Q4 2023 Data I/O Corp Earnings Call

Operator: www.globalonenessproject.org Good afternoon, and welcome to the Data I-O fourth quarter 2023 Financial Results Conference call. All participants will be in listen-only mode.

Good afternoon, and welcome to the data I O fourth quarter 2023 financial results conference call.

All participants will be in listen only mode.

Operator: After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Jordan Darrow, Investor Relations.

Jordan Darrow: Thank you, Operator, and welcome to the Data I-O Corporation fourth quarter 2023 financial results conference call. With me today are the company's president and CEO Anthony Ambrose and Chief Financial Officer Jerry. Before we begin, I'd like to remind you of the statements made in this conference call concerning future revenues, results from operations, financial position, markets, economic conditions, supply chain expectations, estimated impact of tax and other regulatory reform, product releases, new industry partnership, and any other statements that may be construed as a prediction of future performance or events or forward-looking These factors include uncertainties as to the impact of global and geopolitical events, international trade regulations, order levels 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 Form 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.

International trade regulations order levels for the company any activity level of the automotive in 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 describe.

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 statement should not be unduly relied upon data 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 C E. Okay and I.

Anthony Ambrose: And now I would like to turn the call over to Anthony Ambrose, President and CEO of Data I.O. Well, thank you very much, Jordan, and welcome, everyone. I will begin my formal remarks by addressing our 2023 financial and operational performance, and then I'll turn the call over to Jerry Eng, our CFO, for a more detailed look at the numbers. We delivered very strong financial performance in 2023, with a 16% growth in revenue and a return to profitability. We also experienced encouraging business momentum, which has carried over into 2024. A quick summary of 2023 shows that our top line grew 16 percent. The automotive market represented over 63% of our bookings for 2023.

Well, thank you very much Jordan and welcome everyone. I will begin my formal remarks by dressing or 20 twenty-three financial and operational performance and then I'll turn the call over to Jerry Ang R. C. F O for a more detailed look at the numbers.

We delivered very strong financial performance and 20 twenty-three with a 16% growth in revenue and a return to profitability.

We also experienced encouraging business will mention which is carried over into 2024.

A quick summary of 2023 shows that our top line grew 16%.

The automotive market represented over 63% of our bookings in 2023.

Anthony Ambrose: We had over 23 new customer wins in 2023, and that was worldwide and across all segments. This marks our third year in a row with over 20 new customers, and many of those were marquee wins in automotive locations worldwide during the year. Our PSV platform for programming is the most successful platform in the industry and now has over 485 deployments worldwide.

We had to work twenty-three new customer wins in 2023.

And that was worldwide and across all segments and this marks our third year in a row with over 20, new customers and many of those were Mark key wins, an automotive locations globally during the year.

R. P. S. B platform for programming is the most successful platform in the industry and now has over 485 deployments worldwide.

Anthony Ambrose: Centrix, our secure provisioning deployment platform, grew 150 percent in software and pay-per-use revenue in 2023 versus 2022. Gross margins for the year were nearly 58%, in line with our mid to upper 50s guidance on gross margin for the year. Inventories declined nearly $900,000 as we unwound our COVID-era supply chain strategies, and cash grew about $830,000 for the year, reflecting operating profitability, inventory reductions, and spending control. Finally, pointing to our strong operating leverage, we delivered increased profits, with adjusted EBITDA increasing to $2.3 million for the year, up over $1 million from the prior year, and net income was positive, as I mentioned earlier. 2023 was an interesting year.

Sentrix are secure provisioning deployment platform grew 150% and software and pay per use revenue in 2000 twenty-three versus 2022.

Gross margins for the air where nearly 58% in line with our mid to upper fifties guidance on gross margin for the year.

Inventories declined nearly $900000 as we unwound, our COVID-19 era supply chain strategies and.

In cash grew about 830, K for the year, reflecting operating profitability inventory reductions in spending controls.

Finally pointed of our strong operating leverage we delivered increased profits with adjusted EBITDA, increasing the $2.3 million for the year up over $1 million from the prior year and net income was positive as I mentioned earlier.

2023, it was an interesting year, our global reach proved very positive for the years, we had excellent growth in the Americas region, as well as Asia Asian region outside of China.

Anthony Ambrose: Our global reach proved very positive for the year as we had excellent growth in the Americas region, as well as in the Asian region outside of China. In Japan, we're pleased with our new partnership launched in the first part of the year with NOAA Leading Company to establish the first Centrix security provisioning service in Japan, as well as a separate collaboration we formed with Nuviton Technology to support their latest generation of IoT microcontroller products with our Centrix platform. As I mentioned earlier, Centrix overall grew our software and pay-per-use revenue by 150% in the year. And I mentioned earlier that solar was one of the new markets we tapped into in 2023, as well as multiple customers coming into production. Thank you.

In Japan were pleased with our new partnership launched in the first part of the year would know a leading company.

To establish the first centrex security provisioning service in Japan, as well as a separate collaboration we form a new baton technology to support their latest generation of Iot microcontroller products with our centrex platform.

As I mentioned earlier Sentrix overall grew our software and pay per use revenue 150 per cent in the year.

And I mentioned earlier that solar was one of the new markets, we tapped into in 2000, twenty-three and as well as multiple customers coming into production.

Anthony Ambrose: Today, especially AI is top of the news these days for very good reasons, and people continue to ask us, you know, how does AI impact Data I-O markets? Well, AI plays into our business in a couple of ways. First, AI platforms need strong hardware-based routes of trust to ensure data sets that are used for machine learning, training, and other learning are accurate, and that their software is secure. This is a use case we have talked about with a customer of ours, securing an AI accelerator card for the HyperCloud.

Today, especially AI is top of news. These days for very good reasons and people continue to ask US you know how does how does AI impact date, Iowa markets.

AI plays into our business in a couple of ways first day, our platforms need strong hardware based roots of trust to ensure datasets that for machine learning.

Training and and other learning are accurate and that their software is secured.

This is a use case, we have talked about with a customer of ours, securing an AI accelerator card for the hyper cloud.

Anthony Ambrose: We also see AI coming into play in the automotive space as we see more autonomous driving applications and other use cases as automotive electronics become more sophisticated and more centralized. In 2024, in addition to these markets, our focus will be on what we call "disciplined growth." We'll continue to target the automotive, industrial, and programming center markets worldwide, and we'll be adding to that the spending discipline and focus that Jerry's brought in for the second half of 2023. For growth, automotive electronics at 63% of our business is foundational for us moving forward, as we've said multiple times on multiple calls. We have applications driving the increase in semiconductor content continuously. These include advanced driver assist systems or active safety, in-vehicle infotainment, electrification, connectivity, and security.

We also see AI coming into play in the automotive space as we see more autonomous driving applications and other use cases as automotive electronics become more sophisticated and more centralized.

In 2024. In addition to these markets are focus will be on what we call disciplined growth.

We'll continue to target the automotive industrial and programming center markets worldwide and will be adding to that the spending discipline and focus the jerry's brought in in the second half of 2023.

For growth automotive electronics at 63% of our business is foundational for us moving forward.

As we said multiple times on multiple calls we have applications driving the increase in semiconductor content continuously. These include advanced driver assist systems or active safety.

In vehicle infotainment.

Electrification connectivity and security we.

Anthony Ambrose: We continue to see strong growth worldwide, and even though we are a dominant supplier in the automotive industry, people ask us, how can you continue to grow in the automotive industry if you have 18 of the top 20 customers? Well, we continue to win new customers as new entrants come into the market, and we continue to win new sites as existing customers expand new factories worldwide. And we continue to win with new technologies as current and new customers expand their use of UFS flash memory in all the applications that I mentioned earlier.

We continue to see strong growth worldwide.

And even though we are a dominant supplier and automotive people ask us how can you continue to grow and automotive if you have 18 of the top 20 customers.

Well, we continue to win new customers as new entrants come into the market.

We continue to win new sites as existing customers expand new factories worldwide.

And we continue to win with new technologies as current and new customers expand their use of Uff's flash memory and all applications that I mentioned earlier.

Anthony Ambrose: So we see continued momentum in the automotive going into 2024, and across the board, not only in the automotive but in industrial and programming centers, our sales funnel has added significant opportunities in the past quarter and is at its highest level in several years. This is the basis for a positive outlook for the year. Second, people continue to be a big asset for Data I-O. Our global team did an amazing job navigating through the COVID closures, supply chain disruptions, and inflation spikes that we've had to deal with over the past several years. We believe those times are largely behind us.

So we see continued momentum and automotive going into 2024 and across the board not only an automotive, but industrial and programming centers are sales funnel is added significant opportunities in the past quarter is at its highest level in several years.

This is the basis for a positive outlook for the year.

Second is people continue to be a big asset for data I O.

Our global team did an amazing job navigating through the Covid closures supply chain disruptions and inflation spikes that we've had to deal with over the past several years.

We believe those are largely behind US we continue to keep our great team and add to it.

Anthony Ambrose: We continue to keep our great team and add to it. As you may recall, Jerry Yang was appointed our CFO during the third quarter of last year, and he's now really putting his stamp on the company. I have specifically asked Jerry to focus on tighter spending controls, process efficiencies, and operating leverage, as improvements here will turbocharge our financial performance as we grow the company's top-line revenues. I'll reiterate what we provided in our earnings release regarding 2024 expectations. Based on continued strength amid a stable global operating environment, we expect double-digit bookings growth in 2024, and gross margins are expected to be in the mid to high 50% range for the year.

As you May recall, Jerry Yang was appointed are CFO during the third quarter of last year and he's now really putting a stamp on the company.

I have specifically, Australia to focus on tighter spending controls process efficiencies and operating leverage as improvements here will turbocharge, our financial performance as we grow the company's top line revenues.

I'll reiterate what we provide in our earnings release regarding 2024 expectations.

<unk> continued strength amid a stable globe rating global operating environment, we expect double digit bookings growth in 2024.

Gross margins are expected to be in the mid to high 50 per cent range for the year.

Operating expenses for 2024 are expected to be consistent with or moderately lower than operating expenses in 2000 twenty-three excluding.

Excluding incentive comp sales commissions and currency.

Anthony Ambrose: Operating expenses for 2024 are expected to be consistent with or moderately lower than operating expenses in 2023, excluding incentive comp, sales commissions, and currency. The combination of spending control and top line growth is an exciting combination for us in 2024. Before I turn it over to Jerry for his commentary, I'd like to invite investors and other interested parties to listen to our recent Fireside Chat interview. Late last month, we launched an interview where our CTO Rajeev Gulati and I were hosted by small cap investor and Data I O shareholder Vishal Mishra of Bard Associates on the topic of AI programming and security requirements. Next week we'll launch an interview hosted by Semiconductor Senior Equity Research Analyst David Williams of Benchmark Company where we talk about semiconductor programming growth opportunities in general. Also, in April, we invite you to join us at the annual Industry Trade Show Apex Expo in Anaheim, California. If you're in the area, please contact Jordan Darrow if you'd like to attend as our guest.

The combination of spending control and top line growth as an exciting combination for us in 2024.

Before I turn it over to Jerry for his commentary I'd like to invite investors and other interested parties solution to our recent fireside chat interviews.

Late last month, we launched an interview our CTO regimes Gulati and I were hosted by small cap investor and data shareholder Vishal Misra of Bart associates on the topic of AI programming and security requirements.

Next week, we'll launch an interview based on Ah hosted by semiconductor Senior equity research analyst David Williams, a benchmark company, we talked about semiconductor programming growth opportunities in general.

Also in April we invite you to join US at the annual industry trade show apex Expo in Anaheim, California.

If you're in the area. Please contact Jordan Darrow, if you'd like to attend as our guest.

With that I'll turn it over to Jerry Yang.

Thank you asked me and good day to everyone.

I look forward to my second earnings update having joined data idle net 2000, twenty-three and working with the team to enhance our operational capabilities and financial results.

My comments today will be focused on key points of interest for the fourth quarter and full year 2023 performance.

Our perspective looking forward.

Jerry: With that, I'll turn it over to Jerry. Thank you, Anthony, and good day to everyone. I look forward to my second earnings update, having joined Data I-O in mid-2023 and working with the team to enhance our operational capabilities and financial results. My comments today will be focused on key points of interest for the fourth quarter and full year 2023 performance and our perspective looking forward. Data I-O's financial condition remains strong at the end of Q4, with $12.3 million in cash, up $831,000 from the prior year. The four-year cashing, Flex Improved Operating Profitability, Lower Inventory Levels, and Higher Interest Earnings, cash and working capital at $18.4 million had a slightly greater increase of $846,000 from $17.6 million at the end of 2022. The company continues to have no debt.

Data, Iowa, Idaho financial condition remains strong at the end of Q4 $12.3 million in cash.

Up 831000 from the prior year.

The full year cash increase reflects improved operating profitability.

Lower inventory levels and higher interest earnings.

Cash and working capital at $18.4 million had a slightly greater increase of 846000 from $17.6 million at the end of 2022.

Company continues to have no depth.

Inventory at 5.9 million declined 876000 from the prior year that.

That change has Anthony mentioned Ah dresses earlier market conditions during the Covid aftermath, and a strategy a strategy that now have unwound that increase.

Improved supply chain conditions.

Disposition that material for end of life products and.

And leaned operational initiatives contributed to our overall reduction efforts.

Jerry: Inventory, at $5.9 million, declined $876,000 from the prior year. The change, as Anthony mentioned, addresses earlier market conditions during the COVID aftermath and a strategy that now has unwound that increase. Improved supply chain conditions, disposition of material for end-of-life products, and Lean Operational Initiatives contributed to our overall reduction effort. Optimizing inventory levels remains a top priority while balancing anticipated customer demands in 2024. Moving to the income statement, fourth quarter revenue at $6.9 million reflects lower coming into the period backlog because of booking delays from the third quarter, which resulted in a decline of 397,000 as compared to Q4 2022. However, with a strong fourth quarter bookings recovery at $7.2 million, fourth quarter revenue at $6.9 million increased $314,000 or 5% from the preceding quarter for all of 2020. Sales were $28.1 million, up 16% from $24.2 million.

Optimizing inventory levels remain a top priority, while balancing anticipated customer demands in 2024.

Mhm reflect lower.

Coming into the period backlog, because a book and delays from the third quarter.

Which resulted in a decline of 397000 as compared to Q4 2022.

However, with a strong fourthquarter bookings recovery at $7.2 million.

Fourth quarter revenue at 6.9 million increased sweetheart, and 14000 or 5% from the preceding quarter.

For all of 2023.

Sales were $28.1 million up 16% from $24.2 million.

Again, reflecting continued growth in the automotive electronics and Iot industries Faye.

Favourable comparison.

Post lockdown recovery one year ago.

And a strong backlog of $48 million at the start of 2023.

Backlog has returned to a more normalised level at $2.8 million as of December 31st of this past year.

Otto Middle of electronics at 63% twenty-three bookings was two percentage points higher than 2022.

Jerry: Again, reflecting continued growth in the automotive electronics and IoT industry. A favorable comparison to the post-lockdown recovery one year ago and a strong backlog of $4.8 million at the start of 2023, backlog has returned to a more normalized level at 2.8 million as of December 31st of this past year. Automobile electronics, at 63% of 23 bookings, was two percentage points higher than 2022. However, revenue remains steady with systems revenue at 58%, and recurring and consumable revenue at 42% for 2023. Gross margin for both Q4 and full year 2023 was 58 percent, up three percentage points from the comparable prior period.

Revenue remained steady with systems revenue at 58%.

And recurring and consumable revenue at 42% for 2023.

Gross margin for both Q4 and full year 2023 was 58%.

Up three percentage points from the comparable prior periods.

The improvement.

We're driven by a combination of higher sales volume.

Favorable mix of new systems and recurring revenue growth.

Material cost reductions and of course operational efficiency improvements.

For example, lower inventory levels, which contributed to our increased cash also contributed to lower freight.

Tara.

Obsolescence and carrying costs.

Moving onto operating expenses.

Operating expenses at $3.8 million in Q4 represented two consecutive quantity quarterly declines from the high for $2 million reached in the second quarter of 2023 <unk>.

Jerry: The improvements were driven by a combination of higher source volume, a favorable mix of new systems and recurring revenue growth, material cost reductions, and, of course, operational efficiency improvements. For example, lower inventory levels, which contributed to our increased cash, also contributed to lower freight, tariff, obsolescence, and carrying costs. Moving on to offering expenses, operating expenses of $3.8 million in Q4 represented two consecutive quarterly declines from the high of $4.2 million reached in the second quarter of 2023.

Cost containment and efficiency improvements undertaking in the third quarter and.

<unk> to lower operating expenses and improve profitability in the second half of 2023.

We continued to critically review spending manage noncritical costs.

An increase operational efficiencies.

Excluding cost related to a sales volume changes, we expect to maintain this strong operational discipline, which will generate near term cost savings and longer term operating capacity growth.

Jerry: Cost containment and efficiency improvements undertaken in the third quarter contributed to lower operating expenses and improved profitability in the second half of 2023. We continue to critically review spending, manage non-critical costs, and increase operational efficiency. Excluding costs related to sales volume changes, we expect to maintain this strong operational discipline, which will generate near-term cost savings and longer-term operating capacity growth. Interest income growth also contributed to improved profitability, worth $190,000 in 2023 compared to $34,000 for the previous year. The increase was due to a stronger cast position, higher interest rates of return, and greater deployment of operating cash into Short-Term Investments, such as nightly sweep accounts and one- to two-month certificates of deposit. A net income of $144,000 for Q4 added to our profit of $486,000 for the full year, which compares to a net loss of $1.1 million for the prior year.

Interest income growth also contributed to improve profitability.

Well for her 90 190000 for 2023 compared to 34000 for the previous year.

Increase was due to strong cash position.

Interest rates of return.

And greater deployment of operating cash into short term investments such as 90 sweep accounts in one to two months.

If it gets up deposit.

Net income of 144004 Q4 added to our profit of 486000 for the full year.

Which compares to a net loss of 1.1 million for the prior year.

The 23 revenue increase of $3.8 million.

The 320 basis point improvement in gross margin.

In the second half operating expense reductions.

Contributed to a net income increase of 1.6 million or 42% leverage from 2022.

Similarly, adjusted EBITDA was 514004 Q4 and two.

Jerry: The 23 revenue increase of $3.8 million, the 320 basis point improvement in gross margin, and the second half offering expense reductions contributed to a net income increase of $1.6 million, or 42% leverage, from 2022. Similarly, adjusted EBITDA was $514,000 for Q4 and... $2.3 million for 2023, again, representing a four-year improvement of $1 million. Looking forward to 2024, we expect double-digit bookings growth, as Anthony highlighted earlier, to be weighted more in the second half of the year. The timing of orders and subsequent deliveries may impact our full-year revenue outlook on a four-year basis. We expect operating expenses to decrease, which will help offset sales volume and compensation-related expense increases.

$2.3 million for 2023, again, representing a full year improvement of $1 million.

Looking forward to 2000 looking forward to 2024, we expect double digit bookings growth as Anthony highlighted earlier.

To be waited more in the second half of the year.

The timing of orders and subsequently deliveries may impact our full year revenue outlook.

On a four year basis we.

We expect operating expenses to decrease which will help offset sales volume and compensation related expense increases.

As is always the case in the first quarter.

Operating expenses will be substantially higher due to annual expenses, including your N. Odyssey's 10-K in proxy filings and similar public company calls.

Overall, we remained very solid financially.

With a strong cash position no debt and a return to full year profitability.

I look forward to continuing to partner with Anthony and the data Io team and improving our operational capabilities and financial performance.

Operator: As is always the case in the first quarter, our operating expenses will be substantially higher due to annual expenses, including year-end audit fees, 10K and proxy filings, and similar public company costs. However, overall, we remain very solid financially, with a strong cash position, no debt, and a return to full-year profitability. I look forward to continuing to partner with Anthony and the Data I O team in improving our operational capabilities and financial performance. That concludes my remarks for the fourth quarter of 2023. Please start the Q&A process. We will now begin the question-and-answer session. To ask a question, you may press star, then 1 on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the key.

That concludes my remarks for the fourth quarter of 2023.

<unk> would you please start the Q&A process.

We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad, if you're using a speaker phone. Please pick up your handset before blessing pressing the keys.

Is that any time. Your question has been addressed and you would like to withdraw your question. Please press Star then too.

Also please ask one question and one follow up and if you have additional questions. Please re enter the question queue.

At this moment, we will pause momentarily to assemble our roster.

David Marsh: If at any time your question has been addressed and you would like to withdraw your question, please press star then two. Also, please ask one question and one follow-up question, and if you have additional questions, please re-enter the question queue. At this moment, we will pause momentarily to assemble our roster. The first question comes from David Marsh with Singular Research. Please go ahead. Thank you so much for taking questions. First guys, I just wanted to ask about the guidance for 24. The guidance, you know, is around bookings. Typically, your bookings do translate to revenue, you know, reasonably quickly. Should we assume that, you know, the double-digit bookings growth also translates to revenue growth in that relative ballpark, or is that, you know, trying to draw too many conclusions from it? David, a really good question.

The first question comes from David Marsh with with Cingular Research. Please.

Please go ahead.

Thank you so much for taking the questions first guys just one too.

Ask about the guidance for 24.

The guidance you know it's around it's around bookings typically your bookings do translate to revenue you know reasonably quickly should we assume that you know.

Double digit.

Bookings grows.

Also translates to revenue growth in that relative ballpark or is that you're trying to draw too much of a conclusion from it.

Oh, David a really good question I think what we're saying with our sales funnel as you know we see.

The opportunities have gone up sharply in our sales funnel and we believe that translates into double digit bookings growth. The exact timing of when we get the bookings when they turn into revenue is you know a little bit less certain we do believe that it'll be more back end loaded from a revenue perspective Ah just overall, we think that's.

Anthony Ambrose: I think what we're saying with our sales funnel is, you know, we see that opportunities have gone up sharply in our sales funnel, and we believe that translates into double-digit booking growth. The exact timing of when we get the bookings, when they turn into revenue, is a little bit less certain. We do believe that it will be more back-end loaded from a revenue perspective just overall. We think that's pretty clear from what we're hearing from test companies as well. And so, you know, it depends exactly on when you get the bookings and when they want the systems.

Pretty clear across what we're hearing from tests companies as well.

And so you know it it depends exactly and when you get the bookings and when they want the systems, but I think we're the expectation would be revenue would grow a little bit less than the double digit bookings.

Okay. Thank you and then for my second question I'd like to do kind of a two parter, you know where <unk>.

Anthony Ambrose: But I think the expectation would be revenue would grow a little bit less than the double-digit bookings. Okay, thank you. And then for my second question, I'd like to do kind of a two-parter.

With regard you you guys have talked a lot in the past about growth coming from <unk> and you know we're seeing some some headwinds in the news about <unk> some of the manufacturers backing off of any production.

Anthony Ambrose: You know, with regard to growth coming from EVs, and, you know, we're seeing some headwinds in the news about EVs, some of the manufacturers backing off of EV production. And, you know, we're also hearing headlines about China, the recovery in China is being very slow, and the economy is still not really hitting on all cylinders. So, you know, kind of tying those two things together, you know, can you just talk about what gives you the confidence in light of those headwinds to come to the table with pretty decent booking growth guidance just in terms of the overall market and just give us a sense of what's going on and, you know, what's fact and what's fiction, I guess. So, you know, David, it's interesting. I think it was a pretty rough morning for the EV guys.

And you know I. We're also hearing headlines about China, you know recovery in China being very slow in the economy, yeah still not really hitting on all cylinders. So yeah.

10 of time those two things together you know can you just talk about what gives you the confidence in light of those headwinds you know to come you know to come to the table with with pretty decent booking growth guidance just in terms of.

The overall market and just give us a sense of you know, what's going on and and and you know what what what.

What what's fact and what's fiction I guess [laughter]. So you know David It's interesting I think it was a pretty rough morning for the E Bay guys I happened to turn on the business News this morning, and I think.

Anthony Ambrose: I happened to turn on the business news this morning. And I think, to maybe overuse a metaphor, they were backing up the bus over the EV guys this morning, except, of course, for Tesla, and, of course, for BYD and maybe some of the other leaders. I also read that in the Chinese market, they cut prices pretty sharply, which is maybe not as great for them but good for us because that should stimulate demand. I'm always a little nervous about comparisons in China this time of year because the Chinese New Year is in a different month this year than it was last year, and it'll be like having Christmas shift from December to January and then wondering why your comparisons year over year were distorted. So I'm gonna form a firsthand opinion.

Maybe overuse of metaphor. They were they were backing up the bus over the the E V guys. This morning.

Except of course for Tesla in except of course for B Y D and maybe some of the other other leaders I also read that the Chinese market they'd cut prices pretty sharply.

You know, which is you know maybe not as great for them, but good for us because that should stimulate demand.

I'm always a little nervous on comparisons in China. This part of the year because the Chinese new year is in a different months this year than it was last year.

And you know be like having Christmas shift from December to January and then wondering why your comparisons year over year were distorted so I'm going to have a form of first hand opinion, we'll see you know directly on the ground, but we see people in China continuing to buy systems, we see people in China and automotive continuing to.

Anthony Ambrose: We'll see directly on the ground, but we see people in China continuing to buy systems. We see people in China and the automotive industry continuing to buy service and consumables and things like that. You know, I don't know what to tell you other than what we see from our customers and, you know, there's continued business in the market there. The other thing that I want to mention is... EVs are one leg of the five legs that we see as driving growth overall in automotive. We've talked a lot about them, and one of the reasons we like EVs is because they also have a lot of the new advanced driver assist systems or a lot of the new IBI platforms that tend to consume a lot of programming. But you don't need to be an EV to have those new systems in there. And there's been no talk of slowing down advanced driver assist or active safety. There's been no talk of, you know, let's cut back on the features in our infotainment platforms in the car. Quite the opposite, in fact.

By service and consumables and things like that so.

You know I I don't know what to tell you other than we see what we see from our customers and you know there's continued business in the market there the.

The other thing that I want to mention is.

E V R. One leg of the five legs that we see as driving growth overall in automotive.

We've talked a lot about them.

One of the reasons, we like vs is because they also have a lot of the new advanced driver assistance systems or a lot of the new Ivy I platforms tend to consume a lot of programming.

[noise], but you don't need to be an easy to have those new systems in there.

And there's been no talk of of slowdown in advanced driver assist or active safety.

There's been no talk of you know, let's cut back on the features in our infotainment platforms in the car quite.

Quite the opposite.

Anthony Ambrose: And so, again, when you look at everything and you look at our sales funnel, which includes automotive globally, as well as industrial, as well as programming centers, you know, we like what we see in our funnel and that's motivated us to, you know, make the predictions we're making today. Thanks, guys. Very helpful. Appreciate it. The next question comes from Kevin Garrigan with West Park Capital. Please go ahead.

And so.

Again, when you look at everything and they look at our sales funnel, which includes automotive globally as well as industrial as well as programming centers. You know, we we like we see on our final and that's motivated us to.

You know make the the predictions were making today.

Thanks, guys very helpful. I appreciate it.

The next question comes from Kevin Garrigan with less Park capital. Please go ahead.

Kevin Garrigan: Yeah, hey Anthony, hey Jerry, good afternoon, and congratulations on the results. Thanks for the first question. Looking, looking at the IOT market centrics, I think in the past you, Anthony, you had noted that you were early to the security market. In 2023, it seemed like things were kind of picking up steam with centrics, you know, doubling revenues. Are things now kind of starting to play out as you had originally imagined? Or are we still kind of early in the process?

Yeah, Hey, Anthony Hey, Jerry Good afternoon, and congrats on the results. Thanks for your first question you know.

Looking.

Looking at the Iced tea market Sentrix I think in the past you. Anthony you had noted that you were early to to the security market too.

2023, it seemed like things were kind of picking up steam with Sentrix doubling revenues are things now kind of starting to play out as you had originally imagined or are we still kind of early in the process.

You know I.

Anthony Ambrose: You know, I think we're in a situation where we're happy with the traction that Centrix is gaining. It's obviously, as we've said multiple times, it's taken us a lot longer. But the fundamental fact, the belief we have is that, and we've said this before, you know, ten years from now, you won't be able to buy a microcontroller that doesn't have security on it, and that's $30 billion with a B unit mark. And so what we've done is we've made some investments in the platform. Those are largely complete at the platform level.

I think we're.

We're in a situation, where we're happy with attraction that centrex is gaining it's obviously, we've said multiple times, it's taken us a lot longer but the.

The fundamental facts the belief we have is that we.

We've said this before you know 10 years from now you won't be able to buy a microcontroller that doesn't have security on it.

And that's a 30 billion with a b unit market.

And so what we've done is we've made some investments in the platform. Those are largely complete at a platform level, we still make investments to support new devices and add new features and capabilities for customers.

Anthony Ambrose: We still make investments to support new devices and add new features and capabilities for customers. But what we need to do now is just continue to find new customers and help them understand the benefits of Centrix. Some of these customers will be new to us, and some of these customers will come to us from our partners that have programming centers. And some of the customers will be well known to us that want to add Centrix capability to systems they already have. But I'm not going to call it an inflection point yet. But, you know, 150% growth year over year doesn't suck. Yeah, no, that's kind of.

But what we need to do now is just continue to go find new customers help them understand the benefits of Sentrix. Some of these customers will be new to us. Some of these customers will come to us from our partners that have programming centers and some of the customers will be well known to watch that want to add sentrix capability to systems. They already have.

I'm not gonna call, an inflection point, yet, but you know <unk>.

50 per cent growth year over year doesn't suck.

Yeah, no that that's kind of.

I forget the call around that.

Anthony Ambrose: And just as a follow-up, so, you know, we're now two months into 2024, and, you know, you noted a few tailwinds in your preparation. What kind of gets you most excited and what keeps you up at night as you look out kind of the rest of the year? What gets me excited is looking at our sales funnel and, again, at the opportunities we have across Automotive, Industrial, and Programming Center. What keeps me up at night is... you know, will people just be in a situation where the world is a lot messier place than it already is?

Okay, and just as a as a follow up so you know we're not two months into 2024 and you know you noted a few a few.

Kind of in in your prayer.

You know what kind of get the most excited and what keeps you up and as he looked out the rest of the year.

You know what what.

What gets me excited is looking at our sales funnel.

And looking at again at the opportunities we have across automotive industrial and programming center, what keeps me up at night is.

You know will will people just you know be in a situation.

<unk>, where the world is a lot messier place than it already is.

Anthony Ambrose: We don't have any control over that. Obviously, if the world had a serious breakdown of global supply chains, that would impact us; it would impact everybody. You know, we're much more resilient than we were before by design, and so you know we're doing what we can to insulate ourselves, and as long as the world stays reasonably stable, i.e., about where it is right now, we think we'll be fine. Yep. Got it. I got it.

We don't have any control over that.

Obviously, if if the world has a serious breakdown of global supply chains that would impact us would impact everybody.

You know we're much more resilient.

Than we were before by design.

And so you know, we're we're doing what we can to insulate ourselves and as long as the world's stays reasonably stable.

I E about where it is right now we think will be fine.

Yup got it got it okay perfect. Thank God.

Kevin Garrigan: Okay. Perfect. Thanks, guys. The next question is from Paul Xavier with Devon Capital. Please go ahead.

The next question is from pose the air with Devin Capital. Please go ahead.

Paul Xavier: Hello, thanks for taking my call. I think some of it was already answered by the first individual, but you read all the time, as you said, about the EV industry, the growth, the changes, the marketplace, and it seems like every day there's new information out there from the companies that are in it or the companies that supply it. So even companies like Ford are talking about China's EV industry being the biggest competition. So with them wanting to expand the Chinese market to Mexico, Latin America, and other markets, is there any more color you can provide from what you said earlier about just your operating position and where you see this growing from an automotive electronics standpoint? Well, Paul, thanks for the question. I have a similar opinion to what I think the Ford CEO has mentioned and others have mentioned, that the I think their biggest threat in the Americas region is probably from very low-cost imported electric vehicles from China.

[noise] Hello, Thanks for taking my call I think some of it was already answered that with the first individual but I. You know you read all the time as you said about the the industry the growth the changes the market place and it seems like every day this new.

Information out there from the companies that are in answering the company to supply. It you know so even companies like <unk> don't you know the Chinese [laughter].

E B industry being.

The biggest competition, so with them wanting to expand the Chinese to Mexico, Latin America and.

In other markets does this you know is there any more color you can provide from what you said earlier about just your operating positioning.

There you see this growing from an automotive electronic standpoint.

Paul Thanks to the question I have a similar opinion to what I think the the Ford C. E. O has mentioned and others have mentioned that the.

Their biggest threat.

In in the Americas region is probably from very low cost imported electric vehicles from China.

Anthony Ambrose: Now, for us, that's partially a threat, it's partially an opportunity. We believe we're number one in China for supplying the automotive electronics industry because we've had a focused strategy to do that for a decade. And as those companies grow and expand, we want to be in a position to grow and expand with them. We're a good supplier to the global electronics industry for the automotive industry, period. And so, you know, as it goes forward, I think you'll see a lot of change in where and how cars are supplied, especially in what used to be known as emerging markets, Mexico, Eastern Europe, Africa, and Southeast Asia.

Now for us that's partially a threat, it's partially an opportunity you know we believe we're number one in China on supplying the automotive electronics industry.

Because we've had a focused strategy to do that for a decade.

And as those companies grow and expand we wanna be in a position to grow and expand with them.

We're a good supplier to the global electronics.

Industry for automotive period and.

And so you know as it goes forward.

I think you'll see a lot of change in.

Where and how cars are supplied especially in what used to be known as emerging markets, Mexico, Eastern Europe Africa, South East Asia.

Anthony Ambrose: And, you know, our goal is to be the supplier of choice and programming for the auto industry wherever it is. Great. Excellent. Thank you. The next question is from David Kanen with Kanen Wealth Management. Please go ahead. Hi Anthony. Jerry, thanks for taking my questions. The first question is on Centrix.

And you know our goal is to be the supplier of choice and programming for the auto industry wherever it is.

Alright excellent. Thank you.

The next question is from David Canaan with came in wealth management. Please go ahead.

Hi, Anthony.

Jerry Thanks for taking my questions first.

First question is on the sand tricks.

Do you have a line of sight.

David Kanen: Do you have a line of sight on the ramp this year with various design wins and customers that you already have? And can that business get to a seven-figure fund rate in excess of a million a year exiting this year? Hi Dave.

Ramp.

Here.

Various design wins and customers that you already have and cannot business get into a seven figure run rate in excess of a million dollars a year exiting this year.

Hi, Dave Thanks for the call, we don't breakout centric separately as you know we break it out with our.

Anthony Ambrose: Thanks for the call. We don't break out Centrix separately. As you know, we break it out with our software services and Centrix line, which grew substantially during the year. So I'm not going to give a separate Centrix forecast. I think if you look at where you would need to get to have the software and pay-per-use get to a million dollars, That's not out of the question.

Software services, and Centrex line, which grew substantially during the year. So I'm not gonna give a separate centrex forecast I think if you look at.

You know, where you would need to get to have the software and pay per use get to a million dollars.

That is that's not out of the question I think this year would be certainly more aggressive than we're forecasting.

Anthony Ambrose: I think this year would be more aggressive than we're forecasting. But the concept is to get this to the point where you can scale the platform to support that kind of volume, and, you know, just put it into scale. We have about 485 data programming systems in service around the world, which represent, you know, roughly listed capacity of about a billion and a half units a year of installed base capacity.

But the concept is to get this to the point, where you can scale the platform to support that kind of volume.

And you know at.

Just to put it in this scale.

We have about 485 data programming systems in service around the world.

Which represent at you know roughly listed capacity about a billion and a half units a year of installed base of capacity.

Anthony Ambrose: And so that, in and of itself, is more than enough to get you, by an order of magnitude or more, a seven-figure centric specificity. So the question is not, you know, can we get there? The question is, how fast will the world convert to security overall, and then, with a subset of that, how fast will they be converting to, you know, our way of doing it, which is central? And the TAM that we're going after is 30 billion units of microcontrollers. It's not going to happen this year, OK, but in a 10-year period, as I mentioned, I just don't see how microcontrollers are sold without security deeply embedded in them.

And so that ended up itself is more than enough to get you by an order of magnitude or more a seven figure sentrix business.

So the the question is not.

You know can we get there. The question is how fast will the world convert to security overall, and then with a subset of that how fast will they be converting too you know our way of doing it which is centrex.

And the task.

Going after is 30 billion units of Microcontrollers, it's not gonna happen. This year, okay, but in a 10 year period as I mentioned I don't I, just don't see how microcontrollers are not sold without security deeply embedded in them.

David Kanen: Okay, and then my follow-up is on our expense structure. I believe last quarter you talked about looking at ways to bring OPEX down, and I know Jerry was, I'm getting his feet wet, but at this point, your prepared remarks, honestly, as a shareholder, I don't think they're sufficient. You're saying that you expect operating expenses to be similar to down moderately for 2024. I don't think that's

Okay, and then my follow up is Ah.

On our expense structure I believe last quarter, you talked about looking at ways to bring opex down and I know Jerry was just kind of getting his feet wet but.

His point your prepared remarks honestly as a shareholder I don't think there are sufficient like you were saying that you expect operating expenses.

Alert to doubt moderately for 2024, I don't think that's sufficient I mean, we earn $144000.

David Kanen: We earned $144,000 this quarter. In order to have a successful return for shareholders, we need to be printing money. 8, 10, 12, 15 cents again like we've done in the past. So my question is, what is being done about looking at every OPEX expenditure that we are making right now, and can we get to a savings of two million dollars a year? Because otherwise, really, barring, you know, more than 10% growth, we're just never going to get there to where we have a successful stock because we're not going to, you know, we're not going to earn enough to.., you know, be an attractive investment for shareholders. So if you could comment on that, and then I just wanted to know what you did in adapter sales for the quarter. You could hit that as well? Thank you.

Order in order to have a successful.

Return for shareholders, we need to be printing.

810, 12, 15 cents again like we've done in the past. So my question is.

What is being done about looking at every opex bandage or that we are making right now and can we get to a savings of $2 million a year.

Because otherwise really boring you know more than 10% growth would just never gonna get there to where we have a successful stop Ah because we're not that we're you know.

We're not gonna earn adopt to.

Be an attractive investment Ah.

For for shareholders. So if you could comment on that and then I and then I just wanted to know what you did and adapter sales for the quarter.

That is well thank you.

Jerry: I can maybe give mixed comments regarding the expense side of things. Number one, first and foremost, as we look into 2024, our primary objective and first objective is to cover what we anticipate to be increases from an inflation perspective. So we're going to have higher expenses associated with revenue growth; we're going to have higher expenses associated with compensation, and so forth. So the first order of business is we've got to find operating efficiencies to cover that. Number two, the next focus is really on improving the bottom line, which is a function of both operating expenses as well as gross margin improvement. And so we've got initiatives underway to basically look at the rest of the P&L in terms of opportunities to improve performance.

I I think that maybe it didn't make comments regarding the expense side of things Ah number one first and foremost as we look into 2024.

Primary objective in first objective is to cover what we anticipate to be increases inflation.

Inflation perspective, so wherever I have higher expenses associated revenue growth, we're gonna have higher expenses associated with compensation and so forth. So first order of business is we've got to find operating efficiencies to cover that.

Number two.

The next focus is really on improving bottom line, which is a function of both operating expenses as well as gross margin improvement and so we've got initiatives underway to basically look at the rest of the P&L in terms of opportunities improve.

That performance so examples material cost reduction.

Jerry: So, examples, material cost reduction, logistics improvement, lower inventory, and the associated impact on obsolescence and carrying costs. All those initiatives will help us improve the gross margin line. We made a three-point improvement this past year. Some of it is a function of volume, but a lot of it is also a function of operational efficiencies, and that translates to improved profitability.

Logistics improvement Ah.

Lower inventory and the associated impact on Ah obsolescence carrying costs all of those initiatives will help us improve the gross margin life.

We made eight three point improvement this past year. Some of it is a function of volume, but there's a lot of it is also a function of operational efficiency and that translates to improve profitability on the Opex line Ah separate from gross profit there's opportunities there as well.

Jerry: On the OPEX line, separate from gross profit, there are opportunities there as well that the team is looking at. So we're going to be looking across the whole P&L, looking at initiatives that can help drive improvement, and ultimately, we're going to see that fall through. We had a nice 42 percent fall in net income from the growth in revenue, and our goal is to maintain that and hopefully improve that with these initiatives that basically cut across the overall P&L. So, Dave, I'll just echo the message. I think there's more going on than maybe we're willing and able to talk about on an earnings call right now, but, you know, we understand your point. Okay, and what were adapter sales for the quarter? Adapter sales, oh, Thank you.

Soon as looking at so we're going to be looking at across the whole P&L looking at initiatives that can help thrive improvements and ultimately we're gonna see that fall through we had a nice 42 per cent fall through on net income from the Brooklyn revenue.

And I'll go is to maintain that and hopefully improve that with these initiatives sufficient cut across the overall piano.

So Dave I'll, just I'll, just echo hear the message I think there's more going on and maybe we're we're willing and able to talk about it and Ah earnings call right now, but you know we understand your point.

And what what was the adapter sales for the border.

Adapter sales Oh.

David Kanen: Thank you. Thank you. Thank you. Tell you what, while Jerry's looking that up, we'll go ahead and take the next call, and we'll put the answer into the next call. Thank you. Again, if you have a question, please press star then 1. The next question comes from Michael Wetherington with Wild Glen Ventures. Please go ahead.

[noise] tell you what while Jerry's looking that up we will go ahead and take the next call and we'll we'll put the answer into the into the next call.

Thank you.

Again, if you have a question. Please press Star then one.

The next question comes from Michael Wetherington with Wild Glen Ventures.

Please go ahead.

Michael Wetherington: Hi, thanks for taking my question. So if you look at approximately kind of a four-year cycle, it appears that your stock appreciates when it's trading at an EV-to-sales ratio that's as kind of low as where it is today. So I wanted to kind of get your idea of what you think about that, what it says about your valuation. Well, Michael, thanks for the question. First, let me get back to Dave.

Hi, Thanks for taking my question. So if you look at approximately kind of a four year cycle. It. It it appears that your stock appreciates when it's trading at a easy to sales ratio. That's kind of low is where it is today and the <unk> you know can I get your idea of what you think about that what's it say about telling your evaluation.

[noise] Oh, Michael and thanks for the question first let me get back to Dave. So, we did 2 million and adapters in Q4 and $8.1 million for the year.

Anthony Ambrose: So we did 2 million adapters in Q4 and 8.1 million in Q4. So, you know... For those of you that are somewhat technical in nature in your analysis, and I guess at least most of you do some work there, you know, we get questions a lot looking at the enterprise value to revenue ratio, and it seems to follow the four-year semiconductor cycle, not necessarily in the ways that you would think it should, but it seems to be on a four-year cycle. We hit one of those bottoms recently. You know? I don't know what it portends for the future, but it's certainly a case where, you know, I'd want to at least try and understand what's going on there.

So you know.

For those of you that are somewhat technical in nature on your analysis, and then I would I guess at least most of you do some some work there you know we get questions. A lot you know looking at the enterprise value to revenue ratio.

And it seems to follow the four year semiconductor cycle not necessarily in the ways that you would think it should but it seems to be on a four year cycle.

We hit one of those bottoms recently, you know I don't know what it portends for the future, but it's certainly a case, where you know I'd I'd want to at.

At least try and understand what's going on there.

Anthony Ambrose: And I think the other interesting tidbit, Michael, I heard this morning on the Business News Channel was the historic divergence between the multiples paid for large cap stocks and the multiples paid for small cap or micro cap stocks in the market right now. But I'm not a technical analyst. I think you guys are probably a lot smarter on this than I am, but it's just an interesting setup in terms of, you know, if you believe in reversion to the mean, there might be some interesting things going on there. Yeah, fair point there.

And I think the other other interesting tidbit, Michael I heard this morning again on the business News channel was the historic divergence between the multiples paid for large cap and the multiples paid for small cap or microcap in the market right now.

I'm not a technical analyst I think you guys are probably a lot smarter on this than I am but it's just an interesting set up in terms of you know if you. If you believe in reversion to the mean there might be some interesting things going on there.

Yeah Fair point, there also follow up just looking at your castle, the generation and the and the strong operating leverage as you exited twenty-three and your outlook for for 24 with the exception of you know the one timers in Q1, you talked about what is the <unk>.

Michael Wetherington: Also, follow up, just looking at your cash flow generation and the strong operating leverage as you exited 23 and your outlook for 24, with the exception of, you know, the one-timers in Q1 you talked about, what are the plans for excess cash going forward, and is IBAC maybe one of those options? So I think on just the, we get that question a lot. We need a certain amount of cash to manage the business, the excess cash, at least right now, and I guess we're doing a better job since Dave did not bring up this question on the call about interest income, but we're actually getting paid for our cash, which is good. We're constantly looking for ways to deploy that cash for the maximum possible return for shareholders.

Plans for excess cash going forward and and is a buyback maybe one of those options.

So I think on it just the we get that question a lot we.

We we need a certain amount of cash to manage the business the excess cash at least right now and I guess, we're doing a better job since Dave did not bring up this question on the call around interest income or actually get paid for our cash which is which is good.

We're constantly looking for ways to deploy that cash or maximum impossible return for shareholders. We've said we're interested in you know can we do Ah accretive M&A, obviously be pretty small we we have our our radar up nothing's come across the radar yet that we can you know.

Michael Wetherington: We've said we're interested in, you know, can we do accretive M&A, obviously be pretty small. We have our radar up. Nothing's come across the radar yet that we can, you know, get to our liking, but we're always looking. We've done buybacks historically in the past. Given the increased cost of capital right now, I don't see a buyback in the short-term future, based on, again, what the real cost of capital is and the potential to find something.

Get to our liking, but we're always looking we've done buybacks historically in the past given the increased cost of capital right now I don't see a buyback in the short term future.

Based on again, what the real cost of capitalism.

And the potential to find something.

Anthony Ambrose: In the meantime, we'll look at our Finance team to make sure that the surplus cash that we don't need for the day to day working capital in each of our foreign subsidiaries, as well as in the United States, is deployed effectively to earn some interest for the government. Thank you. Ladies and gentlemen, thank you. 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. I'd like to thank everyone that had a question today. Given that there are no more questions, I will now close this earnings call. Thank you very much. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

Accretive for us in the meantime, we'll look at our finance team to make sure that the surplus cash that we don't need for the day to day working capital in each of our foreign subsidiaries as well as the United States is deployed effectively to earn some interest income.

Alright, thank you.

Ladies and gentlemen, thank you. 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 I'd like to thank everyone that had a question today.

Given that there are no more questions.

I know a close this earnings call. Thank you very much.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.