Data I/O Corp Q1 FY2024 Earnings Call

Good afternoon, and welcome to the Data I/O First Quarter 2024 Financial Results Conference Call. Please note this event is being recorded. I would now like to turn the conference over to Jordan Darrow, Investor Relations. Please go ahead.

Thank you, operator, and welcome to the Data I/O Corporation first quarter 2024 financial results conference call. With me today are the company's President and CEO, Anthony Ambrose; and Chief Financial Officer, Gerry Ng. Before we begin, I'd like to remind you that 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 in 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 Forms 10-K and 10-Q with the Securities and Exchange Commission, press release 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 forward-looking statements. And now, I would like to turn over the call to Anthony Ambrose, President and CEO of Data I/O.

Thank you very much, Jordan. I'll begin my formal remarks by addressing our first 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. We had very strong bookings at $8.1 million in the first quarter, closing deals in a strong sales funnel that we previously discussed in February's call. This is the highest bookings level in 11 quarters. We won 5 new customer locations in Q1 including a major programming center win in EMEA for a new site. Orders were back-end loaded and we closed with revenue at $6.1 million. We have a very strong backlog in place and we continue to expect a back-end loaded year, as most of this backlog will be recognized as revenue in the second half of 2024. Geographical rotation is also happening in our business. The Americas region has been very strong for us in the past couple of years. And we're seeing a digestion of some of the CapEx wins for the past 2 years. Perhaps it's due to a change in demand for EVs in North America or perhaps it's just the fact that it's been so strong for the past 2 years. At the present time, we're seeing EMEA pick up some of the slack as they've been stronger than they have been in the past couple of years, both in bookings and future opportunities. Asia continues to be strong and is expected to remain strong for the rest of the year. We continue to see some interesting deals in SentriX and our units program continue to grow through our partners. However, the sales cycle remains long due to the complexity of the design and programming requirements for those applications. When I talk to investors and others, I get a lot of questions about AI and how it impacts our business. One of the emerging growth areas for AI is a so-called Edge AI. This is different from what you read about in ChatGPT and some of the other things, Edge AI is the deployment of artificial intelligence algorithms directly on devices or hardware at the edge of the network. We're seeing significant adoption in several industries, including ADAS, IoT and smart devices, healthcare monitoring and wearables, smart factory automation, and retail analytics. As you know, we're a very big player in ADAS and a key supplier to the Tier 1s and OEMs in the automotive industry. Industrial IoT is our second-largest market behind automotive, and that's also positively impacted by Edge AI. So, Edge AI is all about bringing intelligence right to the edge; in the case of ADAS, right to your car. This means data processing locally instead of having to send data to the cloud, enabling real-time decision-making, which is very important for ADAS and autonomous driving. Edge AI ensures that the processing power remains localized, requiring the code and decision-making apparatus of code to be programmed into the car's flash memory. The demand for programming will increase due to faster growth of ADAS systems, larger code sizes, and the complexity of devices. During Q1, we won several systems for ADAS and continue to have a strong automotive funnel that includes ADAS, electrification, instrument clusters, etc. In IoT devices, Edge AI is revolutionizing the Internet of Things landscape by embedding AI algorithms directly into IoT devices. This enables local data processing, reducing latency and enhancing privacy. Edge AI drives increased data programming demand as well as maintaining strong security for these IoT devices. Moreover, we announced our 500th PSV system order earlier this month. This milestone showcases Data I/O's continued innovation and investment in programming technology and confirms the PSV family as the most successful automated programming system in the industry. It sets the tone for our future with software innovation, security capabilities, and enhancements to the platform, balancing system sales and recurring revenue. In summary, we're focusing on disciplined growth targeting automotive, industrial, and programming center markets worldwide. We continue to have investor outreach, and our marketing initiatives will include more detailed topics in our upcoming fireside chats. Our next fireside chat will be hosted by investment manager and influencer, Avi Fisher of Long Cast Advisers, focusing on smart factory and industrial applications. Lastly, our Annual Meeting will be held on May 16 at our headquarters in Redmond, Washington. You should have received all the materials around the 10-K and proxy and voting information. We look forward to your vote and attendance. Now, I'll pass it over to Gerry.

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 first quarter of 2024 and our perspective looking forward. Data I/O's financial condition remains strong at the end of Q1. We have $12 million in cash, slightly down $342,000 from the beginning of the quarter, which reflects the anticipated higher first quarter expenditures for public company costs, including audit, regulatory filings, and NASDAQ fees. Our cash and working capital at $18.1 million showed a comparable decrease from $18.4 million on December 31. Cash benefited from strong customer collections of accounts receivable at $4.8 million, with days sales outstanding at 59 days and past due receivable balances greater than 30 days remaining very low at less than $30,000 at the end of Q1. Inventory increased to $6.4 million from $5.9 million at the beginning of the quarter due to lower Q1 sales volume. The company continues to have no debt. First quarter revenue at $6.1 million was down 16% compared to $7.2 million from the prior year period, reflecting lower backlog entering the period and timing of shipments from our new bookings. On a favorable note, first quarter bookings at $8.1 million were up 41% from the prior year on strong opportunity conversion in Europe and Asia, leading to our backlog increasing by $1.7 million to $4.5 million as of March 31, 2024. Gross margin for Q1 was 53%, down 5 percentage points from the 2023 prior year, driven by a combination of lower sales volume and higher distributor channel sales and product mix. These unfavorable impacts were partially offset by ongoing initiatives to reduce material and operational costs. Excluding the impact of sales volume fluctuations, we expect gross margin to return to a more normalized mid- to high 80% range as outlined in our outlook for 2024. Although we still reported net and adjusted EBITDA losses this quarter due to timing of shipments, our Q1 operating expenses were under $4.1 million, down $53,000 or 1% from the prior year. First quarter expenses are typically high due to annual payments for public company costs and certain compensation-related expenses, which are non-recurring in future quarters. We anticipate that our performance will reflect lower spending moving forward, alongside continued cost reductions. Reiterating our 2024 outlook, we expect double-digit bookings growth, as Anthony highlighted earlier, with system deployments weighted more in the second half. The timing of orders and subsequent deliveries will affect our revenue recognition. Overall, we remain solid financially with a strong cash position, no debt, and the ability to navigate market opportunities and challenges throughout the year. That concludes my remarks for the first quarter of 2024. Operator, would you please restart the Q&A process?

The first question comes from David Marsh with Singular Research.

You made it a bit challenging; I have one question, so I'll attempt to limit it to just one.

Well, Dave, you're special. So we'll let you go for 2. How about that?

Thanks, Anthony. It was a challenging quarter for revenue realization, but the backlog growth is quite encouraging. Could you provide some clarity on the backlog? I noticed your comments suggested much of it will ship later in the year. I would appreciate more details regarding the backlog, including the geographic distribution and product mix. Is everything equivalent, or are there specific components like adapter products or SentriX included? It would be helpful to understand what contributes to that backlog.

Yes. So if you recall in our call in February, we said we had a very strong sales funnel, and we were able to monetize that in March with bookings, which led to the highest bookings quarter we've had in 11 quarters at $8.1 million. Those bookings included a large order for a customer opening up a new site. Typically, with customers opening a new site, they need 2 or 3 quarters advance notice. They get all their corporate ducks in a row and get the approval to go ahead and place the orders for later this year. So for that big order, that's going to start shipping in the second half. We also got a lot of orders very late in the quarter that are going to ship. We want to indicate that the balance of that is likely to ship in the second half, which is typically orders that we receive and ship the next quarter. We just want to call that out that it's going to be much more back-end loaded than normal, to enable investors to build a good model.

Could you provide an update on your experiences in the international markets? It seems that North America might be experiencing a slowdown, while overseas markets appear to be performing better. Please give us a quick overview of the market situation globally.

Yes. Pretty much what I said in the prepared remarks. North America, especially Mexico, has been very strong for us, with many capital purchases. We're engaged with customers now. They need machine #3 or machine #4. In Q4, they said they needed it in Q1. In Q1, they said it needed in Q2. Here in Q2, they say, I might need it in Q2; I might need it in Q3. It seems they believe they need it, but their demand is not ramping as quickly as they thought. I'm confident we'll get the orders; I just don't think this revenue is going to happen until the second half in North America. I was in Asia earlier this Q1, and we continue to have strength in our Asian markets: Korea, China, and India. Everyone had hopes for a bounce back in China early in the year, but it's been slowly recovering. They’re focusing on their EV industry, and we’re a critical supplier. Overall, automotive and the rest of Asia are strong for us. Europe has been weak for a while, but we had a strong bookings quarter in Europe in Q1, with a good sales funnel and some interesting opportunities. Our overall plan for the year remains unchanged in terms of bookings, but where we get those bookings has probably changed a little bit in our thinking in the past 5 or 6 months.

The next question comes from Kevin Garrigan with WestPark Capital.

Going off of David's question and your previous answers, so again, I know automotive is kind of your largest market for system orders and then it's followed by industrial and programming centers. And in your prepared remarks, you said programming centers had a strong start. So can you provide some color on which end markets you think will be the strongest for orders in 2024? Will programming centers become winners of orders, or will automotive drive the bookings growth?

If I look at the funnel going forward, it resembles our past several years of business. For any one quarter, we can see a significant shift one way or another, based on the levels of orders we receive and the markets they represent. Nevertheless, automotive and industrial continue to be our fundamental business. A lot of these areas connect through Edge AI. I've researched and discussed this topic; the excitement around AI tends to be focused on ChatGPT and similar things, but much of it will be about advanced driver assist systems, smart IoT, smart homes, factory automation, etc. The connecting thread is more code, more programming, more security. And that's beneficial for Data I/O.

If I could, just a quick follow-up. You had noted that you're seeing some interesting deals for SentriX. Can you expand on the markets these deals are coming from?

The deals are primarily coming from the Edge AI market that I described earlier, particularly in IoT. There is significant pre-sales effort, which must go into these. There is ongoing unit growth, but a couple of interesting deals are in the funnel, and I’m optimistic we can close them.

Thank you, ladies and gentlemen. This concludes our question-and-answer session. I would like to turn the conference back over to Anthony Ambrose for any closing remarks.

Thank you very much, operator. I'd like to thank everyone for attending and for the questions from our analysts. I'd also like to remind everyone to please return your votes for the shareholder meeting in May. With that, I'd like to close the call. Thank you very much.

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