Q2 2024 Data I/O Corp Earnings Call
Good afternoon and welcome to the Data I-O 2nd Quarter 2024 Financial Results Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions.
Operator: All participants will be in a listen-only mode. 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, Director of Investor Relations. Please go ahead.
Please note this event is being recorded. I would now like to turn the conference over to Jordan Darrow, Investor Relations. Please go ahead.
Jordan M. Darrow: Thank you, Operator, and welcome to the Data I-O Corporation's second quarter 2024 Financial Results Conference call. With me today are the company's President and CEO, Anthony Ambrose, and Chief Financial Officer and Vice President, Gerry Ng.
Jordan M. Darrow: Thank you, Operator, and welcome to the Data I-O Corporation's second quarter 2024 Financial Results Conference call. With me today are the company's President and CEO , Anthony Ambrose.
Jordan M. Darrow: Before we begin, I'd like to remind you 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 partnerships, and any other statements that may be construed as a prediction of future performance or events are forward-looking statements, which involve known and unknown risks, uncertainties, and other factors which may cause actual results to differ materially from those expressed or implied by such statements. These factors include uncertainties as to the impact on 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, part shortages, pricing, and other activities by competitors, and other risks, including those described from time to time in the company's filing on Forms 10-K and 10-Q with the Securities and Exchange Commission, press releases, and other communications.
Speaker Change: and Chief Financial Officer and Vice President Gerry Ng.
Speaker Change: Before we begin, I'd like to remind you that statements made in this conference call concerning future revenues
Speaker Change: Results from operations, financial position, markets, economic conditions, supply chain expectations.
Jordan M. Darrow: estimated impact of tax and other regulatory reform, product releases, new industry partnerships, and any other statements that may be construed as a prediction of future performance or events are forward-looking statements.
Jordan M. Darrow: which involves known and unknown risks, uncertainties, and other factors which may cause actual results to differ materially from those expressed or implied by such statements.
Jordan M. Darrow: These factors include uncertainties as to the impact on global and geopolitical events, international trade regulations, order levels for the company, and the activity level of the automotive and semiconductor industry overall.
Jordan M. Darrow: Ability to record revenues based on the timing of product deliveries and installations.
Jordan M. Darrow: 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, press releases, and other communications.
Jordan M. Darrow: The accuracy and completeness of forward-looking statements should not be unduly relied upon. Data I is under no duty to update any forward-looking statements. Now, we would like to turn the call over to Anthony Ambrose, President and CEO of Data I-O.
Data.io: The accuracy and completeness of forward-looking statements should not be unduly relied upon. Data I-O is under no duty to update any forward-looking statements.
Data.io: And now we would like to turn over the call to Anthony Ambrose, President and CEO of Data I-O.
Anthony Ambrose: Thank you very much, Jordan. I'll begin my formal remarks by addressing our second quarter 2024 financial and operational performance. And then I'll turn over the call to Gerry Ng for a more detailed look at the numbers. As we mentioned in the release, bookings and revenue were soft in Q2 and below our expectations. This wasn't monolithic, however, as we saw divergent business conditions across our sales regions and various markets. Throughout the first half of the year, Asia and EMEA sales regions were performing ahead of expectations, while the Americas were substantially below plan.
Anthony Ambrose: By market, we saw strength in programming centers, industrial IOT, and EMS, and weakness in the automotive sector. We continue to have strong traction in new customer acquisition, with 8 new customer and location wins in Q2, for a total of 13 wins to date. Most of these were in the IoT industrial and EMS markets supporting edge AI applications.
Anthony Ambrose: Well, thank you very much, Jordan. I'll begin my formal remarks by addressing our second quarter 2024 financial and operational performance, and then I'll turn over the call to Jerry Ng for a more detailed look at the numbers.
Gerry Ng: As we mentioned in the release, bookings and revenue were soft in Q2 and below our expectations.
Anthony Ambrose: This wasn't monolithic, however, as we saw divergent business conditions across our sales regions and various markets.
Anthony Ambrose: Throughout the first half of the year, Asia and EMEA sales regions are performing ahead of expectations as the Americas have substantially below plan.
Anthony Ambrose: By market, we saw strength in programming centers, industrial IOT and EMS, and weakness in the automotive sector.
Anthony Ambrose: We continue to have strong traction in new customer acquisition, with eight new customer and location wins in Q2, for a total of 13 year to date.
Anthony Ambrose: Most of these were in the IoT industrial and EMS markets supporting Edge AI applications. This has contributed to our bookings of $13.7 million in the first half of the year, increased slightly from $13.3 million over the prior year period.
Anthony Ambrose: This has contributed to our bookings of $13.7 million in the first half of the year, which increased slightly from $13.3 million in the prior year period. At the same time, we won new business, we saw significant push-outs from existing automotive customers who were planning capacity additions, primarily in North America. While system capacity demands slowed, we still saw good bookings for adapters, software, and services. Together, they reached 49% of our revenue year to date. Included in that is our Centrix security provisioning platform, and that set a record for units processed by our programming center partners in the second quarter.
Anthony Ambrose: At the same time we're winning new business, we saw significant push-outs from existing automotive customers who were planning capacity additions, primarily in North America.
Anthony Ambrose: America. Well, system capacity demands slowed; we still saw good booking for adapters and software and services. Together, they reached 49% of our revenue year to date. Included in that is our centric security provisioning platform, and that's set a record for units processed by our programming center partners in the second quarter. Moving along to spending, we made significant progress on spending controls, process efficiencies, and reducing direct product costs. Gerald will go into more details on the spending side, but we're pleased with the progress made in Q2. We're focusing on long-term structural efficiency improvements, including deploying AI and machine learning capabilities and other tools to accelerate these efficiency gains.
Anthony Ambrose: While system capacity demand slowed, we still saw good bookings for adapters and software and services.
Anthony Ambrose: Together, they reached 49% of our revenue year-to-date. Included in that is our Centrix security provisioning platform, and that set a record for units processed by our programming center partners in the second quarter.
Anthony Ambrose: Moving along to spending, we made significant progress on spending controls, process efficiencies, and reducing direct product costs. Gerry will go into more detail on the spending side, but we are pleased with the progress made in Q2. We're focusing on long-term structural efficiency improvements, including deploying AI and machine learning capabilities and other tools to accelerate these efficiency gains. Meanwhile, our balance sheet remains very strong. We moved cash from China to the USA in Q2, and we paid the associated dividend taxes. Having the cash in the USA gives us more flexibility on the balance sheet, as well as an opportunity to earn more on our cash.
Anthony Ambrose: Moving along to spending, we made significant progress on spending controls, process efficiencies, and reducing direct product costs. Gerry will go into more details on the spending side, but we are pleased with the progress made in Q2.
Gerry Ng: We are focusing on long-term structural efficiency improvements, including deploying AI and machine learning capabilities and other tools to accelerate these efficiency gains.
Anthony Ambrose: Our balance sheet remains very strong. We moved cash from China to the USA in Q2 and paid the associated dividend taxes. Having the cash in the USA gives us more flexibility on the balance sheet, as well as an opportunity to earn more on our cash.
Gerry Ng: Our balance sheet remains very strong. We moved cash from China to the USA in Q2 and paid the associated dividend taxes. Having the cash in the USA gives us more flexibility on the balance sheet as well as an opportunity to earn more on our cash.
Anthony Ambrose: Looking at Q3 and Q4, all of us are wondering when automotive demand will return. We still see long-term secular growth in electronics content in cars and view the recent softness as inventory corrections and a change in mix from EV to hybrid and internal combustion engine models. Automotive nameplates are recalibrating or at least taking a measured approach to their investments in EV development and related capital investment. An example of this is Ford moving their Super Duty production to an assembly plant that was originally meant for EV trucks to Super Duty trucks, which is an internal combustion engine product. Political uncertainty around U.S. policy, as well as hopes for an interest rate reduction going forward, may also be holding back capital additions in our customer base.
Anthony Ambrose: Looking at Q3 and Q4, all of us are wondering when automotive demand returns. We still see a long-term secular growth in electronics content in cars, and view the recent softness as inventory corrections and a change in mix from EV to hybrid and internal combustion engine models. Automotive name plates are recalibrating or at least taking a measured approach to their investments in EV development and related capital investments. The example of this is forward moving their super-duty production to Oakville Assembly Plant that was originally meant for EV trucks to super-duty trucks, which is an internal combustion engine product.
Speaker Change: Looking to Q3 and Q4, all of us are wondering when automotive demand returns. We still see a long-term secular growth in electronics content in cars and view the recent softness as inventory corrections and a change in mix from EV to hybrid and internal combustion engine models.
Speaker Change: Automotive nameplates are recalibrating or at least taking a measured approach to their investments in EV development and related capital investments.
Speaker Change: The example of this is Ford moving their Super Duty production to Oakville Assembly Plant that was originally meant for EV trucks to Super Duty trucks, which is an internal combustion engine product.
Anthony Ambrose: Political uncertainty around U.S. policy as well as hopes for an interest rate reduction going forward may also be holding back capital additions in our customer base. Recent statements by automotive OEMs, Tier 1's, equipment suppliers, and semiconductor companies do not indicate a snapback in automotive demand in Q3, however. Our historical experience shows auto-electronics demand move sharply once they decide to add capacity. We have the capacity in our manufacturing plant in place to move quickly once demand returns. We also have the right technology for our automotive customers as they begin to add more capacity. This includes recent new releases for our UFS programming technology, as well as entry-level programming trends.
Speaker Change: Political uncertainty around U.S. policy, as well as hopes for an interest rate reduction going forward, may also be holding back capital additions in our customer base.
Anthony Ambrose: Recent statements by automotive OEMs, Tier 1s, equipment suppliers, and semiconductor companies do not indicate a snapback in automotive demand in Q3, however. Our historical experience shows auto electronics demand moves sharply once companies decide to add capacity. We have the capacity in our manufacturing plant in place to move quickly once demand returns. We also have the right technology for our automotive customers as they begin to add more capacity. This includes recent new releases for our UFS programming technology, as well as entry-level programming trends.
Speaker Change: Recent statements by automotive OEMs, Tier 1s, equipment suppliers, and semiconductor companies do not indicate a snapback in automotive demand in Q3, however.
Speaker Change: Our historical experience shows auto electronics demand moves sharply once they decide to add capacity.
Speaker Change: We have the capacity in our manufacturing plant in place to move quickly once demand returns.
Speaker Change: We also have the right technology for our automotive customers as they begin to add more capacity. This includes recent new releases for our UFS programming technology as well as entry level programming trends.
Anthony Ambrose: Our focus will continue to be on the things we can control, such as attracting new customers, making continued progress on spending and cost controls, and being ready with the right products for customers as their capacity needs return. Despite the softness in North American automotive, there's still a significant amount of contractual backlog that's expected to be shipped and recognized as revenue in the second half of 2024. As we ship this backlog, we look forward to benefiting from the operating leverage in our model, especially given the progress made on managing costs and expenses. With that, I'll pass it over to Gerry Ng. Gerry? Thank you, Anthony. Thank you.
Anthony Ambrose: Our focus will continue to be on the things we can control, attracting new customers, making continued progress on spending and cost controls, and being ready with the right products for customers as their capacity needs return. Despite the softness in North American automotive, there's still a significant amount of contractual backlog that's expected to be shipped and recognized as revenue in the second half of 2024. As we ship this backlog, we look forward to benefiting from the operating leverage in our model, especially given the progress made on managing costs and expenses.
Speaker Change: Our focus will continue to be on the things we can control, attracting new customers, making continued progress on spending and cost controls, and being ready with the right products for customers as their capacity needs return.
Speaker Change: Despite the softness in North American automotive, there's still a significant amount of contractual backlog that's expected to be shipped and recognized as revenue in the second half of 2024.
Speaker Change: As we ship this backlog, we look forward to benefiting from the operating leverage in our model, especially given the progress made on managing costs and expenses.
Gerald Ng: With that, I'll pass it over to Jerry and Jerry. Thank you, Anthony, and good day to everyone. I look forward to all lining and elaborating on our recent financial performance in more detail. My comments today will focus on key points of interest for the second quarter of 2024, and our perspectives looking forward, including our progress on spinning efficiencies, unit cost reductions, and balance sheet management. Despite the current automotive market headwinds, Data I-O's financial condition remains strong at the end of Q2. He maintain a strong back log heading into the second half of 2024, a healthy balance sheet, and a lower operating cost structure, which will contribute to improve financial performance as the market's recover as Anthony commented on earlier.
Gerry Ng: Thank you, Anthony, and good day to everyone. I look forward to outlining and elaborating on our recent financial performance in more detail. My comments today will focus on key points of interest for the second quarter of 2024 and our perspective looking forward, including our progress on spending efficiencies, unit cost reductions, and balance sheet management. Despite the current automotive market headwinds, Data I-O's financial condition remains strong at the end of Q2.
Speaker Change: With that, I'll pass it over to Gerry Ng. Gerry? Thank you, Anthony, and good day to everyone. I look forward to outlining and elaborating on our recent financial performance in more detail.
Gerry Ng: We maintain a strong backlog heading into the second half of 2024, a healthy balance, and a lower operating cost structure, which will contribute to improved financial performance as the markets recover, as Anthony commented earlier. Despite the second quarter revenue shortfall, cash remained relatively steady at $11.4 million as of June 30th, down $559,000 from the $12 million at the end of Q1. Cash benefited from continued strong customer collections and lower operating expenses, which were offset by a $337,000 tax related to a $3.4 million cash dividend bepatriated from our China operation.
Gerry Ng: My comments today will focus on key points of interest for the second quarter of 2024 and our perspectives looking forward, including our progress on spinning efficiencies, unit cost reductions, and balance sheet management.
Gerry Ng: Accounts receivable at $3.3 million as of June 30th is maintaining a steady daily sales outstanding (DSO) at 55 days and very low credit loss exposure. Inventory at $6.7 million increased from $6.4 million from the beginning of the quarter on lower Q2 sales volume and anticipation of higher sales volume and backlog reductions for system deployments in the second half of 2024. Overall, networking capital at $17.6 million at the end of Q2 declined slightly from the $18.1 million at the end of Q1. However, the company continues to have no debt.
Speaker Change: Despite the current automotive market headwinds, Data I-O's financial condition remains strong at the end of Q2.
Speaker Change: We maintain a strong backlog heading into the second half of 2024, a healthy balance sheet.
Speaker Change: and a lower operating cost structure, which will contribute to improved financial performance as the markets recover, as Anthony commented on earlier.
Gerald Ng: Despite the second quarter of revenue shortfall, cash remain relatively steady at $11.4 million as of June 30th. Down, $559,000 from the 12 million at the end of Q1, cash benefited from continued strong customer collections and lower operating expenses, which were all set by a $337,000 tax related to a $3.4 million cash dividend, be patriated from our China operations. Accounts receivable at $3.3 million as of June 30th is maintaining a steady day sales outstanding, or DSO, at $55. And very low credit loss exposure. Inventory at $6.7 million increase from $6.4 million from the beginning of the quarter on lower Q2 sales volume, and anticipation of higher sales volume and backlog reductions for system deployments in the second half of 2024.
Anthony Ambrose: Despite the second quarter revenue shortfall, cash remained relatively steady at $11.4 million as of June 30th, down $559,000 from the $12 million at the end of Q1.
Anthony Ambrose: Cash benefited from continued strong customer collections and lower operating expenses, which were offset by a $337,000 tax related to a $3.4 million cash dividend bepatriated from our China operations.
Anthony Ambrose: Accounts receivable at $3.3 million as of June 30 is maintaining a steady Day Sales Outstanding, or DSO, at 55 days.
Anthony Ambrose: and very low credit loss exposure.
Anthony Ambrose: Inventory at $6.7 million increased from $6.4 million from the beginning of the quarter on lower Q2 sales volume.
Anthony Ambrose: and anticipation of higher sales volume and backlog reductions for system deployments in the second half of 2024.
Gerald Ng: Overall, networking capital at $17.6 million at the end of Q2 declined slightly from the $18.1 million at the end of Q1 2024. The company continues to have no debt. Moving to the income statement, second quarter revenue at $5.1 million was down 32% compared with $7.4 million from the prior year period, reflecting sluggishness in the America's region. And extended timing of our backlog conversion to shipments. Talking quarter bookings were $5.7 million on strong opportunity conversion in Asia and Europe, as anything indicated. Our consumables software and services at 49% of total year to day revenue have provided a steady base of recurring sales, helping offset the current cap-act system softness in the America's region.
Anthony Ambrose: Overall, networking capital at $17.6 million at the end of Q2 declined slightly from the $18.1 million at the end of Q1 2024. The company continues to have no debt.
Gerry Ng: Moving to the income statement, second quarter revenue at $5.1 million was down 32% compared with $7.4 million from the prior year period, reflecting sluggishness in the Americas region. Extended timing of a backlog conversion to shipment, Second quarter bookings were $5.7 million on strong opportunity conversion in Asia and Europe, as Anthony indicated, are consumables, software, and services at 49% of total year-to-date revenue, have provided a steady base of recurring sales helping offset the current CapEx system softness in the Americas region. Finally!
Anthony Ambrose: Moving to the income statement, second quarter revenue at $5.1 million was down 32% compared with $7.4 million from the prior year period.
Anthony Ambrose: reflecting sluggishness in the Americas region and extended timing of our backlog conversion to shipments.
Anthony Ambrose: Second quarter bookings were $5.7 million on strong opportunity conversion in Asia and Europe as Anthony indicated.
Speaker Change: Our consumables, software, and services, at 49% of total year-to-date revenue, have provided a steady base of recurring sales, helping offset the current cap-back system softness in the Americas region.
Gerald Ng: Finally, ending Q2 backlog at $5.4 million has increased by $2.6 million from the beginning of the year. Moving on to gross margins, Q2 was at 55.3 percentage points from the 2023 prior year level. Do largely to lower sales volume. However, our Q2 margins were two percentage points higher than the preceding Q1 2024 quarter from improved product mix and save low cost control F.
Gerry Ng: Ending Q2 backlog at 5.4 million has increased by 2.6 million from the beginning of the year. Moving on to gross margins, Q2 was at 55%, down 3 percentage points from the prior-year level, due largely to lower sales volume. However... Our Q2 margins were 2 percentage points higher than the preceding Q1. 2024 quarter, due to Improved Product Mix and Favorable Cost Control Effort. The improvement reflects ongoing initiatives to reduce material, manufacturing, and service costs. Product Value Re-engineering, Sourcing Optimization quality improvements, and process streamlining have all contributed to the overall improvement and sustainable impact. Similarly, I'd like to address the progress we have made on off-breeding.
Speaker Change: Finally, ending Q2 backlog at $5.4 million has increased by $2.6 million from the beginning of the year.
Speaker Change: Moving on to gross margins, Q2 was at 55%, down 3 percentage points from the 2023 prior year level, due largely to lower sales volume.
Speaker Change: However, our Q2 margins were two percentage points higher than the preceding Q1 2024 quarter from improved product mix and favorable cost control efforts.
Gerald Ng: Conference. The improvement reflects ongoing initiatives to reduce material, manufacturing, and service costs. Product value re-engineering, sourcing optimizations, quality improvements, and process streamlining have all contributed to the overall improvement and sustainable impacts. Similarly, I'd like to address the progress we have made on operating expenses. Second-quarter operating expenses were 3.3 million, down 886,000 or 21% from the prior year, and down 757,000 or 19% from the preceding quarter. Core personnel, facilities, IT, and other outside services costs declined through prioritization of critical initiatives and overall efficiency improvements. This lower and efficient cost structure has allowed the company to partially mitigate the current revenue decline and will contribute to improved financial performance when the overall market conditions and related systems shipments improve.
Speaker Change: The improvement reflects ongoing initiatives to reduce material, manufacturing, and service costs.
Speaker Change: Product Value Re-Engineering
Speaker Change: Sourcing optimizations, quality improvements, and process streamlining have all contributed to the overall improvement and sustainable impacts.
Speaker Change: Similarly, I'd like to address the progress we have made on operating expenses.
Gerry Ng: Second quarter operating expenses were $3.3 million, down $886,000 or 21% from the prior year, and Dow. 757,000, or 19% from the preceding quarter. Core personnel, facilities, IT, and other outside services costs declined through prioritization of critical initiatives and overall efficiency improvements. This lower and efficient cost structure has allowed the company to partially mitigate the current revenue decline and will contribute to improved financial performance when the overall market conditions and related assistance shipments improve.
Speaker Change: Second quarter operating expenses were $3.3 million, down $886,000, or 21% from the prior year.
Speaker Change: and Dow.
Speaker Change: $757,000 or 19% from the preceding quarter.
Speaker Change: Core personnel, facilities, IT, and other outside services costs declined through prioritization of critical initiatives and overall efficiency improvements.
Speaker Change: This lower and efficient cost structure has allowed the company to partially mitigate the current revenue decline and will contribute to improved financial performance when the overall market conditions and related assistance shipments improve.
Gerald Ng: The company incurred a net loss of $797,000 for Q2 compared to a net income of $300,000 in the second quarter of 2023. Again, they declined, due largely to lower revenue. A foreign tax expense for cash repatriated from China, which was partially offset by significantly lower operating expenses and higher interest income. A foreign reporting tax of $337,000 was incurred in China from a $3.4 million dividend pay from our China operations to a parent company in the US. This was undertaken to, number one, optimize the cash position and operate needs of each operation. Increase the interest earning potential of our overall cash holdings and ensure available liquidity in the US to support future strategic and operational initiatives.
Gerry Ng: The company incurred a net loss of $797,000 for Q2 compared to a net income of $300,000 in the second quarter of 2023. Again, the decline was due largely to lower revenue. A foreign tax expense for cash repatriated from China, which was partially offset by significantly lower operating expenses and higher interest income. A foreign withholding tax of $337,000 was incurred in China on a $3.4 million dividend paid from our China operations to a parent company in the U.S.
Speaker Change: The company incurred a net loss of $797,000 for Q2 compared to a net income of $300,000 in the second quarter of 2023.
Speaker Change: Again, the decline was due largely to lower revenue.
Speaker Change: A foreign tax expense forecasts repatriation from China.
Speaker Change: which was partially offset by significantly lower operating expenses and higher interest income.
Speaker Change: A foreign withholding tax of $337,000 was incurred in China.
Speaker Change: from a $3.4 million dividend paid from our China operations to a parent company in the U.S.
Operator: This was undertaken to, number one, optimize the cast position and operating needs of each operation, increase the interest earning potential of our overall cash holding, and ensure available liquidity in the U.S. to support future strategic and operational initiatives. Overall, we remain very solid financially, with a strong cash position, no debt, and the ability to navigate market opportunities and challenges. Looking ahead, our contractual backlog is expected to be shipped and recognized as revenue in the second half of 2024, as well as leveraging the progress we have made in managing costs that I've discussed earlier. That concludes my remarks for the second quarter of 2024. Operator, would you please start the Q&A process?
Speaker Change: This was undertaken to, number one, optimize the cast position and operating needs of each operation.
Speaker Change: increase the interest earning potential of our overall cash holdings.
Speaker Change: and ensure available liquidity in the U.S. to support future strategic and operational initiatives.
Gerald Ng: Overall, we've made very solid financially, we'll say strong cash position, no debt, and the ability to navigate market opportunities and challenges. Looking ahead, our contractual backlog is expected to be shipped and recognized as revenue in the second half of 2024, as well as leveraging the progress we had made in matching costs that have discussed earlier.
Speaker Change: Overall, we remain very solid financially, with a strong cash position, no debt, and the ability to navigate market opportunities and challenges.
Speaker Change: Looking ahead, our contractual backlog is expected to be shifted and recognized as revenue in the second half of 2024, as well as leveraging the progress we have made in managing costs that I've discussed earlier.
Gerald Ng: That concludes my remarks for the second quarter of 2024.
Operator: We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been answered and you would like to withdraw your question, please press star and then 2. At this time, we will pause momentarily to assemble our roster. The first question comes from David Kanen with Kanen Wealth Management. Please go ahead.
Speaker Change: That concludes my remarks for the second quarter of 2024. Operator, would you please start the Q&A process?
Operator: Operator, 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 touchdown phone. If you are using a speaker phone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star and then two.
Speaker Change: We will now begin the question and answer session. To ask a question you may press star then 1 on your touchtone phone.
Speaker Change: If you are using a speakerphone please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question please press star and then 2.
Operator: At this time, we will pause momentarily to assemble our roster.
Speaker Change: At this time, we will pause momentarily to assemble our roster.
David Kanen: The first question comes from David Cainin with Cainin Welch Management. Please go ahead. I get afternoon, guys. Thanks for taking my questions. Got a couple, and then I'll go back into Q. Jerry, good job on the reduction of expenses and the cost efficiencies, and I'm assuming there's a sustainable benefit to gross margins kind of go forward basis as volumes increase.
Speaker Change: The first question comes from David Kanen with Kanen Wealth Management. Please go ahead.
David Lawrence Kanen: Hi. Good afternoon, guys. Thanks for taking my question. I've got a couple, and then I'll go back into queue.
David Kanin: Hi. Good afternoon, guys. Thanks for taking my questions.
David Kanin: We've got a couple, and then I'll go back into queue. Gerry, good job on the reduction of expenses and the cost efficiencies, and I'm assuming...
Gerry Ng: Gerry, good job on the reduction of expenses and the cost efficiencies, and I'm assuming there's a sustainable benefit to gross margins on a go-forward basis as volumes increase. My first question is, in theory, if revenues were to increase, let's say, from $5 million to $7 million, with the various measures that you've taken in the cost of goods. Can gross margins get into the high 50s, or even 60%, based on significant volume increases?
Speaker Change: There's a sustainable benefit to gross margins on a go-forward basis as volumes increase. My first question is...
My first question is...
Speaker Change: In theory, if revenues were to increase, let's say, from $5 million to $7 million,
Speaker Change: With the various measures that you've taken in cost of goods,
Speaker Change: Can gross margins get into the high 50s, even 60%, based on significant volume increases?
Gerry Ng: Yes, I believe we can. Let me give you a good example. For our current quarter, our revenue was at $5 million, and our operating income was at a $400,000 loss. We typically get a 60% fall through on revenue, to the extent that we can maintain our efficient cost structure. We should see, again, a similar future, 60% fall through on revenue increases. So, correspondently, you know, as our revenue goes from 5 to 6 to 7, we should see a comparable and corresponding fall through to the bottom line. Yeah,
Speaker Change: All right.
Speaker Change: Yes, I believe we can.
Speaker Change: Let me give you a good example. For our current quarter, our revenue was at $5 million and our operating income was at $400,000 loss. We typically get a 60% fall through on revenue.
Speaker Change: to the extent that we can maintain our efficient cost structure.
Speaker Change: We should see again a similar future 60% fall through on revenue increases.
Speaker Change: So, correspondently, you know, as our revenue goes from 5 to 6 to 7, we should see a comparable and corresponding fall through to the bottom line.
Anthony Ambrose: bottom line. Yeah, the only thing I would add there, Dave, is Gerry's right. It just depends on the mix, the location of the revenue. As you know, we have different margin structures when we sell through distribution versus selling direct. So, just, you know, it assumes kind of a normal mix, and then I think...
Dave: Yeah, the only thing I would add there, Dave, is, you know, Gerry's right, it just depends on the mix, the location of the revenue. As you know, we have different margin structures and we sell through distribution versus selling direct. So, just, you know, it assumes kind of a normal mix and then I think...
David Lawrence Kanen: Okay, so the next question relates to that. And again, we don't know how much is going to be direct or through distributors, but assuming a normal mix, as you put it, what is the variable expense on the next million dollars of revenue? So let's say, for example, revenues were $6 million instead of $5 million. On that incremental million, what is the variable component? Is it 10%, 15%?
Dave: Comments stand?
Speaker Change: Okay, so the next question relates to that, and again, we don't know how much is going to be direct or through distributors, but assuming a normal mix, as you put it, what is the, Gerry, what is the variable expense
Dave: on the next million dollars of revenue. So let's say, for example, revenues were $6 million instead of $5 million. On that incremental million, what is the variable component? Is it 10%, 15%?
Anthony Ambrose: Yeah, so Dave, I'll interject into this. I think it's primarily going to be related to, obviously, sales expenses. And that's the primary variable component. And again, if we're in a situation where we sell directly, those expenses will be higher. If we go through distribution, they'll be lower. But you know, that's not – we're not going to burn more electricity in the factory. You know, there might be incremental travel.
Gerry Ng: Yeah, so, Dave, I'll interject in this. I think it's primarily going to be related to, obviously, the sales expenses, and that's the primary variable component.
Speaker Change: And again, if we're in a situation where we sell directly, those expenses will be higher. If we go through distribution, they'll be lower.
Speaker Change: But, you know, that's, there's not, we're not going to burn more electricity in the factory.
Anthony Ambrose: There might be some incremental costs to build stuff, depending on how much not G&A so much as operations to build the product, but again, I don't anticipate that being very much. Yeah, just to add to that, again, material costs, freight, logistical costs, commissions, those are typical variable expenses associated with revenue activity, and again, if you kind of follow our typical leverage fall-through on revenue, we should get a beneficial impact.
Speaker Change: other DNA to build stuff depending on how much
Speaker Change: not G&A so much as operations, but to build the product. But again, I don't anticipate that being very much. Yeah, just to add to that again, material costs, freight.
Speaker Change: Logistical costs, commissions, those are typical variable expenses associated with revenue activity. And, again, if you kind of follow our typical leverage fall through on revenue, we should get a beneficial impact.
David Lawrence Kanen: Okay, so what I'm trying to nail down is with the variable component, assuming a normal mix on that for a million dollar delta in revenue, is it 10% 15%? What is that approximately? The SQ&A will go up.
Speaker Change: Okay so but what I'm trying to nail down is with the variable component assuming a normal mix on that on a million dollar Delta in revenue is it
Speaker Change: 10%? 15%? What is that approximately? The SQ&A will go up. Historically, we've always told people, Dave, that the operating leverage is 40%.
Anthony Ambrose: Historically, we've always told people, Dave, that the operating leverage is 40%. Given where we are, it might be better, but we've always told people when you net everything out, that's where the operational leverage comes to.
Dave: Given where we are, you know, it might be better. But we've always told people, when you net everything out, that's where the operational leverage comes to.
David Lawrence Kanen: Okay. And then, guys, are there incremental expense reductions or efficiencies that we should see in the back half of the year, or is everything complete at this juncture?
Speaker Change: Okay, and then, guys, are there incremental expense reductions or efficiencies that we should see in the back half of the year, or is everything complete at this juncture?
Gerry Ng: It will be smaller as we continue to kind of work through the opportunities. A lot of these initiatives we have have some short-term as well as longer-term benefits, particularly material cost reduction that may have a longer-term but more sustainable impact. So we expect some continued improvement as we move forward.
Speaker Change: It will be smaller as we continue to work through the opportunities.
Speaker Change: A lot of these initiatives we have had some short-term as well as longer-term benefits, particularly on material cost reduction that may have a longer term but more sustainable impact. So we expect some continued improvement as we move forward.
Speaker Change: Okay, and then final question. I'll go back into queue, I promise.
David Lawrence Kanen: And then final question, I'll go back into queue, I promise. There's a lot of hype around artificial intelligence, so Anthony, could you sketch out for us the impact of AI on your business? I know you guys are using it, but also, can you talk about various enterprises using AI, their deployment of it, and how that affects your business and the opportunities, if any?
Speaker Change: A lot of hype around artificial intelligence. So, Anthony, if you could sketch out for us
Speaker Change: the impact of AI on your business. I know you guys are using it, but also, can you talk about
Anthony Ambrose: various enterprises using AI, their deployment of it, and how that affects your business and the opportunity, if any.
Anthony Ambrose: Sure, and I would refer you and just all investors to our latest investor material on the website. I think slide eight has some of this conversation and a little bit better graphics.
Anthony Ambrose: Sure, and I would refer you and just all investors to our latest investor material on the website.
Anthony Ambrose: I think it looks like slide 8 has some of this conversation and a little bit better graphics. But in short, Dave, there's a series of applications that we've identified, and others use the term as well, called Edge AI.
Anthony Ambrose: But in short, Dave, there's a series of applications that we've identified, and others use the term as well, called Edge AI. And it's built around a set of products that will require AI implementations to become better, but they will not be able to leverage the AI capabilities in the cloud. I'll give you an example.
Anthony Ambrose: And it's built around a set of products that will require AI implementations to become better, but they will not be able to leverage the AI capabilities in the cloud.
Anthony Ambrose: So for an automotive application, this would be ADAS, or Advanced Driving Assist. You're not going to go back with a latency and unpredictable connection to go to the cloud for directions on whether you're going to take a right turn on Main Street or not. You're not going to teach the car from the cloud. It's going to have to come.
Dave: And I'll give you an example. So for an automotive application, this would be ADAS, Advanced Driving Assist.
Dave: You're not going to go back with a latency and unpredictable connection to go to the cloud for directions on whether you're going to take a right turn on Main Street or not. You're not going to teach the car from the cloud. It's going to have to come. You're going to have to learn as you go.
Anthony Ambrose: You're going to have to learn as you go. There are other applications in smart cities, industrial automation, a lot of the smart metering applications we've talked about, a whole set of other IoT applications, smart homes, etc. Those applications benefit Data I-O in a number of ways. We've talked a lot about automotive and ADAS and the demand increase that we see there. The code size gets bigger. The minute you add AI or machine learning components, right; you just increase the code size.
Dave: There are other applications around smart cities, industrial automation, a lot of the smart metering applications we've talked about.
Dave: A whole set of other IoT applications, smart homes, etc.
Dave: Now...
Speaker Change: Those applications benefit Data I-O in a number of ways. We've talked a lot about automotive and ADAS and the demand increase that we see there.
Speaker Change: The code size gets bigger.
Speaker Change: The minute you add AI or machine learning components, right, you just increase the code size.
Anthony Ambrose: It also ensures that you're developing newer platforms, replacing some of the older platforms that may have even smaller code sizes, which is again good for us. So the whole AI market that I think will benefit Data I-O more directly is in this segment called Edge AI and in the various segments that I just highlighted.
Speaker Change: It also ensures that you're developing newer platforms, replacing some of the older platforms that may have even smaller code size, which again is good for us.
Speaker Change: So, the whole AI market that I think will benefit Data I-O more directly is in this segment called Edge AI and the various segments that I just highlighted.
Anthony Ambrose: Thanks, guys. Good luck!
Anthony Ambrose: Thank you, Dave.
Speaker Change: Got it.
Speaker Change: Thanks guys. Good luck. Thank you, Dave.
David Marsh: And the next question comes from David Marsh with Singular Research. Please go ahead.
David Marsh: Hey guys, thanks for taking the questions. So I guess we just start on the automotive side. I mean, you guys specifically said that America's this week. Could you just kind of give us a little bit of a broader global landscape? I thought you guys had some pretty promising opportunities in China and perhaps India. Maybe you could just talk about those a little bit.
Speaker Change: Thanks for taking the questions.
Speaker Change: So, I guess we just start on the automotive side, I mean, you guys specifically said that America is weak, could you just kind of give us a...
Speaker Change: A little bit of a, you know, broader global landscape. You know, I thought you guys had some pretty promising opportunities in China and perhaps India. Maybe you could just talk about those a little bit.
Anthony Ambrose: Yeah, Dave, basically, most of the promising opportunities in Asia closed as we expected. Asia is far ahead of its plan for the year. And that's, you know, been on strength in Q1 and Q2, including some strength in China. The Americas, by contrast.
Speaker Change: Yeah, Dave, so basically most of the promising opportunities in Asia closed as we expected.
Speaker Change: Asia is far ahead of their plan for the year, and that's, you know, been on strength in Q1 and Q2, including some strength in China.
Speaker Change: The Americas, by contrast, it's gone from, you know, a fiesta to a siesta.
Anthony Ambrose: It's gone from, you know, a fiesta to a siesta. We've seen it before. I haven't seen any deals that we know of that went to competition, but they just all got pushed out, and in my checks with other channel partners, other companies in similar industries, they're seeing a very similar set of activities. After really two big years for us in Mexico, they're just digesting the capacity and, I think, trying to figure out how much they're going to build in Mexico and how much they might have to build in the U.S., depending on the election.
Speaker Change: We've seen...
Speaker Change: I haven't seen any deals that we know of that went to competition, but they just all got pushed out.
Speaker Change: And in my checks with, you know, other channel partners, other companies in similar industries, they're seeing a very similar set of activities.
Speaker Change: Automotive, after really two big years for us in Mexico, they're just digesting the capacity and I think trying to figure out...
Speaker Change: You know, how much you're going to build in Mexico, how much they might have to build in the U.S. depending on the election.
Anthony Ambrose: And then also, you know, there's talk of interest rate reduction. And, you know, corporate CFOs like to pay, you know, four and a half percent for something instead of five percent for something if they can.
Speaker Change: And then also, you know, there's talk, there's been talk of interest rate reductions.
Speaker Change: And, you know, corporate CFOs like to pay, you know, four and a half percent for something instead of five percent for something if they can. And so I think that's also contributed to some of the...
Anthony Ambrose: And so I think that's also contributed to some of the... potential weighting. You heard comments from Ford. Stellantis, NXP, some of the Tier 1s, really talking about product rotation. So I think all that contributes to a let's run the factory with what we've got as long as we can. And then, as you know, our experiences, especially with the automotive guys... I'm They always seem to come in when they're ready to buy, with demands where I need them right away.
Speaker Change: potential weighting.
Speaker Change: You heard comments from Ford, Stellantis, NXP, some of the Tier 1's, really talking about also a product rotation. So I think all that contributes to, hey let's run the factory with what we've got as long as we can.
Speaker Change: And then, as you know, our experiences, especially with the automotive guys,
Speaker Change: They always seem to come in when they're ready to buy.
Speaker Change: with demands where I need it right away.
Anthony Ambrose: We saw that in... 16 and 17. We saw it in 20 and 21. We had a little mini-bump, I think, 18 months ago. And so, when it comes back, I think it will come back fairly rapidly. But I'm telling you, it was, you know, among the roughest quarters for a region I've ever seen, just in terms of everything getting pushed out.
Speaker Change: We saw that in 16 and 17. We saw it in 20 and 21.
Speaker Change: We had a little mini-bump, I think, 18 months ago, and so...
Speaker Change: When it comes back, I think it will come back fairly rapidly.
Speaker Change: But I'm telling you, it was among the roughest quarters for a region I've ever seen, just in terms of everything got pushed out.
Anthony Ambrose: Okay. That's really helpful. And then just, you know, obviously you've got to wait for the queue for the breakdown of revenues, but can you just give us some direction with regard, I guess specifically with regard to the kind of software-centric business? You know, that's clearly the line you really want to see your growth in because it's kind of more recurring. Can you just talk a little bit about, you know, specifically what's going on here?
Speaker Change: Okay, that's really helpful. And then just, you know, obviously you've got to wait for the queue for the breakdown of revenues, but...
Speaker Change: Can you just give us some sense, directionally, with regard, I guess, specifically with regard
Speaker Change: to the kind of software centric business.
Speaker Change: You know, that's clearly the line you really want to see your growth in because it's kind of more recurring. Can you just talk a little bit about, you know, specifically what's going on there? And I mean, as it were, I did catch some comments there, but I didn't get a lot of details, so just...
Anthony Ambrose: I mean, there were, I did catch some comments there, but I didn't get a lot of details. Can you just give us a sense of how this works? So, from a shipments perspective, we have record units processed by our programming center partners on Centrix. OK, and. You know, that continues a pretty steady upward ramp there.
Speaker Change: So, from a shipments perspective, we had record units processed by our programming center partners on Centrix, okay, and, you know, that continues a pretty steady upward ramp there.
Anthony Ambrose: It's, you know, it's a question, when you look at the Centrix and software overall, combined with our consumable adapters, I don't know if it's a record, but it's pretty close to one if we do have to go back and look, but it was 49% of our revenue in the first half. And, you know, that's typically been running 43, 44%, I think, for the So... We talk about a long-term goal of a 50-50 split between recurring revenue and systems.
Speaker Change: It's, you know, it's a question, when you look at the Centrix and software overall, combined with our consumable adapters, I don't know if it's a record, but it's pretty close to one if we...
Speaker Change: I have to go back and look, but it was 49% of our revenue in the first half.
Speaker Change: And, you know, that's typically been running 43, 44 percent, I think, for the year last year.
Speaker Change: We talk about a long-term goal of 50-50 split between recurring revenue and systems.
Anthony Ambrose: We almost hit that so far this year, but admittedly, that's because the system orders were down a bit. But, you know, it indicates the strength we have in the consumables, which, when you combine that with some of the things Gerry's doing on expense reductions, will help us, you know, continue to preserve cash when we have a systems divot and then be ready to have a couple of really good quarters when demand turns up.
David Marsh: Okay. Thank you. And then just one quick last one.
Speaker Change: We almost hit that so far this year.
Speaker Change: Now, admittedly, that's because the systems orders were down a bit.
Speaker Change: But, you know, it indicates the strength we have in the consumables, which, when you combine that with some of the things Gerry's doing on expense reductions, will help us, you know, continue to preserve cash.
Gerry: when we have a systems divot and then be ready to have a couple really good quarters when the demand turns around.
Anthony Ambrose: I mean, and I'm not trying to read anything into this, understand that there was an opportunity there to repatriate that cash from China and get it, but that's not, by any means, a kind of indicator that you feel like your Chinese business is slowing or, you know, you're not going to need as much cash over there to support the business operation. It's just you had an opportunity and took advantage of it. Am I reading that correctly?
Speaker Change: Okay, thank you. And then just one quick last one. I mean, and I'm not trying to read anything into this, I mean...
Speaker Change: understand that there was an opportunity there to repatriate that cash from China and get it but that that's not by any means you know kind of a
Speaker Change: and the indicator that you feel like you're trying to business is
Speaker Change: [inaudible]
Anthony Ambrose: And you've got it. You know, as Gerry indicated in his earlier comments, we have substantial operations in the U.S., China, and Germany, and it's fundamental that we maintain working capital to support those operations flawlessly, and we continue to do that. But as he indicated, the benefit for us, even though you have to pay the tax, is you get the flexibility of having it in the U.S. and the opportunity to earn a little bit more on interest.
Speaker Change: You know, as Gerry indicated in his earlier comments, we have substantial operations in the U.S., China, and Germany, and it's fundamental that we maintain working capital to support those operations flawlessly, and, you know, we continue to do that.
Speaker Change: But as he indicated, the benefit for us, even though you have to pay the tax, is you get the flexibility of having it in the U.S. and opportunity to earn a little bit more on interest.
Anthony Ambrose: And so, you know, we would just talk this over with the board. It's pretty clear. Let's go ahead and repatriate the cash and move on. Got it. Okay, guys. I'll yield to other callers. Thank you very much. Thanks, Dave.
Speaker Change: and so you know we would just talk this with the board it's pretty clear let's let's go ahead and repatriate the cash and move on.
Speaker Change: Okay, thanks guys. I'll yield to other callers. Thank you very much. Thanks, Dave.
Kevin Garrigan: And the next question comes from Kevin Garrigan with West Park Capital. Please go ahead.
Speaker Change: And the next question comes from Kevin Garrigan with West Park Capital. Please go ahead.
Kevin Garrigan: Yeah, Anthony and Gerry, thanks for letting me ask a couple questions. Anthony, just to clarify, so in Q1, you had said that your bookings had seen strong demand across all end markets. So compared to three months ago, automotive companies are just kind of waiting to see how things play out in the market, like interest rates, as you mentioned. Are they noting a significant decline in demand at all?
Kevin Garrigan: Yeah, hey, Anthony and Gerry, thanks for letting me ask a couple questions.
Kevin Garrigan: Anthony, just to clarify, so in Q1 you had said that your bookings had seen strong demand across all end markets.
Kevin Garrigan: So compared to three months ago, automotive companies are just kind of waiting to see how things play out in the market, like interest rates, as you mentioned, are they noting a significant decline in demand at all?
Anthony Ambrose: Yeah, Kevin, I mean, it just disappeared in Q2 in North America. I mean, I can't, I can't, you know, I wish I could come up with a softer way of explaining it, but that's basically what happened.
Kevin Garrigan: Yeah, Kevin, it just disappeared in Q2 in North America.
Speaker Change: I mean, I can't, I can't, you know, I wish I could come up with a softer way of explaining it, but that's basically what happened.
Kevin Garrigan: Yeah, no, that makes sense. Okay. Yeah, that's what I was kind of wondering.
Kevin Garrigan: Yeah, no, that makes sense. Okay. Yeah, that's what I was kind of wondering. Okay. And then...
Anthony Ambrose: Okay, and then you sound pretty confident that you're going to fulfill backlog orders in the second half of the year. So, I mean, does your backlog consist of non-cancellable orders? Or what gives you the confidence that these orders won't get pushed out or cancelled?
Speaker Change: You sound pretty confident that you're going to fulfill backlog orders in the second half of the year, so, I mean, does your backlog consist of non-cancellable orders, or what kind of gives you the confidence that these orders won't get pushed out or cancelled?
Anthony Ambrose: Some of the terms are non-cancelable, some are not, but the way our industry has traditionally behaved is people don't cancel orders on us once they place an order. We had one exception when COVID hit and shut down; literally, one customer that canceled it four hours after they sent us the order. But, you know, knock on wood; we don't see behavior where customers come in and cancel. Now, they have the right to do so under our standard terms up until we ship. But it's not something that's plagued us.
Speaker Change: You know, I'm
Speaker Change: We had one exception when COVID hit and shut down and literally one customer that canceled it four hours after they sent us the order.
Speaker Change: But, you know, knock on wood, we don't see behavior where customers come in and cancel. Now, they have the right to do so under our standard terms up until we ship.
Kevin Garrigan: Got it, got it. Okay, that makes sense. And then just as a last quick question, on Dave's question earlier regarding Edge AI, I know automotive and ADAS are, you know, large markets for you guys, but I would say ADAS might be taking a little bit longer than expected. Is there another application that you're kind of seeing take off more now for Edge AI?
Speaker Change: Got it, got it. Okay, that makes sense. And then just as a last quick question, on Dave's question earlier regarding Edge AI, I know automotive and ADAS are, you know, large markets for you guys.
Speaker Change: But, you know, I would say ADAS might be taking a little bit longer than, you know, expected. Is there another application that you're kind of seeing take off more now for Edge AI?
Anthony Ambrose: I went over the list earlier a little bit around, you know, certainly the smart metering. We've won a number of deals there. IoT, factory automation, we had a number of factory automation wins over the past couple of years. And on the new customer, new location wins, I mean, it's skewed more towards.
Speaker Change: I went over the list earlier a little bit around you know certainly the smart metering we've won a number of deals there.
Speaker Change: IOT, factory automation. We had a number of factory automation wins over the past couple of years.
Speaker Change: And on the new customer, new location wins, I mean, it's skewed more towards...
Anthony Ambrose: Everything besides automotive, including Edge AI, in Q2 with eight wins. I think Otto was two of the eight, so yeah, I mean, it has not displaced Automotive. I'm not going to go that far. I think, you know, Automotive will come back, hopefully sooner rather than later, but it does represent some interesting growth opportunities for us, and we're going to continue to dig a little deeper on that.
Kevin Garrigan: Okay, perfect. Thank you.
Speaker Change: and everything besides automotive and including Edge AI in Q2 with the eight wins.
Speaker Change: I think Otto was two of the eight, so, yeah, I mean, it's, it has not displaced automotive. I'm not going to go that far. I think, you know, automotive will come back.
Speaker Change: hopefully sooner rather than later, but it does represent some interesting growth opportunity for us and we're going to continue to dig a little deeper on that.
Speaker Change: Okay, perfect. Thank you.
Operator: Thank you, ladies and gentlemen. This concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks.
Speaker Change: Thank you.
Speaker Change: Thank you ladies and gentlemen. This concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks.
Anthony Ambrose: Operator, thank you very much. I'd like to thank everyone who asked questions, and at this point, I would like to conclude the call.
Speaker Change: Operator, thank you very much. I'd like to thank everyone who asked questions. And at this point, I would like to conclude the call.
Operator: The conference is now concluded. Thank you for attending.