Q2 2023 Data I/O Corp Earnings Call
Good afternoon, and welcome to the data <unk> second quarter 2023 financial results Conference call.
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I'd now like to turn the computer Jordan Darrow Investor Relations. Please go ahead Sir.
Thank you operator, and welcome to the data I O Corporation second quarter 2023 financial results Conference call.
With me today are the company's president and CEO , Anthony Ambrose and Joel Hatless, Chief operating Officer, and Chief Financial Officer, as well as chairman and Vice President of Finance.
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 and other regulatory reform product releases, new industry partnerships and any other statements that.
It 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.
It 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.
Russian War with Ukraine, including any related international trade restrictions, along with continued reopening and recovery efforts within the relevant global supply chain and our monarch customer base.
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 parts shortages 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.
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'd like to turn the call over to Anthony Ambrose President and CEO of <unk>.
Thank you very much Jordan I'll begin my formal remarks by addressing our 2023 second quarter financial and operational performance and then I'll turn the call over to Joel Heartland for more detailed look at our numbers.
With us today on today's earnings call for the first time as Jerry Yang who joined the company as our Vice President of Finance on July one.
Effective August 16th 2023, who will become our CFO , succeeding Joel Hatless, who as we previously disclosed is retiring after 30 plus years with the company.
Until that time, Joe will be handling the full second quarter reporting cycle and driving a smooth transition including surgery in an advisory capacity. After the end of the second quarter reporting cycle.
On a personal note I'd like to thank you all for his many years of service to the company and its shareholders and to acknowledge his professionalism expertise and unparalleled character.
He's played a pivotal role in defining who we are today and setting us up on our future course, our staff customers partners and shareholders hold them in the highest regard.
On behalf of everyone will be wishing him well in retirement.
So our incoming CFO , Jerry Yang he's really hit the ground running and we look forward to his contributions moving forward with that Jerry would you like to introduce yourself. Thank you asked me what inception I am very pleased to be joining data Io team and contributing to the company's continued growth and operational success.
Our finance team has been tremendously supportive, which I believe is a testament to this concept by management and.
And we have a comprehensive plan to ensure a seamless transition.
I look forward to speaking with all of you in the future.
With that I'll pass it back to Jeff.
Thanks, very much Gerry now, let's take a look at our numbers here. The second quarter was very strong which builds on the momentum from our first quarter similar we maintain our long term outlook that benefits from secular growth catalysts in automotive industrial automation and the internet of things.
I'll start with our centric platform, where we continue to see strong and increasing recurring revenues.
Numbers were strong in Q2 as customers are going into production or increasing production levels as demands for security enabled Iot devices continue.
We also got a repeat order on our central platform in the quarter.
Well.
We're also benefiting from solid demand in the industrial sector.
This market is being driven by robotics factory automation advancements and increased demand for security.
We also see strength in automotive electronics, which is the market, where we generate the majority of our revenues.
But it's clear we're fully benefiting from demand for automotive electronics. This is a long term continuing growth opportunity where analysts forecast semiconductor growth.
10% to 15% compounded annual growth rate for at least the end of the decade, the mid point of that growth or about 12% a year, there's triples, the size of our market.
On top of this we believe everything will need to be secured as Iot grows creating centric opportunities for us in both markets.
Our business model to deliver strong operating leverage or about 40% to the bottom line for every dollar of revenue.
The markets, we serve where the definitive leader and continue to strengthen our position at the top through new customer wins and investments in our products.
Let's take a look at some of the key numbers contributing to our <unk> results bookings were $7 6 million growing by about 32% from the first quarter and 19% from the second quarter of last year we.
We added five new customers in the second quarter, which now brings us to 15, new customers in the first half alone.
This is on top of at least 20, new customers in each of the last two years.
Witnessed in Q2 include a global OEM leader for electronic vehicles. We're.
We're benefiting from very strong demand excellent products and an improved supply chain for the automotive industry.
Yeah.
Our financial performance for the past four quarter shows the progressive factory recovery from supply chain and Covid related challenges in the prior years Q2 was an easy comparison to one year ago. When we were locked down in China for much of the quarter.
You'll recall that we estimated this shifted between about 1 million to one and a half a million dollars of revenue from Q2 to Q3 of last year.
Even including that adjustment were up substantially year over year in revenue bookings and gross margin.
Regionally, we're continuing to see strong re shoring effects to North America. We also saw strength in EMEA as indicated in our first quarter call.
China has been slow in the first half and we're expecting better results in the second half there.
It's important to reiterate the demand for data Io products and services in automotive electronics is driven primarily by the semiconductor content per vehicle and the associated long term growth.
Having said this strong unit momentum for field for vehicle growth in North America complements the secular growth in semiconductor consumption for autos and is contributing to our strength.
Okay.
Third party sources confirmed strong automotive silicon demand and strong OEM demand overall within the automotive market.
We've heard a interesting results from forward today. We also saw an interesting report published by the Wall Street Journal a couple of weeks ago, where it is estimated that new car sales were up 13% during the first half of the year exceeding industry forecasts.
Strong unit growth has been complementing double digit secular growth in silicon consumption per car and this combined creates a very encouraging environment for our business as over 63%.
A data Io sales or in the automotive electronics industry.
In addition to afford many automotive Oems, who reported strong demand in the quarter Toyota North America unit was up 7% G. M was up nearly 19%, including strong EV growth Mercedes said its battery electric car sales more than doubled in Q2.
Yeah.
And all of these companies reported an improved silicon supply chain.
And looking at other key players in our world Teradyne of semiconductors semiconductor test equipment provider yesterday reported strong sales to automotive customers and their Q2 results.
S. T micro reported strong Q2 results again, highlighting the growth driven by automotive and industrial markets.
While the automotive and industrial markets are strong we're paying particular attention to E. V developments is there a significant growth catalyst for us all.
Higher demand is based on consumer sentiment regulatory stimulus and the new models being added almost daily by automotive manufacturers to their portfolios.
In addition to E V. We're also seeing some changes under the hood so to speak in automotive electronics, we're seeing the early days of the software defined vehicle.
And it includes a fundamental structure change to more compute power and fewer domains within the automotive electronics market.
This gives us a great opportunity as the programming leader to continue to expand our business in this area as all of these changes require programming at increased speeds with greater and greater amounts of code and data.
Data I O is the gold standard for flash programming to address this demand in the auto industry.
And the smart vehicle architecture with domain controllers, just an exciting growth opportunity for us all.
With that I'll turn it over to Joel Heartland for a more detailed look at the numbers.
Thank you Anthony and good day to everyone I'll start with the balance sheet and then move to the income statement.
In my commentary today and to set the stage for Jerry in the third quarter, we will focus on specific points of interest and allow you to review our press release for the earnings for the comprehensive review of the second quarter financials.
Data <unk> financial condition remains strong in the second quarter with $11 9 million in cash still up 400000 from $1 million from 11 million five a December 31.
Cash and working capital at 18 million were approximately the same as on March 31.
Receivables and inventory both declined from the end of the first quarter, while inventory had been elevated in 2022 to address potential shortage risks, we no longer see the same exposure. So we are managing operations to reduce inventory levels going forward during 2023.
Days sales outstanding or DSO, a receivables collection measure was at 42 days as of June 30 of 2023, this is better than our target range.
As Anthony mentioned, our bookings for the quarter were quite strong and we're at the highest quarterly level in two years for the first half of 2023 bookings were $13 3 million.
From $12 6 million in the first half of 2022.
Our backlog at June 30th of 2023 was $3 8 million up from $3 2 million on March 31 of 2023.
As we have noted in the release a larger share of the backlog is scheduled for Q4 delivery than is typical.
Automotive electronic orders represented 63% up year to date bookings and continues to be our primary addressable market for.
For comparison, 61% of our bookings were derived from the automotive sector during the year 2022.
On a geographic basis International sales represented approximately 86, 3% of revenue for the second quarter of 2023 compared to 89, 2% for the second quarter of 2022.
Gross margins at 59, 1% in the second quarter of 2023.
Or up from 57, 8% in the second quarter of 2022 with margin.
With margins improved by higher sales volumes on relatively fixed costs.
Product mix, including a recognition of previously deferred rental income that's a purchasing credit.
And our channel mix offset in part by less favorable factory variances.
For our channel mix with direct sales from the Americas and parts of Europe being stronger in the second quarter of 2023, and where we can account for selling commissions.
Our operating expenses, we show a higher level of gross margin as a percentage of sales.
Some of the other factors came into play in our second quarter, which impacted expenses compared to our first quarter run rate. These include about 80000 in additional R&D expenses as compared to prior quarter as we incurred spending on outside services in support of our product lines.
<unk>.
Selling expenses in SG&A, where about 60000 higher due to a higher mix of direct sales as discussed earlier we.
We added additional one time I T project and support spend as well as a hiring resulting in a 110000 of additional SG&A.
We had a noncash expense of 60000 for annual stock based compensation true ups relating to original grant estimates of forfeitures.
Other factors in the second quarter, which were significant relative to the second quarter of 2022.
Our second quarter net interest income was up 47000 compared to the second quarter of 2022 due to higher interest rates applied to our higher invested cash balances.
Incentive compensation was $100000 compared to none in the 2022.
Period due to that period's loss.
Income tax on the profits of foreign subsidiaries, which are not shielded by our U S. Corporate Nols resulted in second quarter income tax expense of 109000 versus 35000 in the first quarter and 61000 in the second quarter of 2022.
Currency gains based on the following U S. Dollar of about 196000 in the second quarter of 2023 as compared with a loss of 74000 in the first quarter of 2023 and on a strengthening us dollar.
On a strengthening U S dollar 130000 in the second quarter of 2022.
Expenses ran a little hotter in the second quarter, and we have an eye on it.
Adjusted EBITDA earnings of 869000 in the second quarter of 2023 compares with adjusted EBITDA earnings of 502000 in the first quarter of 2023 and negative adjusted EBITDA of 65.
In the second quarter of 2022, so the year over year differential was over 930000.
We had 9 million eight.
18875 shares outstanding on June 30th 2023.
Our Nols on June 30th 2023 stood at over 22 million.
Overall, we remain very strong financially and continue to have no debt.
Looking forward with the high level of activity in our sales funnel and fundamental growth catalysts as Anthony discussed in his remarks, we continue to plan for double digit revenue growth in 2023.
Gross margins are expected to continue to be in a range of mid to high fifty's throughout the year.
Operating expenses for the year are now expected to be modestly elevated giving some of given some of the inputs from the second quarter, along with higher sales commissions and incentive compensation and the impact of currency changes.
That concludes my remarks for the second quarter of 2023, but before we open up the call for questions I'd like to comment on my retirement I am very happy that we've reported Jerry Yang to replace me and I'm confident that he and the team will go forward to great success.
I look forward to spending more time with family I must say that I truly enjoyed the people and the passion shared by the data our team for the past 32 years.
We absolutely change the face of programming first in the early two thousands with the mobile phone industry and more recently and into the future for the automotive electronics and the Iot security markets.
Been both challenging and rewarding as we endeavor to create value for customers and shareholders alike.
I'm grateful for the experiences and wellness all of you.
Including you the members of our community.
Thank you and wish you all well with that said operator will you. Please start the Q&A process.
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Okay.
Okay.
Okay.
Our first question will come from Kevin Garrigan with West Park capital.
You May now go ahead.
Yeah, Hey, good afternoon, guys. Congrats on the strong results Gerry Congrats on joining the data I O team and all the best in retirement Joel.
Thank you just yeah, absolutely just to start off.
Anthony I think in the past you had noted that.
Centrex at about 20 customers can you kind of give us a sense of that.
Of that number today and the five new customer wins does that include any new centric customers.
Yeah, Kevin Thanks, very much for the comments on the <unk> I mentioned earlier that we got are actually repeat order in the quarter. So there's that to add to it and also focus on the fact that the units are that we're seeing through.
Some of our partners are up pretty sharply. So those are the encouraging things on centric for the quarter.
I also want to comment just to sort of clarify Joes comments, we talked about the double digit growth in margins and expenses I just want to make sure. It was clear he is referring to the full year with those comments.
Okay got it got it that makes sense and then the the global vehicle OEM that you guys. One as a customer how long are you engaged with that customer before they decided to actually become a customer and what would you. What would you say was kind of a draw.
Well, we've been we've been engaged with.
The OEM customer that we referred to for quite some time and I think the reason that we won the business with them is the reason we win the business with the tier ones.
With our you know EMS companies going into automotive.
We're the global leader in automotive.
We understand the needs of the automotive industry from not only high quality programming systems, but the ability to deploy those systems through a resilient supply chain to five continents around the world the ability to service those systems the ability to add new components to the systems the ability to risk.
Bond if there's an issue.
Because it's very costly for automotive supply chain to have any kind of issue that lingers for any length of time.
So the same reasons why we have 18 of the top 20 tier ones are the reason we were able to add this automotive OEM. We don't have permission to use their name, but you would certainly know who they are to our list of customers.
Okay now that makes total sense.
One for Jerry if I can and then I'll hop back in the queue and Jerry Congratulations again on joining the team I'm. Just you know what were the top two or three things that attracted you to sort that out.
Yeah. Thank you.
First and foremost.
You indicated a date I O is the industry leader.
In this particular market.
And with high growth potential of the automotive industry.
It was a easy decision for me to join the team and continue to contribute to its growth and operational excellence.
Our next question will come from David Marsh with singular research you May now go ahead.
Hey, guys congratulations on the quarter and just to echo the previous caller's comments, Gary welcome and.
Don Congratulations.
Thank you thanks, David.
Hum.
To start.
Your commentary in your prepared remarks, as well as the press release, just talking about China, and the first half being a slower recovery, but it sounds like your expectations for the second half are for demand to pick up over there could you put a little bit more color and and perhaps some you know.
Like some numbers around that in terms of maybe percentage of revenue or or anything of that nature that would just help us understand.
You know kind of exactly how slow it has been in the first half and then kind of.
How much you're kind of expecting it to pick up in the second half.
Sure David I, probably won't go into the level of detail you want on the call, but I think what we saw was what you've probably heard from a number of other companies.
Sort of an expectation you know, okay Q1 is going to be tough and then it'll sort of snap back don't really haven't seen it snapped back now you know having said that we expect you know Q2 is better than Q1, we expect Q3 to be better than Q2, but I think it'll be more steady and measured as opposed to a sort of a b.
He shaped recovery.
Having said that you know China is the world's largest automotive market. It's the world's largest market for electric vehicles sales when they think about three out of every five electric vehicles getting sold in China.
So it's a huge a huge contributor and you know from our standpoint, just think of what the numbers could look like when China is firing on all on all cylinders. If you can use that analogy for an EV car.
Which we expect will happen over time.
Yes.
Pretty helpful. I, certainly I appreciate the.
I appreciate that you can't get too granular.
Then just the other question I had is you know gross margins in the first half really are kind of knocking it out of the park up about 59% in both quarters.
I'm guessing that that's somewhat driven by mix I was hoping maybe you could comment a little bit on that and I noticed a very subtle change in your guidance for the full year, where you know you had previously been guiding mid fifties for the full year now mid to upper fifties should we start thinking in that.
Directionally that the rest of the year could in fact, it looked like the first half towards the upper Fifty's.
And can you just give us some clarity around you know how what drives that what drives that gross margin.
Yes, I think Dave.
David We basically saw that our guidance has stayed in the mid to upper fifties and that's that's really what it's been all year long.
But we have benefited from a number of situations this year, where the mix of both customers and channels have been relatively favorable for gross margins by that I discussed how Americas and parts of Europe that are that we sell to directly.
Contribute a better gross margin, having a little bit more operating expenses for selling commissions instead of distributor discounts. So that's a margin benefit we had some product mix in particular, a deferred revenue from our lease purchase.
Option that we recognized during the quarter that helped and then I'd say the last piece was really related to just pure sales volume as it as opposed to a year ago, where the sales volume relative to.
Fixed factory costs were where another <unk>.
Benefit in the comparison.
Our next question will come from Matt Winthrop with equitable you May now go ahead.
Hello, how are you Anthony.
Great Matt Thank you.
Yeah, I think I was curious if we can release and listen to your comments.
Debbie I O scales to the marketplace.
Regarding automotive is it more on <unk>.
Volume output or when a car line introduced the new vehicle Ford has a new electric vehicle test lab, the new is a new vehicle or a new introduction to the marketplace more favorable to you than more volume.
Sales.
That's a really good question and let me answer it this way.
The overriding factor is that a model that you introduced this year is going to have more silicon in it than last year's model, which has more silicon in it than the prior year model. Okay. So every time the auto companies refreshed their product line.
The car.
It's going to have more silicon in it and that will mean theres more dip total demand for programming.
So it's this long term secular growth of 10% to 15% a year that you know Mckinsey has published a lot of the automotive semiconductor companies are published.
That's their target for the silicon growth.
And that's really the fundamental driver for the growth in our business.
We're extremely well positioned inside the automotive electronics industry, you know what the numbers I mentioned earlier on 18 of the top 20 tier ones increasingly automotive EMS companies and and you know we're going to be focusing more on some of the Oems going forward as they get more.
Focused on on their own silicon.
So it's really just that simple there's more stuff theres more silicon going into the car and every month. There is another model out there that's replacing a model and the new model has more silicon and more programming and we get a piece of that most likely.
That's a good thing and that's why I asked you the question.
I'm going to sort of backup on this in the centric world because you and I have talked about this I noticed in your prepared remarks, you didn't mention.
At all you Didnt mentioned anything.
But I know that there is a connection there is there anything that you can add color that all of what's going on.
Benefit you guys indirectly or directly.
Sure I'm I'm, probably the only person in the whole world and last quarter. It Didnt mentioned a eye on their earnings call.
<unk>.
But we would have.
The way we play with AI is if you and I think I might have said this in prior calls.
In order to do a good job with AI you have to have a solid training base and especially in machine learning environments that the data structures that you use to train the AI to get the algorithms developed has to be well understood and have to be known and basically cannot be tampered with.
So theres an element of security that comes in with AI that is even more important than in other factors.
We have had AI customers in that space that are using centric to secure their own systems to make sure that they're protected not only on the algorithms, but the data streams coming in and out of the machines. So as the world does more and more AI I think theyre going to become more acutely aware of security.
Because you know in a regular world if you're a bad data it's garbage in garbage out in an AI World. If you have bad data coming in and you train the machine and properly it.
It could be catastrophic.
Again, if you have a question. Please press Star then one.
Our next question will come from Chris Lukowski, a private investor.
You May now go ahead.
Hello.
Congratulations on good results.
Thank you.
I want to ask about China.
It seems that even though you know the Chinese economies is well publicized to being sort of a slowdown.
The electric car sales are doing.
Well, so how old are they broken out those codes are they using.
Oh, the legacy programmers.
Well I think what we've seen in China is we have a tremendous presence in China in the automotive industry through tier ones are and in some cases Oems. So I think the you know we're pretty happy with our penetration in China, and we think that as that market continues to grow.
We will participate in it I think you recall, we said last quarter that there was some shifting going on in some models are there were new emission standards coming into effect in July and we think that had some impact in specifically the manufacturing process dealers wanted to get some of the older cars off of their lots because.
They would not be able to sell them.
Once the new emission standards came in.
Okay. So probably maybe they're just they're just not having the new models as much.
Alright.
Do expect China to improve in the near future.
Yeah, we have we believe China will be better in the second half than the first half.
Alright.
In general I want to ask Oh, whether you view yourselves.
Mostly dependent on the number of memory chips and cards or the overall memory goes in other words is the self touring cause cause gets more complex and they need more gigabytes of a plus to start it would that help you.
Yeah, Chris I think you hit on a good point there are we've talked about the overall semiconductor content when I say that I, usually referred to the dollar value I can probably also referred to the bids to be programmed.
We've seen.
There are a number of markets that we play in in automotive electronics infotainment, probably has seen the biggest increase in total bids that.
We can easily easily see.
And you're seeing there you know more and more.
Oh, $30 $40 60 gigabytes of data.
Not only as the size goes up but noted the transition of technologies from EMC to U S.
That's an obvious one.
We continue to see big memory chips, especially in the software defined architectures are domain controller architectures.
But theres still a lot of microcontroller demand, especially as companies add more and more active safety.
Elements to cars.
So it's a combination of both increased.
Memory footprint more bits.
More total systems as well as additional security.
There are no further questions. This concludes our question and answer session I would like to turn the conference back over to management for any closing remarks.
Well. Thank you very much operator, I'd like to thank everyone for joining the call today and again, Thank you Joel and welcome aboard Jerry.
With that this call is now closed.
The conference has now concluded. Thank you for today's presentation you may now disconnect.