Data I/O Corporation (DAIO) Q3 2022 Earnings Conference Call October 27, 2022 5:00 PM ET
Company Participants
Jordan Darrow – Investor Relations
Anthony Ambrose – President and Chief Executive Officer
Joel Hatlen – Chief Operating Officer and Chief Financial Officer
Conference Call Participants
Brendan McCarthy – Singular Research
Avi Fisher – Long Cast Advisers
Operator
Good afternoon, and welcome to the Data I/O Third Quarter 2022 Financial Results Conference Call. All participants will be in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. And please note that this event is being recorded.
I would now like to turn the conference over to Jordan Darrow, Investor Relations. Please go ahead, sir.
Jordan Darrow
Thank you, operator, and welcome to the Data I/O Corporation third quarter 2022 financial results conference call. With me today are Anthony Ambrose, President and CEO of Data I/O Corporation, and Joel Hatlen, Chief Operating Officer and Chief Financial Officer of Data I/O.
Before we begin, I’d like to remind you that statements made in this conference call concerning COVID-19, future revenues, results from operations, financial position, markets, economic conditions, silicon chip shortages, supply chain expectations, estimated impact of tax reform, product releases, new industry partnership 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 from COVID-19, including the 2022 outbreaks in China, the Russian war with Ukraine, including any related international trade restrictions, along with continued reopening and recovery efforts within the relevant global supply chain and among our customer base, level of orders for the company and the activity level of the automotive and semiconductor industry overall, ability to record revenues based on the timing of product deliveries and installations, market acceptance of new products, changes in economic conditions and market demand, part 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. 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.
And now I would like to turn the call over to Anthony Ambrose, President and CEO of Data I/O.
Anthony Ambrose
Well, thank you very much, Jordan. I’d like to begin my formal remarks by addressing our 2022 third quarter financial and operational performance. And then I will turn over the call to Joel Hatlen for a more detailed look at the numbers.
Our performance in the third quarter was outstanding as we delivered across the board with strong bookings, strong revenue, strong operating income, and strong cash generation. The second quarter call, we predicted an end to the operational disruptions from the China COVID lockdowns and resumption of strong growth in Q3. And this is exactly what happened. Our team excelled in managing our global manufacturing capacity, silicon shortages, freight challenges as we delivered 16 PSV systems to customers in the quarter and shipped a record unit and dollar volume of adapters to customers as well. We also have a large industrial SentriX customer going into production in Asia during the quarter.
In addition to a strong operating quarter, we had an excellent sales quarter with third quarter bookings of $7.1 million, reaching the highest level in the past year. Within the verticals, we had a strong automotive quarter, continuing our strength for the year. Automotive electronics represents 63% of orders so far this year, and we had four new customer wins in automotive and industrial during Q3. For those keeping score, that’s 16 new customer wins this year alone. We’re the market leader, and we’re adding to our share. Our sales funnel in the third quarter continued the momentum from the first half of the year.
New opportunities from automotive and industrial customers are driving our high level of demand. Activity within Asia and Americas has been strongest year-to-date and Europe had a very strong Q3 as well. This is in spite of currency weakness for the euro and the yuan, high inflation and interest rates, and the war in Ukraine. These overall trends on demand reinforce our long-term view of a tripling of the automotive semiconductor market by 2030 with automotive memory growing at an even faster rate.
Supporting our focus on the automotive memory market, earlier this month we announced significant improvements on the LumenX programming platform for automotive-grade UFS memory with our VerifyBoost technology. VerifyBoost delivers verified performance up to 750 megabytes per second on high-speed Gear 3 by two lane support for UFS 3.1 devices. And this enables customers to leverage existing production capacity for significant throughput gains while reducing their overall total cost of programming.
LumenX programmers within our PSC programming systems deliver up to 4.5x improvement in programming performance and reduce the total cost of programming by up to 39% while using VerifyBoost. This technology is now available in new systems as well as upgrades to any of our over 400 and growing PSV5000 and PSV7000 systems in the field. In this technology announcement, our semiconductor partner Micron states that UFS is experiencing rapid deployment growth in automotive, consumer and industrial applications with significantly more volume expected in the coming years as UFS becomes the automotive standard in new systems. This view is shared by other leading suppliers of automotive memory as well, and Data I/O is extremely well positioned to take advantage of this transition.
VerifyBoost also illustrates the benefit of our continuous investment policy. We invest through good times and bad, through the downturn, through supply disruptions, through COVID lockdowns so that we can deliver great technology in the market at precisely the right time.
SentriX is another important programming platform for Data I/O where we continue to innovate. We think we’re headed towards a golden age as security becomes ever more demanded and ever easier to implement across industrial, IoT and automotive markets. We had a large OEM customer going to production in Asia recently, and we’re working on a number of interesting deals that I hope to discuss more on our next call.
Shifting bases a bit, as I’ve discussed through the year, we’re celebrating our 50th anniversary as a company. One of the activities we’ve been involved in as part of the celebration is a series of interviews that we’ve called fireside chats. During the third quarter, we conducted three fireside chat interviews. It’s been a lot of fun personally, and we’re getting tremendous feedback from both the investment community and from our industry partners. The primary objective of these interviews is to inform and articulate a vision for what we are doing as well as where we see things going for the industry long-term.
Topics of our sessions in the third quarter included, number one, the Future of Semiconductors for Automotive and Electronics with guest host Suji Desilva, the semiconductor equity research analyst at ROTH Capital. Second topic was Managing a Resilient Supply Chain with guest host Gene Inger of the Inger Newsletter. And third, The Future of Security, which we see through the lens of our SentriX deployment platform, and this was conducted with guest host, Avi Fisher of Long Cast Advisers.
Earlier this month, we uploaded our most recent interview, which was on Industry 4.0 and Why Everything Else Needs to be Connected, with guest host Vishal Mishra of Mishra Capital Partners. I should point out that Mishra Capital and Long Cast Advisers are shareholders of Data I/O. We’re grateful to all of our hosts for participating in those series of interviews and hope all of you are watching whether on our website or through our social media channels.
Based on our backlog and order flow, our continued operation is running well. We’re expecting a good quarter in Q4, and it’s an exciting time for us here at Data I/O.
With that, I’ll turn it over to Joel Hatlen.
Joel Hatlen
Thank you, Anthony, and good day to everyone. I’d like to start by providing a review of our third quarter of 2022, starting with the balance sheet and then moving on to the income statement.
Data I/O’s financial condition remains strong. In fact, from the second quarter, it got much stronger with cash increasing to $11 million on September 30 from $10.3 million on June 30. As expected in the third quarter, and as Anthony referenced in his talk, during the period we were able to catch up with the effects of the Shanghai COVID lockdown. This had resulted in the balance sheet returning to more normal levels from the impact of the craziness of the two prior quarters.
Days sales outstanding, or DSO, a receivables collection measure, is back to a normal level at 51 days as of September 30, which is down from 74 days at the end of June. With the increase in business activity level, deferred revenue grew to $2 million, up by $500,000, including a delivered system waiting for final acceptance from the end of the second quarter. Net working capital on September 30 was $16.5 million, up $600,000 from June 30.
Inventory of $7.1 million on September 30 was $200,000 higher than the $6.9 million on June 30 and compares to $6.4 million at the end of last year. During the past year, the increase in inventory related to our decisions to hold additional inventory to address shortage risks, as well as to improve our resilience as a supplier and to support the record backlog level going into the fourth quarter. Our backlog at September 30, 2022, was $4.9 million compared to $3.3 million on September 30, 2021.
Now on to the income statement. For the third quarter, revenue of $7.2 million was up from $4.8 million in the second quarter of 2022 and $6.7 million in the third quarter of 2021. With the strong third quarter revenues as discussed by Anthony earlier, I should remind everyone that approximately 90% of our revenues are derived from outside the United States. Many international currencies have devalued against the U.S. dollar. In particular, the euro and yuan for our subsidiaries, which resulted in their financials translating into lower reported revenues on a U.S. dollar consolidated basis. Despite this reporting convention, there is no associated impact on our regional market share and operations in local currencies.
Automotive orders represented 63% of year-to-date bookings and continues to be our primary addressable market. For comparison, in 2021, 58% of our revenues were derived from the automotive sector. Consumables were up to 32% of revenue year-to-date compared to 30% in all of the prior year. Software and services revenues were 12% of revenue year-to-date at the end of the third quarter and were equal to the prior year – the full prior year percentage of 12%.
On a geographic basis, international sales represented approximately 90.5% of revenue for the third quarter compared with 86.8% in the prior year period. The third quarter bookings for 2022 were $7.1 million, up from $6.4 million in the second quarter of 2022 and $5 million in the third quarter of 2021. The resumption of operations and shipping in Shanghai was reached during the latter part of the second quarter, so with the third quarter, we were able to catch up to more normal deliveries. Further, with our effective supply chain strategies, we were able to build and ship a lot of products in the third quarter, especially items related to the previous Shanghai COVID shutdown period. As a result, our backlog of $4.9 million at the end of the third quarter was brought down from $5.8 million at the end of the second quarter.
Gross margins at 57% in the third quarter were down from 60.7% in the third quarter of 2021. The decrease was primarily due to the currency strength of the U.S. dollar, which is up approximately 15% versus the euro and the yuan, offset in part by the net favorable factory variances. Operating expenses were $3.4 million for the third quarter of 2022 compared to $3.5 million in the second quarter and $3.9 million in the third quarter of 2021. Compared to the period in the prior year, the reduction was related to lower costs from currency-related – from currency translated subsidiary expenses, reduced incentive compensation, and spending discipline.
Funding our R&D continues to be an integral component of our growth initiatives. R&D expense was $1.4 million in the third quarter compared to just under $1.6 million in the second quarter and $1.7 million in the third quarter of 2021. Selling, general and administrative expenses were just under $2 million in the third quarter of this year compared to just over $1.9 million in the second quarter and $2.2 million in the third quarter of 2021.
Taxes during the quarter consisted solely of foreign taxes with no U.S. income tax. Reminder that year-to-date taxes included the dividend withholding tax on our first quarter repatriation of cash from China. The company had net operating loss carryforwards of approximately $17.2 million on September 30. Net income in the third quarter of 2022 was $847,000 or $0.10 per share compared with a net income of $12,000 or $0.00 per share in the third quarter of 2021. We had 8,816,381 shares outstanding on September 30, 2022. Adjusted EBITDA earnings of just over $1.4 million in the third quarter of 2022 compares with the adjusted EBITDA earnings of $564,000 in the prior year period. Overall, we remain very strong financially and continue to have no debt.
Based upon our preliminary evaluation, we believe Data I/O was not impacted by the October 7 Biden Administration restrictions on export support or doing business with certain technology for China semiconductor companies.
At this point, I wanted to reiterate our expectations for the fourth quarter. We expect to ship and recognize as revenue the majority of backlog and systems in deferred revenue at the end of the third quarter. We expect relatively flat currency exchange and flat operating expenses compared to the third quarter with gross margins in the mid-50s.
That concludes my remarks for the third quarter. Operator, would you please start the Q&A process?
Question-and-Answer Session
Operator
Certainly. And we will now begin the question-and-answer session. [Operator Instructions] And our first question today will come from Brendan McCarthy with Singular Research. Please go ahead.
Brendan McCarthy
Yes. First off, congratulations on the strong quarter, impressive results. My question is just around geographic demand and topline growth. And I guess where are you seeing – or where did you see the bulk of the demand come from, from a geographic standpoint, just in terms of Asia, Europe, and the Americas?
Anthony Ambrose
Yes. Well, Brendan, thanks for the comments. We’ve had consistently good results coming from Americas and Asia all year. And Europe joined the party in the third quarter. I’d say all regions were strong in the third quarter. As Joel indicated, we had very strong automotive in the quarter. 70% of the bookings were automotive and 63% year-to-date. That was actually a little bit richer than we normally have on automotive, but not surprising. So good strength globally, all three regions contributing, and then automotive showing excellent strength.
Brendan McCarthy
Got it. Yes. And if I could just kind of ask a follow-up there, was that surprising to see Europe bounce back later in the quarter?
Anthony Ambrose
No. I mean, we’ve had it in our sales funnel. I guess – you never know, right, with all the things you read in the newspaper. And I tried to comment on this in our last call, there’s sort of the whole macro negative narrative of rising interest rates, inflation, the war, are people going to have heat in their homes in the winter? And then the other narrative was, okay, my sales team is saying these deals are advanced in the sales funnel and should close. We trusted our eyes as opposed to media reports and our sales guys delivered what they said they were going to deliver.
From our standpoint, I think there’s still – all those macro issues are out there. I guess the U.S. reported good growth in the third quarter overall despite all those items. And I’ll be in Europe for a couple of weeks to see for myself what’s going on, on the ground, and form an opinion for the first half of next year as well.
Brendan McCarthy
Thank you.
Operator
[Operator Instructions] Our next question will come from Avi Fisher with Long Cast Advisers. Please go ahead.
Avi Fisher
Hi, Anthony. Thanks for taking my questions. I have two of them. First off, you have – I’m curious if you could talk about kind of what drives a customer win. You talked about 60 new customer wins year-to-date. Is SentriX part of those wins? Are customers – it doesn’t sound like you sold 16 SentriX units. Do customers appreciate the option to upsell eventually to SentriX? Just wondered if you could talk around what makes a customer win, why they’re not buying SentriX units now, how SentriX plays into their decision to become a customer?
Anthony Ambrose
Sure. We have a focus in our team on new customer acquisition as well as supporting existing customers who often bring capacity additions to us. The new customer focus is important because there are a number of new entrants coming into the automotive and industrial space. And a new customer will come to us when, typically, they have a new project or their circumstances change. And I’ll give you an example. We had a customer that, an automotive customer, that we won about a year-ago that was doing end-of-line programming and found it very inconvenient and inflexible for their particular need. And so we were able to work with them over about a three-quarter period to bring Data I/O preprogramming technology into their facility.
It was a very protracted process because they’re a Japanese domiciled company. But we were able to get ourselves in that first location. We booked a second location in the third quarter. We think that represents a course of converting a substitute programming technology to Data I/O. We also have customers that have been using a direct competitor that for one reason or another aren’t happy or maybe they need to up-level their game a little bit if they’re automotive, and so we certainly get those customers as well.
And then you have customers that, with SentriX, they’re brand new. They come in either through direct means or through one of our programming center partners. And if it’s a programming center partner, then we do things like the device support for them and make sure the partners got everything they need to be successful. We’ve also sold a couple of systems, and I think I highlighted this in our call last time, that we call SentriX-ready. Where the customer might be a data customer now and says, yes, I’m probably going to be doing something with you on SentriX. Why don’t you just get the system ready that I’m buying for SentriX and we’ll get it going on data today and then I can turn on SentriX and have it be real convenient. I don’t have to have someone come out and do a physical upgrade. And so we think that’s a viable pathway going forward. Increasingly, we’re seeing customers value the benefits that we can bring as a premium supplier in data programming as well as SentriX.
And again, despite our extraordinary share in automotive, and penetration, we think we have over 250 of our 430 PSV systems focused on the automotive market. There’s still places out there that don’t have a Data I/O system, and that’s a shame, and we want to help out those customers as fast as we can.
Avi Fisher
Thanks for these details. For my second question, Anthony, just it’s a little bit on the kind of guidance you talked about, backlog plus deferred revenue. It seems to imply something about bookings. What’s happening with bookings in 4Q? Have they slowed so much that now we’re just dealing with backlog and deferred revenue? I’m curious about that.
Anthony Ambrose
No, don’t over read it. We don’t give a bookings forecast usually at all. I think what Joel was trying to comment on was, as we indicated in the third quarter, we had an extraordinary backlog. We did burn down some of that through shipments, but we also have a system in deferred revenue at about $300,000, Joel?
Joel Hatlen
Yes.
Anthony Ambrose
That we expect to ship in the fourth quarter.
Joel Hatlen
It shipped. It’s just recognized.
Anthony Ambrose
There you go, and so the concept there is just to make sure everybody has as much information about where we see the backlog coming out in the fourth quarter.
Avi Fisher
Just to be clear, because I was confused by this, when Joel talked about the backlog plus the deferred revenue, that comes to $5.2 million in revs. You’re not guiding to that?
Anthony Ambrose
No, that’s not a guidance for revenue in the fourth quarter at all. As you know, we have a lot of business that books and ships within the quarter. What I think the message, Avi, is, that backlog plus deferred revenue number is extraordinarily high on a basis going back several years. We just wanted to make sure you were aware of that.
Avi Fisher
Okay. Thank you. Appreciate it.
Anthony Ambrose
You are welcome.
Operator
And this will conclude our question-and-answer session. I’d like to turn the conference back over to management for any closing remarks.
Anthony Ambrose
Well, thank you, Operator. At this point, I would just like to remind everyone that we will be at several events in the fourth quarter and early in the first quarter. We’ll be meeting with investors in the New York area in a few weeks. And we also have a fireside chat coming up on November 14. And please get with Jordan Darrow if you’d like to schedule some time when we’re in New York. We’ll also be in Europe in the fourth quarter, and we have trade shows coming up as well at Apex in January in the United States.
So with that, I’d like to conclude today’s call. Thank you very much.
Operator
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect your lines at this time.
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