Q3 2022 Data I/O Corp Earnings Call

Good afternoon, and welcome to the data <unk> third quarter 2022 financial results Conference call. All participants will be in a listen only mode. After today's presentation. There will be an opportunity to ask question I believe.

Is being recorded I would now like to turn the conference over to Jordan Darrow Investor Relations. Please go ahead Sir.

Thank you operator, and welcome to the data I O Corporation third quarter 2022 financial results Conference call with me today are Anthony Ambrose President and CEO of data I O Corporation, and Joel happened, Chief operating Officer, and Chief Financial Officer.

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 estimated impact of tax reform product releases, new industry partnerships and any other.

Statements that may be construed as a prediction of future performance or events are forward looking statements, which involve known and unknown risks uncertainties and other factors, which may cause actual results to differ materially from those expressed or implied by such statements.

These factors include uncertainties as to the impact of COVID-19, including the 2022 outbreaks in China.

The war with Ukraine, including any related international trade restrictions, along with continued reopening and recovery efforts within the relevant global supply chain.

Our customer base level 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 our children as 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.

And thank you with the Securities and Exchange Commission.

Releases and other communications the accuracy and completeness of forward looking statements should not be unduly relied upon.

I always under no duty to update any of these forward looking statements and now I would like to turn the call over to Anthony Ambrose President and CEO , Okay to I O.

Well. Thank you very much Jordan I'd like to begin my formal remarks by addressing our 2022 third quarter financial and operational performance.

Then I will turn over the call to Joel Heartland for a more detailed look at the numbers.

Our performance in the third quarter was outstanding as we delivered across the board with strong bookings and strong revenue strong operating income and strong cash generation.

The second quarter call, we predicted and enter the operational disruptions from the China, Covid Lockdowns and resumption of strong growth in Q3.

And this is exactly what happened.

Our team excelled in managing our global manufacturing capacity silicon shortages freight challenges as we delivered 16 PSV systems to customers in the quarter.

And shipped a record unit and dollar volume of adapters to customers as well.

Yeah.

We also have a large industrial centric customer going into production in Asia during the quarter.

In addition to a strong operating quarter, we had an excellent sales quarter with third quarter bookings of $7 $1 million, reaching our highest level in the past year.

Within the verticals, we had a strong automotive quarter, continuing our strength for the year automotive electronics represented 63% of orders. So far this year and we had four new customer wins in automotive and industrial during Q3.

For those keeping score that 16, new customer wins this year alone where.

We're the market leader and we're adding to our share.

Our sales funnel in the third quarter continued the momentum from the first half of the year.

New opportunities from automotive and industrial customers are driving our high level of demand.

Activity within Asia, and Americas are that's been strongest year to date in Europe had a very strong Q3 as well.

This is in spite of currency weakness for the euro and the one high inflation and interest rates and the war in Ukraine.

Yeah.

These overall trends on demand reinforce our long term view of a tripling of the automotive semiconductor market by 2030 with automotive memory growing at an even faster rate.

Supporting our focus on the automotive memory market earlier. This month, we announced significant improvements on the Illumina X programming platform for automotive grade Uff's memory with our verify boost technology.

Verify boosts deliveries verify performance up to 750 megabytes per second on high speed gear three by two lane support for you our past 3.1 devices and this enables customers to leverage existing production capacity for significant throughput gains while reducing their overall total cost of programming.

Luminary programmers within our PSC programming systems deliver up to four five times improvement in programming performance.

And reduce the total cost of programming by up to 39%, while using verify boost.

This technology is now available in new systems as well as upgrades to any of our over 400 and growing PSV 5000, and PSV 7000 systems in the field.

This technology announcement, our semiconductor partner Micron states that <unk> is experiencing rapid deployment growth in automotive consumer and industrial applications with significantly more volume expected in the coming years as <unk> becomes the automotive standard in new systems.

This view is shared by other leading suppliers of automotive memory as well and data I O is extremely well positioned to take advantage of this transition.

Verify boost also illustrates the benefits of our continuous investment policy, we invest through good times and bad through the downturn through supply disruptions through Covid lockdowns. So that we can deliver great technology in the market at precisely the right time.

<unk> is another important programming platform for data Io, where we continue to innovate we think we're headed towards a golden age as security becomes ever more demanded and ever easier to implement across industrial Iot and automotive markets.

Large OEM customer go into production in Asia recently, and we're working on a number of interesting deals that I hope to discuss more on our next call.

[laughter].

Shifting basis, a bit as I've discussed through the year, we're celebrating our 15th anniversary as a company.

One of the activities we've been involved in it as part of the celebration is a series of interviews that we've called Fireside chats.

During the third quarter, we conducted three fireside chat interviews you spent a lot of fun personally and we're getting tremendous feedback from both the investment community and from our industry partners.

A primary objective of these interviews is to inform and articulate a vision for what we are doing as well as where we see things going for the industry long term.

Topics of our sessions in the third quarter included number one the future semiconductors for automotive and electronics with guest host tsuji to shelter that.

Semiconductor equity research analyst at Roth capital.

Second topic was managing a resilient supply chain with guesthouse gene Inger of the anger newsletter.

And third the future of security.

Which we see through the lens of our centrex deployment platform and this was conducted with guest host Avi Fisher of long cast advisers.

Earlier this month, we uploaded our most recent interview, which was at an industry Ford auto and why everything else needs to be connected with guesthouse Vishal Mishra, a mixture of capital partners.

I should point out that Mishra capital and long cast advisers are shareholders of data I O.

We're grateful to all of our hosts are participating in those series of interviews and hope all of you, we're watching where they're on our website or through our social media channels.

Based on our backlog and order flow our continued operations running well, we're expecting a good quarter in Q4, and it's an exciting time for us here at data I O.

With that I'll turn it over to Joel.

Thank you Anthony and good day to everyone.

I'd like to start by providing a review of our third quarter of 2022, starting with the balance sheet and then moving onto the income statement.

<unk> financial condition remains strong in fact from the second quarter. It got much stronger with cash increasing to $11 million on September 30th.

$10 3 million on June 30th.

As expected in the third quarter and as Anthony referenced in his talk during the period, we were able to catch up with the effects of the Shanghai Covid Lockdown.

This had resulted in the balance sheet returning to more normal levels from the impact of the craziness of the two prior quarters.

Day sales outstanding or DSO, a receivables collection measure is back to a normal level at 51 days as of September 30th which is down from 74 days at the end of June .

With the increase in business activity level deferred revenue grew to $2 million up by 500000, including a delivered system waiting for final acceptance from the end of the second quarter net working capital on September 30th was $16 5 million up 600000 from June <unk>.

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Inventory of $7 1 million on September 30 was 200 K higher than the $6 9 million on June 30, and compares to $6 4 million at the end of last year.

During the past year, the increase in inventory related to our decision to hold additional inventory to address shortage risks as well as to improve our resilience as a supplier and to support the record backlog level going into the fourth quarter.

Our backlog at September 30th of 2022 was $4 9 million compared to $3 3 million on September 30 of 2021.

Now onto the income statement.

For the third quarter revenue of $7 2 million was up from $4 8 million in the second quarter of 2022 and $6 7 million in the third quarter of 2021.

With the strong third quarter revenues as discussed by Anthony earlier.

I should remind everyone that approximately 90% of our revenues are derived from outside the United States.

Many international currencies have devalued against the U S. Dollar in particular, the euro and one for our subsidiaries, which resulted in their financials translating into lower reported revenues on a U S. Dollar consolidated basis. Despite this reporting convention there is no.

<unk> impact on our regional market share and operations in local currencies.

Automotive orders represented 63% of year to date bookings and continues to be our primary addressable market for comparison in 2021, 58% of our revenues were derived from the automotive sector.

Consumables were up to 32% of revenue year to date compared to 30% in all of the prior year.

Software and services revenues were 12% of revenue year to date at the end of the third quarter and were equal to the prior year.

For the full prior year percentage of 12%.

On a geographic basis international sales represented approximately 95% of revenue for the third quarter compared with 86, 8% in the prior.

Year period.

The third quarter bookings for 2022 were $7 1 million up from $6 4 million in the second quarter of 'twenty two.

And $5 million in the third quarter of 2021.

The resumption of operations and shipping in Shanghai was reached during the latter part of the second quarter. So with the third quarter, we were able to catch up to more more.

Our normal deliveries.

Further with our effective supply chain strategies, we were able to build and ship.

A lot of product in the third quarter, especially items related to the previous Shanghai Covid shutdown period.

As a result, our backlog of $4 9 million at the end of the third quarter was brought down from $5 8 million at the end of the second quarter.

Gross margins at 57% in the third quarter were down from 67% in the third quarter of 2021 the.

The decrease was primarily due to the currency strength of the U S dollar, which is up approximately 15% versus the euro and the one off.

Offset in part by the net favorable factory variances.

Operating expenses were $3 4 million for the third quarter of 2022 compared to $3 5 million in the second quarter and $3 9 million in the third quarter of 2021.

Compared to the period.

In the prior year, the reduction was related to lower costs from currency related.

From currency translated subsidiary expenses.

Reduced incentive compensation and spending discipline.

Funding, our R&D continues to be an integral component of our growth initiatives R&D expense was $1 4 million in the third quarter compared to just under $1 6 million in the second quarter and $1 7 million in the third quarter of 2021, selling general and administrative expenses were just under $2 million in the third.

Quarter of this year compared to just over $1 9 million in the second quarter and $2 2 million in the third quarter of 2021.

Taxes during the quarter consisted solely of foreign taxes with no U S income tax reminder, that year to date taxes included the dividend withholding tax on our first quarter.

Repatriation of cash from China.

The company had net operating loss carryforwards of approximately $17 2 million on September 30th.

Net income in the third quarter of 2022 was 847000 or <unk> <unk> per share compared with a net income of 12000 or zero cents per share in the third quarter of 2021.

At 8 million 816, 381 shares outstanding on September 30th 2022.

Adjusted EBITDA earnings of just over one 4 million in the third quarter of 2022 compares with the adjusted EBITDA earnings of 564000 in the prior year period.

Overall, we remained very strong financially and continue to have no debt.

Based upon our preliminary evaluation, we believe data Io was not impacted by the October 7th Biden administration restrictions on exports support are doing business with certain technology for China semiconductor companies.

At this point I wanted to reiterate our expectations for the fourth quarter, we expect to ship and recognize as revenue the majority of backlog and systems in deferred revenue at the end of the third quarter we.

We expect relatively flat currency exchange and flat operating expenses compared to the third quarter with gross margins in the mid fifties.

That concludes my remarks for the third quarter, operator would you. Please start the Q&A process.

Certainly and we will now begin the question and answer session to ask a question. Please press Star then one when your telephone keypad.

So it's already a question. Please press Star then two.

Pardon me sorry, Lee for the question.

[noise].

And our first question today will come from Brendan Mccarthy with singular research. Please go ahead.

Yes.

First off congratulations on the strong quarter and impressive results.

My question is just around.

Geographic demand in topline growth and yes.

I guess, where were you seeing or where did you see the bulk of the demand come from from a geographic standpoint.

Yes, just in terms of.

Asia, Europe and the Americas.

Yes, Brian Thanks for the comments.

We've had consistently good results coming from Americas, and Asia all year.

Europe joined the party in the third quarter. So I'd say all regions were strong in the third quarter.

As Joe indicated we had very strong automotive.

In the quarter.

70% of the bookings were automotive and 63% year to date, so that was actually a little bit richer than we normally have on automotive, but not surprising.

So good strength globally, all three regions contributing and then automotive showing excellent strength.

Yeah.

Yeah.

Got it yes, and if I could just kind of basketball up there was that surprising to see Europe bounce back later in the quarter.

No.

We've had it in our sales funnel I guess.

You never know right with all the things you're reading the newspaper and I tried to comment on this in our last call.

Sort of you know the whole macro negative narrative.

Rising interest rates inflation the war.

People are going to have heating their homes in the winter.

And then the other narrative was okay <unk>.

My sales team is saying these deals are advanced in the sales funnel and should close.

So.

We we trusted.

<unk> as opposed to media reports and.

Our sales guys delivered what they said they were going to deliver so from our standpoint.

Theres still you know all of those macro issues are out there.

I guess the U S reported good growth in the third quarter overall, despite all those items.

And I'll be in Europe for a couple of weeks to see for myself, what's going on on the ground and.

Form an opinion for the first half of next year as well.

Thank you.

And again, if you'd like to ask a question. Please press Star then one our next question will come from Avi Fisher with long cast advisors. Please go ahead.

Hi, Anthony Thanks for taking my questions I have two of them.

First off do you have.

Curious if you could talk about.

Kind of what drives a customer win.

You talked about 60 do customer wins year to date.

It's.

Eccentric part of those wins are customer and it doesn't sound like you've sold 16 central units to customers. Appreciate the option to upsell eventually the centrex just wondering if you could talk around what makes a customer win why theyre not buying centrex units now have centrex plays into their decision to.

Become a customer.

Sure.

So we have a focus and our team on new customer acquisition as well as supporting.

Existing customers, who often bring capacity additions to us.

The new customer focus is important because.

There are a number of new entrants coming into the automotive and industrial space and a new customer will come to us when <unk>.

Typically they have a new project or their circumstances change.

And I'll give you. An example, we had a customer that AR and automotive customer that we won about a year ago.

It was doing end of line programming and found it very inconvenient and flexible for their particular need.

And so we were able to work with them over about a three quarter period to bring data Io.

Pre programming technology into their facility.

It's very protracted process, because there are Japanese domiciled company.

But we're able to get ourselves in that first location.

We booked a second location in the third quarter.

Okay.

We think that represents.

First of converting.

Substitute programming technology to data Io.

We also have customers had been using a direct competitor that for one reason or another.

Happy or maybe they need to up level their game, a little bit if they're if they're automotive and so we certainly get those customers as well.

And then you have customers that with centric they are brand new they come in and either through direct means or through one of our programming Center partners and if it's a programming center partner then we do things like the device support for them and make sure of the partners.

Got everything they need to be successful. We've also sold a couple of systems and I think I highlighted this in.

On our call last time that we call centrex ready, where the customer might be a data customer now and says yes.

Yeah, I'm, probably going to be doing something with you on centrex why don't you just get the system ready that I'm buying <unk>.

<unk> and we'll get it going on data today, and then I can turn on centrex and have it be real convenient I don't have to have someone come out and do a physical upgrade.

And so we think thats a viable pathway going forward.

Increasingly we're seeing customers value the benefits that we can bring as a premium supplier and data programming as well as centrex and again, despite our extraordinary share in automotive and penetration.

We think we have over 250 of our 430 PSV systems focused on the automotive market.

There are still places out there that don't have a date iOS system.

<unk>.

That's a shame and we want to help out those customers as fast as we can.

Alright, thanks for those details.

For my second question and Anthony just a little bit on the kind of guidance you talked about backlog plus deferred revenue.

It seems to imply that something about something about bookings.

Whats happening with bookings in <unk>.

Slowed so much that now we're just dealing with backlog and deferred revenue I'm curious about that.

No I don't over read it.

We don't give a bookings forecast usually at all I think what Joel was trying to comment on was.

As we indicated in the third quarter.

We had an extraordinary backlog, we did burn down some of that through shipments.

But we also have a system in deferred revenue at about 300, K Joel yes that we.

<unk> to ship in the fourth quarter it shifted to just recognize there you go.

And so the the concept there is just to make sure.

Everybody has as much information about where we see the backlog coming out in the fourth quarter.

So just to be clear.

Because I was confused by this.

When Joel talked about the backlog plus the deferred revenue that up to $5 2 million and Reds.

You're you're not guiding to that.

No that's not the guidance for revenue in the fourth quarter at all as you know we have a lot of business to books and shifts within the quarter. What yes, I think the message Avi is that backlog plus deferred revenue number is extraordinarily high on a basis going back several years and we just wanted to make sure you are aware of that.

Okay.

I appreciate it.

Youre welcome.

And this will conclude our question and answer session I would like to turn the conference back over to management for any closing remarks.

Well. Thank you operator at this point.

Just like to remind everyone that we will be at.

Several events in the fourth quarter and early in the first quarter.

We'll be meeting with investors in the New York area and a few weeks and.

We also have a fireside chat coming up on November 14th.

Please.

Yet with Jordan Darrow, if you'd like to schedule. Some time when we're in New York, We will also be in Europe in fourth quarter, and we have trade shows coming up.

As well at apex in January in.

Cited states.

So with that I'd like to conclude today's call. Thank you very much.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.

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Yes.

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Yes.

Okay.

Yeah.