Data I/O - Q3 2024

Transcript

Operator (participant)

Good afternoon, and welcome to the Data I/O third 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. Please note this event is being recorded. I would now like to turn the conference over to Mr. Jordan Darrow, Investor Relations. Please go ahead, sir.

Jordan Darrow (Head of Investor Relations)

Thank you, operator, and welcome to the Data I/O Corporation third quarter two thousand and twenty-four financial results conference call. With me today are the company's President and CEO, Bill Wentworth, and Chief Financial Officer and Vice President, Jerry Ng. Before we begin, I'd like to remind you that statements made in this conference call concerning future events, 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 such as 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 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 forward-looking statements. And now I would like to turn over the call to Bill Wentworth, President and CEO of Data I/O.

Bill Wentworth (President and CEO)

Thank you very much, Jordan. It is an honor to be presiding over this call, which is my first with Data I/O. I was appointed to serve on the company's board of directors last year. We announced a managed CEO transition plan in August of this year as President, effective September first, and CEO, first of October. We'll address our recent financial performance for the third quarter, ending September thirtieth, later on this call. It may be helpful in discussing my background experiences that are very extremely relevant to the future direction of Data I/O. I've had thirty years of experience with data programming since a very young age of sixteen. That began when I worked for my father's distribution company. After getting exposure in the technology industry, I founded Source Electronics, an independent regional programming services provider, with a partner in nineteen eighty-eight.

At Source, I started my career as VP of Operations and used Data I/O's programming solutions extensively through our operations. As Source expanded to become a national independent programming service provider, the semiconductor industry had significant growth in the late nineties and early two thousands, which drove Source to expand into international markets. As CEO of Source, we needed financing to expand into international markets, which led to a strategic investment from H.I.G. Capital in April of two thousand and one. As we grew the business in the early two thousands, we decided to sell the business to Avnet in two thousand and eight, providing a significant investor return. Fast forward to present day, I see a big opportunity in an industry that I know very well.

We intend to address the industry's current challenges, and I'm very excited to lead Data I/O, given the market opportunities, and set the stage for the heightened value creation for our customers, business partners, and shareholders. Now, let's drill into how we will do this. Since recently joining the company, our team has thoroughly engaged in discovery, assessment, and planning of new strategies to drive significant value to our customers in the markets we serve today. The initial findings are encouraging as we set a new direction to address our existing markets and serve new markets to Data I/O's future growth. Data I/O intends to partner with its customers, suppliers, and enhance the overall customer experience. The company will be collaborating with our customers, customer base on our vast experience with programming solutions and will develop enhanced business models that could lead to higher margins.

Diversification of revenue stream is extremely important, and customer segments will be a very important element as our go-forward strategy. We've identified customers that could lead to additional domains that will diversify our revenue. Currently, Data I/O is dominant in the automotive electronics sector. We will be engaging with the electronic supply chain component suppliers who sell to all markets. This engagement will naturally diversify our revenue streams. Leveraging the strong balance sheet, we'll be able to invest in these strategies to move Data I/O to should lead to sustained and sustainable growth. Thanks to the work of Jerry and his finance team since he came on board last year, and as a board of directors member, he's been doing a phenomenal job in controlling expenses and really, cementing our capabilities around financial controls.

Year-to-date, operating expenses are down by more than $1 million, 11% from last year. Our cash balance at the end of the third quarter is the highest level in 10 quarters. While revenues and bookings were not where we'd like them to be, as I joined the company, we're optimizing in other areas to be well-positioned to implement our new growth strategies for the future. With that, I'd like to pass it over to Jerry Ng for a closer look at our recent financial performance. Jerry?

Gerald Ng (CFO and VP)

Thank you, Bill, 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 third quarter of twenty twenty-four and our perspectives looking forward, including market focus, progress on spending efficiencies, and balance sheet management.

... Despite the current automotive market headwinds in the Americas and Europe, Data I/O's financial condition remains solid at the end of Q3. We maintain a strong backlog, a healthy balance sheet, and a lower operating cost structure, which will contribute to improved future financial performance as the markets recover and as we implement our future transformative plans, as Bill commented on earlier. Despite the third quarter and year-to-date revenue shortfalls, cash remained relatively steady at $12.4 million as of September thirtieth, up $1 million from the $11.4 million at the end of Q2. Cash benefited from continued strong customer collections and lower operating expenses. We remain a cash-generating business, as reflected in our positive Adjusted EBITDA of $37,000 in Q3.

Accounts receivable was $2.6 million as of September thirtieth, with days sales outstanding, or DSO, improving to 43 days, compared to 55 days at the end of Q2. Inventory, at $6.6 million, increased from $5.9 million at the beginning of the year on lower sales year-to-date and in anticipation of higher sales from future backlog reductions from bookings closed earlier in the year. Overall, net working capital at $17.6 million at the end of Q3 was unchanged from the end of Q2, 2024. The company continues to have no debt. Moving to the income statement. Third quarter revenue at $5.4 million was down 17%, compared with $6.6 million from the prior year period.

Since the beginning of the year, automotive electronics uncertainty increased, and customer capacity expansion has slowed, resulting in lower system shipments in the Americas and Europe. Offsetting this headwind was our Asia channel, which grew 29% in Q3 and 26% year-to-date. While the sales of our systems to the automotive market are below our expectations, we continue to achieve steady performance from our programming centers, industrial markets, and recurring revenue offerings. Specifically, our consumables, software, and services grew 6% in Q3 and currently represents 50% of our total year-to-date revenue, which provides a steady base of revenue to help offset the present CapEx softness. Finally, backlog remains strong at $4.7 million as of September thirtieth, down only $700,000 from the start of the quarter, with further reductions expected as planned customer deliveries occur in the next two quarters.

Moving on to gross margin. We achieved 54% in Q3, which is comparable to our prior quarter, Q2, and prior year, Q3. The lower sales volume has hindered our margins due to relatively fixed manufacturing service costs. However, material cost reductions, inventory savings, quality improvements, and operational streamlining continue to generate favorable and sustainable impacts. Similarly, I'd like to address the continued progress we have made on operating expenses. Third quarter operating expenses were $3.2 million, down $334,000, or 9%, from the prior year, and down $1.3 million, or 11%, on a year-to-date basis. Core personnel, facilities, IT, and other outside services costs declined through, of course, prioritization of critical initiatives and overall efficiency improvements.

This lower and more efficient cost structure has allowed the company to partially mitigate the year-to-date revenue shortfall, while positioning us to fund critical future market, product, and other transformative investments to drive future growth. The company incurred a net loss of $307,000 for Q3, an improvement of $490,000 from the Q2 net loss of $797,000. The Q3 loss was due largely to lower revenue, which again, was partially offset by lower operating expenses. Despite the current challenges and its impact on our sales performance, we continue to focus on providing the highest product innovation and quality, service and support, and new offerings to our customer.

Looking ahead, we expect continued near-term market headwinds, which will be partially mitigated by continued backlog reductions in the coming quarters, as well as, of course, leveraging the progress we've made on managing costs that I have highlighted. Overall, we remain very solid financially, with a strong cash position, no debt, and again, improved costs and operating structure, which enable us to begin implementing our new and reimagined market approach. This concludes my remarks for the third quarter of twenty twenty-four. Before we take questions, we are excited to participate in a few upcoming events. These include the Nasdaq closing bell ringing ceremony, scheduled for October twenty-fourth in New York, and the LD Micro Main Event conference on October thirtieth. We look forward to seeing you there. Operator, could you please start the Q&A process?

Operator (participant)

Thank you. We will now begin the question-and-answer session. To ask a question, you may press star, then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. And at this time, we'll pause momentarily to assemble our roster. And the first question will come from David Marsh with Singular Research. Please go ahead, sir.

David Marsh (Equity Research Analyst)

Hi, guys. Thank you for taking the questions, and welcome aboard.

Gerald Ng (CFO and VP)

Thank you.

David Marsh (Equity Research Analyst)

So if we could just talk about auto for a minute, and maybe just talk a little bit more about the pace of activity that you're seeing, whether it be, you know, bidding activity or anything else that can give us, you know, kind of a better indication of, you know, maybe what the timeframe for recovery and demand in that sector looks like.

Bill Wentworth (President and CEO)

Yeah, sure. Brad, thanks for the question. It's obviously been a choppy market out there for the last, really, most of the year, and you know, as you know, EVs drove a lot of content and expansion in that market, as well as even hybrids, as cars take on more technology, as a content of a vehicle. You know, we do believe, and we do know that they kind of overshot that a little bit. That caused the slowness, so it's also, you know, the infrastructure of EVs obviously is slowing down the pace of that adoption as well, but we have seen some socket module increases in certain areas, which is a good sign of some production starting to bleed back in the space.

We don't see any significant pace of growth or increase, but we do expect sometime next year some of that starting to enter back into the market, as well as new models coming out. It is a significant amount of our business, but at the same time, it's a market that will continue to grow in the future, and it's just paced right now, is the best way to describe it. I do believe we're at the bottom of the trough, still bumping a little bit, but you know, do believe at some time those troughs definitely start to lead back upward.

David Marsh (Equity Research Analyst)

Bill, I think, you know, one of the things that, you know, I caught on to in your comments,

Bill Wentworth (President and CEO)

Yep

David Marsh (Equity Research Analyst)

- that actually is pretty encouraging to me, was your mention of, you know, kind of broader expansion into more, and different end markets.

Bill Wentworth (President and CEO)

Yeah.

David Marsh (Equity Research Analyst)

I mean, could you talk about maybe a few that sort of, you know, sort of stand out in your mind as maybe low-hanging fruit opportunities? I mean, I know that the company's been good in industrial, but, beyond that, I don't really know. You know, there's never really been a lot of talk about specific markets highlighted.

Bill Wentworth (President and CEO)

Yeah. And another great question, obviously, is I've done a lot of discovery work over the last 60 days. And being in this industry as well as an independent service provider, you know, it's about really inserting yourself in the path of the supply chain, right? I mean, it's great to service on those direct customers, but who can you partner with that can drive, you know, significant more system sales, but also other products within our portfolio, such as manual and semi-manual systems, which also expands your platform as well. So, examples would be things like the global component distribution companies, such as the Arrows and the Avnets and EMS contract manufacturers who already have a diversified customer base.

We just need to adapt some of our business models and how we manage and service that sector, which we're definitely capable of doing. There's going to be some changes necessary internally to do it, as well as we need to do to service those clients. But that automatically diversifies your customer base because the Arrows and the Avnets are really a really good barometer of what's going on in the global supply chains. So we'll be focusing in on those, you know, those supply chain partners that serve a broader markets.

David Marsh (Equity Research Analyst)

That makes a lot of sense. Let me jump back in the queue and let some others have a shot.

Bill Wentworth (President and CEO)

Yeah, sure.

Operator (participant)

The next question will come from Michael Cooper, investor. Please go ahead.

My question is around the executive compensation. Here's a company that for the last 10 years, hasn't made any money for shareholders. You've been utilizing our capital for all that time. Anthony Ambrose has pulled over $6 million out of the company in terms of stock options and pay. Last year, he got a raise to $775,000. So I'm just wondering, is this company being run for executives or for shareholders? And what is the new CEO compensation package? And what's the philosophy around aligning executive compensation and performance? Thank you.

Gerald Ng (CFO and VP)

Yeah, this is Jerry Ng, and I'll take that particular call. There's obviously multiple threads to your question here, but I'll try to keep it at a high level. First and foremost, you know, we are managed by the board of directors, and as part of the board of directors, we do have a compensation committee. That compensation committee obviously looks at executive compensation on a recurring and annual basis. I believe that the committee clearly looks at levels that are market competitive, given the level, given the size of the company and so forth. So I think that's one criteria that, but that is very structured and organized.

Number two, part of the comp structure, which is, again, available in our proxy. It's both a mix of both salary as well as a lot of variable compensation, including stock grants, and again, very similarly, that is really looked at closely. A portion of the compensation is tied to, obviously, salary. A portion is tied to the performance of the company and the performance of the business, which in turn is also then tied to the value we generate for shareholders. I think all those key concerns and points that you've noted, Michael, are things that the board and the comp committee looks at as we establish, and again, as we establish compensation for executives.

Operator (participant)

The next question will come from Kris Tuttle with Blue Caterpillar. Please go ahead.

Kris Tuttle (Head of Research and Chief Investment Officer)

Hi, thanks for taking my question. I wonder if you could elaborate a little bit on the transition to a growth strategy. You know, you've tightened the ship here, did a nice job and went down for a cyclical market. But, what should we be looking for for the company to be back on a growth path? Do we need to wait and see some new products announced, new marketing initiatives, or is this just gonna be something that shows up in booking growth? And, you know, maybe, you know, you could venture some rough timeframes on that.

Bill Wentworth (President and CEO)

Sure. Jerry, you want to take a first stab, and I'll chime in?

Gerald Ng (CFO and VP)

Yeah, I'll jump in, and Kris, good question. But I'll give you a couple of different frames in my response. First frame, short term versus long term. Obviously, we are focused on what we need to deliver today, this month, this quarter, and this year, and so we have clearly active participation initiatives from our sales, marketing, and the rest of the organization on how we can drive performance now. Obviously, those initiatives are gonna be a little more focused on our current available products and more on how we go to market, so that's clearly an emphasis. Again, we need to balance that with obviously the current market dynamics.

At the same time, we clearly have longer term opportunities that Bill and team are looking at, that we've indicated. Some are gonna be on a product level in terms of how we optimize, improve, and maybe even emphasize different components of our product line. Some of it's gonna be channel. Our Asia market has done really well this year, but our Americas and Europe market have not. And so there's some go-to-market initiatives and opportunities that we can improve upon that may deliver results, not maybe necessarily tomorrow, but clearly in the near term. And then, of course, you know, you always get into the discussion around organic versus inorganic.

And so, I think everything is on the table in terms of our focus, short term, long term, as well as organic and inorganic, product versus go-to-market activities. So-

Bill Wentworth (President and CEO)

And Kris, to add to that, so I'll go back to kind of my early days in this industry, and it's, I've been in this space for a very long time, and when I started Source, Data I/O was our supplier. They were our only supplier. And the reason why is because one of the things that Data I/O did very well back in those days was that their brand, their manual programming centers were given out to a lot of engineering labs and development teams, and that's how it built up the device library and algorithms. And when you wanted to program a part, the option was, the brand was Data I/O.

And so when I look back at that, you know, what, what brought Data I/O to that point of that level of recognition across our industry, when I got here and started to do discovery work, I'm like, "Hmm, what's going on in that manual and desktop and semi-manual systems, and what are we doing in that space? How are we broadening our customer base? How are we broadening our device support?" And I found a gap. And so, you know, we're looking at that space, and we have products in that space, so we can push now. But do they need to be updated? Sure. It's been a little while, so we're looking to, you know, look at some of the product gaps. They're not huge, but, you know, small...

They're big enough to, you know, that when we fill them, it will expand our device library and expand the brand, and by doing that and getting in early in those, you know, engineering labs, you're spec'd in early when they go to production, which will lead to system sales, so when I talk about small gaps, it seems small, but when you actually execute, it becomes a big growth driver, as an example.

Gerald Ng (CFO and VP)

Thank you, Kris.

Kris Tuttle (Head of Research and Chief Investment Officer)

Oh, okay. Yeah, that's helpful. Thank you, guys.

Gerald Ng (CFO and VP)

Yep.

Operator (participant)

This concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks. Please go ahead.

Bill Wentworth (President and CEO)

Thank you very much, operator. To all our listeners participating in today's event, we trust coming away from this call, you are sharing our excitement and enthusiasm, the next phase of growth of Data I/O. At this point, I'd like to conclude the call. Enjoy the rest of your day. Goodbye, and look forward to seeing some of you out in New York City next week.

Operator (participant)

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