 9 million at March 31.
Inventory of $6 9 million on June 30 was approximately 1 million three higher than at the end of the prior year.
300000 comps.
Compared to the start in the quarter.
Increase of inventory related to the decision to hold additional inventory to address shortage risks as well as to improve the resilience as a supplier and support the record.
Our record backlog level.
Now onto the income statement for the second quarter revenue of $4 8 million was down 28% from the $6 7 million in the second quarter of 2021. The decrease was due to weakness in Europe from the economic upheaval of the war and approximate decline.
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Roughly 12% in currencies and delays in shipping associated with the Lockdowns in China actually.
To remind everyone that approximately 90% of our revenues are derived from outside of the United States.
As many overseas currencies, particularly in Europe .
Been devalued against the Greenback, our reported revenues on a consolidated basis will reflect that reduction even though there is no associated impact on our regional market share and operations in local currencies.
Automotive orders represented.
58% of year to date bookings and continues to be our primary addressable market.
Consumables were up to 31% of revenues year to date compared to 30% in the prior year period.
Software and services revenues at 15% of revenue to date.
In the second quarter.
We're up from the prior year period of 11%.
On a geographic basis International sales represented approximately 89, 2% of revenue for the second quarter compared with 92, 5% in the same period last year.
Second quarter bookings for 2022 were $6 4 million up from $6 2 million in the first quarter, but down from the $8 9 million in the second quarter of 2021, which was what our business cycle appears to be turning up after more than three years of decline, but it seems to have.
Been interrupted more recently by supply chain shortages and additional COVID-19, various issues as well as the war.
While business activity in Asia was considerably held up with the Covid containment processing, China during parts of the first and second quarter has picked up considerably in recent months activity in the Americas has also been stronger over the past several months as European activity remained subdued due to the local X.
Conditions currency and the impacts from the Russia, Ukraine War.
The lockdown in China delayed shipments, we've contributed to backlog increasing to $4 1 million at the end of the first quarter of 2022, the resumption of operations and shipping in Shanghai was reached during later in the second quarter, yet with strong bookings and.
In the period and our backlog grew to $5 8 million at June 30 of 2022. This is up from $5 million at the end of the second quarter of 'twenty, one, even though that period had $8 9 million in bookings.
Gross margins at 57 eight.
As a percent in the second quarter were up slightly from the 57% in the second quarter of 2021. The increase was primarily due to favorable variances offset in part by the sales volume impact.
On reduced fixed cost items.
Funding, our R&D as an integral component of our growth initiatives has continued R&D expense was $1 6 million in the second quarter compared to $1 7 million in the prior year period.
Selling general and administrative expense was one 9 million in the second quarter of this year compared to $2 1 million in the prior year period.
The second quarter of 2021, SG&A comparable reflected higher sales commissions associated with the channel mix and sharply increased demand last year for programming equipment as well as higher incentive compensation as the company had returned to profitability on an operating basis in that period.
Deferred revenues were $1 5 million at the end of the second quarter of 2022 down from $1 7 million at the end of the first quarter and up from $1 3 million at the end of the second quarter of 2021.
Taxes during the quarter consisted solely of foreign taxes with no U S income tax during the first quarter of 2020 to a dividend withholding tax of 442000 occurred on the China dividend repatriation.
Net loss in the second quarter of 2022 was 176000 or eight.
<unk> per share compared with a net loss of 29000 or zero cents per share in the second quarter of 2021.
We had $8 million 814290, 879 shares outstanding on June 30 of 2022.
Adjusted EBITDA loss of 64000 in the second quarter of 2022 compares with adjusted EBITDA earnings of.
597000 in the prior year period.
Overall, we remain very strong financially and continue to have no debt.
Combined with our resilient supply chain strategy. These represent key competitive advantages as the best capitalized supplier and reliable producer in the global programming industry.
That concludes my remarks for the second quarter, but before we turn the call back to the operator I'd like to remind investors of what our long term modeling and metrics looked like particularly since we've had a few quarters with very unusual circumstances.
On the top line, we continue to believe that long term, we can track the growth of our primary market for automotive electronics is.
As Anthony stated earlier, we are looking at a CAGR of 12% to 15% for semiconductor content in automobiles annually for years to come.
Although depending on machine deliveries are circumstances, which are out of our control like we've experienced this year our quarter to quarter.
Clearly results may be higher or lower so we encourage investors to model out things on a 12 month basis.
The record backlog is expected to return to normal levels by the ended the year by mid August the large level of backlog orders for consumables will return to normal levels.
By the ended the year.
Sorry about that.
System orders in backlog will mostly ship.
During the quarter, but a significant backlog is expected to build in September and carryover into Q4 before they become more normal.
Core gross margins they are typically in the mid to high.
High Fifty's range R&D spending has been in the one six to $1 7 million per quarter range.
And SG&A has been seen as under $2 million per quarter on average other than generally the first quarter with variations, primarily tied to sales commissions and incentive compensation.
On taxes, we strive to be tax efficient and this is enabled by our carryforward of U S net operating losses.
Approximately $18 million at June 30, resulting in no current U S taxes, we expect to incur taxes on our foreign subsidiaries operating income and expect that to continue to be similar to prior periods.
Did not include a dividend withholding tax.
Moving onto cash flow and the balance sheet capital expenditures is used for traditional investment in property plant and equipment as well as to build demo units and trial sales units, which can be later monetize included only the property plant and equipment as opposed to the demo we invest about a half million dollars.
Per year, So we're really a capital equipment light.
The company.
And very capital efficient organization.
For cash we ended up in the second quarter with $10 3 million and expect that we should restore approximately 600000.
During the quarter, we have no debt and do not see a future where we will have debt unless it is as part of a large and transformative acquisition.
On collections and receivables DSO average about 55% 55 days typically and we expect to return to approximately that level in the quarter.
Net working capital is expected to bounce back to the mid to upper $16 million level.
We expect that that should provide you with a good framework framework to model our growth going forward. Operator will you. Please now start the Q&A process.
We will now begin the question answer session.
To ask a question Star then one on your purple keep at it.
Your phone please pickup your handset before possible Pete.
To withdraw your question. Please press Star then two.
At this time or pause momentarily to assemble our roster.
Our first question will come from Craig White cap.
Capital you.
You May now go ahead.
Okay.
Hello, Thanks for taking my call can you hear me okay.
Yes, yes.
Great.
I'm, a little new to the story and I think I missed some of what you said earlier, but.
Given your markets and given the fact that you supply a lot to automotive Oems.
I would assume your <unk>.
Impacted by capital equipment.
The cyclicality.
Outside of just the regular.
Unusual I shouldn't say regular the unusual things that have happened in the past few years with the pandemic and the supply chain constraints.
No.
Putting that all together with the cyclicality with the demand trends Youre seeing.
You it sounds like Youre confident youre heading back towards like the topline levels achieved I think it was around 2017 2018 is that fair to say.
I think what we're trying to indicate is that.
Since Covid hit we've had a number of additional items on top of the normal industry cyclicality.
The semiconductor industry has been cyclical ever since it's been born.
I've been through nine complete cycles in my business career, and Covid is just thrown additional things on top of that.
Between the Lockdowns the.
Shortages for automotive what we're saying here is that we thought we were coming out of it last year, then I think the shortages really impacted automotive we were thought we were coming out of it earlier this year.
And then the China Lockdown hit in Shanghai in Q2.
You know assuming we can stay open and we don't have any reason to doubt that.
We have a tremendous backlog our operations are open they are well supplied with product to build our systems and so we think we can just.
Focus on.
Shipping product and getting orders for product that we have in our funnel that people are telling us they want to buy.
We should have a very strong second half.
Beyond that I'm, hoping the cycles begin to dampen out just a little bit.
Partly because we see again, a long term trend of substantially increased semiconductor content in cars.
And we also see our business overall, becoming a little less cyclical on the Capex side.
In 2017, we were.
I think almost 70% capex at the top of the cycle, our long term model today, where I think closer to 55% Capex and our long term model is to be closer to 50% Capex and 50% consumables software and other recurring items.
Okay, great that makes sense.
Just a couple of other questions here.
You have a good.
Solid backlog as you mentioned.
And with the Lockdowns in China.
And with.
The supply chain constraints.
It's interesting the customers have continued to place orders put down payments, even while goods are sitting in ports. So is that just being driven by just robust demand or are you doing anything now to try and.
Alleviate these are these bottlenecks.
The first six months of the year.
That's a good question, we see again.
Our customers in China, and Asia have been pretty strong.
Through the first half and we put in a good growth plan for the year for them and where we're actually exceeding that now.
The so and we continue to get good signals for demand from Asia.
So you know knock on wood.
That held up very well through the Lockdowns I think it's important to remember that the Lockdowns didn't hit every city all at once in China.
Chinese growth will be lower this year I think that's pretty clear, we're still seeing good demand from our customers.
And that's reflected in our sales funnel.
On the semiconductor shortage I think my remarks earlier around perhaps some of the weakness in consumer and enterprise are freeing up capacity for automotive and industrial.
Here's to B.
A theme that we're hearing a lot in the industry.
Okay, and you mentioned earlier that you wanted to have a I guess, a long term roughly 50% of the business.
Uh huh.
Tied to Capex can.
Can you just give a little more color about the other markets revenue potential.
Just what you see going forward and he did not.
Capital equipment space.
Sure well in addition to selling the capital right, we have our adapters and other consumable items and as our installed base grows we have over 420, <unk> PSV, which is really the modern generation of systems.
In the field and that continues to grow.
It provides a great base for us to have improved.
Mobile sales every quarter.
And that's been a long term focus for us. So we expect that to continue to grow consumables were 31% Joel I'd say quarter. This this time, you know that'll that'll bounce around a little bit but.
Long term that that will trend upward and that's a key component to getting us to 50% recurring.
Revenue.
Great. Thank you so much.
Thank you.
Oh there you have a question. Please press Star then one.
Our next question will come from Mary Ellen Cushing private investor.
Oh go ahead.
Yes. Thank you I wanted to touch upon R&D for a moment. Please I know you'd stayed reasonably close to breakeven and some of the most challenging business climate of the modern era.
Okay.
It seems like she freighter we lost.
Okay.
Hi.
A little bit.
Yeah.
Would you like me to repeat the question.
Yes. Please go ahead.
Oh, sorry about that Okay can you hear me fine.
Yes.
Okay, Great I wanted to talk about R&D, you've stayed reasonably close to breakeven in some of the most challenging business climate.
Alright, and at the same time, you've maintained your R&D spending you said at the same level at about approximately one 6 million per quarter can you discuss your strategy behind this investment and the company's future.
Sure so.
One of the things I learned early on is in a cyclical business that is heavily dependent on R&D you can't manage R&D in a cycle you have to set priorities and be consistent hire the right people will keep them on board and keep them focused so.
We believe R&D is very important because the innovation drives design wins revenue and margin.
We're focused on.
Leading in programming.
Primarily to support automotive and industrial industries.
We think thats the best place to be in the market and in addition to our programming investments around handling technology programming technology systems integration technology. We've added the centric platform, which is really secure provisioning technology and integrated all of those together.
We see the market continuing to demand programming technology, and more and more of that will be a requiring security capabilities seamlessly integrated into.
What's known today as data programming.
Okay.
Alright, two more questions. One is your overall IP position, including the number of pets.
And what's the how does this create for you from a competitive positioning standpoint.
So we think we have an increasing moat around the business to use your terminology and more importantly around security provisioning, we have over 20 U S and international patent patents for centric and security provisioning technology as I mentioned earlier, we got some extensions enhancements here in the U S as well.
As a groundbreaking patent awarded in China.
We also have over 50 patents overall and on programming technology.
Which we believe is more than anyone else has in the industry.
This gives us a good position.
We want to increase the moat, but at the same time, we want to use the R&D dollars to make sure that we can deliver capabilities that customers want to buy in their systems.
So it's a balancing act we think we have a very good moat will plan to increase it and also keep the R&D investment focused on features and capabilities that customers can pay for.
Yeah.
Our next question will come from David Wright with Henry Investment Trust.
You May now go ahead.
Yeah, Anthony Joel good afternoon.
Good afternoon good afternoon.
Hey question.
Large fire side chat.
Series that Huron or are you, hoping for that to result in any analyst coverage and if so have you made any progress that way.
Yeah.
I think the fireside chats primary.
Objective is to inform investors potential customers.
And.
Really use it as a platform to articulate a vision of where see where we see things are going.
When thinking about this for a while and we finally got around to doing it this year and our 15th anniversary.
As far as analyst coverage.
We're always looking to talk to firms that want to provide coverage.
Increasing analyst coverage is something I think that we might be in a position to.
See more of in the third quarter, just stay tuned to this channel and.
He's willing to talk to firms that want to do coverage the big challenge right now as firms are getting stretched.
Really stretched thinly.
And they tend to.
Focus their energy and this is completely understandable from their part on clients that need banking services.
As Joe mentioned earlier, we have plenty of cash.
We have really no need for banking services to raise money right now.
We don't need to offer that and don't plan to go into that.
That would all change of course, if we found something that out there that we really wanted to buy.
Really a lot of firms want to tie analyst coverage to banking services and so that's something that.
We need to be cognizant of going forward.
Okay, well I'll look forward to anything that might develop in the third quarter. Thanks for that answer and good luck going forward.
Thank you.
Yeah.
Ladies and gentlemen, this will conclude our question and answer session I would like to turn the conference back over to Anthony Ambrose for any closing remarks.
Operator, thank you very much.
Like to thank everyone, who joined the call and ask the questions.
What I'd like to do is remind everyone that our next fireside chat will be with guest host gene Inger of the anchor newsletter that should appear about August 17th.
I'd like to conclude today's call. Thank you very much.
The conference has now concluded. Thank you for this presentation you may now disconnect.
Okay.