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spk01: Good afternoon and welcome to Data.io Corporation's third quarter of 2020 financial results conference call. All participants will be in listen-only mode. Should you need assistance, please call the conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then 2. Please note this event is recorded. I would now like to turn the conference over to Mr. Jordan Darrow. Please go ahead.
spk02: Thank you and welcome to the Data.io Corporation third quarter 2020 financial results conference call. With me today are Anthony Ambrose, President and CEO of Data.io Corporation, and Joel Hatland, Chief Operating Officer and Chief Financial Officer of Data.io. 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, estimated impact of tax 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 from the COVID-19 pandemic, along with continued reopening and recovery efforts within the supply chain and among our customer base, levels of orders, 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, 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 its Securities and Exchange Commissions. press releases, and other communications. The accuracy and completeness of forward-looking statements should not be unduly relied upon. DataIO is under no duty to update any of these forward-looking statements. And now I would like to turn over the call to Anthony Ambrose, President and CEO of DataIO.
spk09: Well, thank you very much, Jordan. I'll begin my formal remarks in a moment, including our 2020 Q3 performance, recent developments, and I'll turn it over to Joel. But once again, I'd like to express our appreciation for the health of our staff, our customers, our partners, and their families, and are grateful for the sacrifices made by healthcare professionals and first responders around the world. The global team here at DataIO has been truly remarkable, and I personally must commend each and every one of them for a job well done. Before we go into quarterly details, I'd first like to welcome our newest board member, Sally Washlow. Sally joined the board of directors effective October 28th of this year. As a consultant and former CEO for Cedar Electronics, she brings experience to the board as an operating leader in the security and automotive electronics markets. From 2015 to 2017, she was the chief executive officer of Cedar Electronics Corporation, the supplier of radar detectors, GPS systems, dash cameras, and other electronic products, and led the integration of the Cobra and Escort electronics businesses. She currently serves on the board of directors of CoStar Technologies, which is an OTC market company. And she'll serve on the Nominating and Governance Committee as well as the Compensation Committee here at DataIO. Sally replaces JD Delafield, who resigned. We'd like to thank JD for his service on the board and wish him well in his future endeavors. Now on to third quarter results. We reported very strong growth sequentially from the second quarter in revenues and bookings. And year-over-year sales increased 56% from last year and 26% sequentially from Q2. Our turnaround in financial performance in third quarter is bolstered by what appears to be a bottoming out of our primary addressable market in automotive electronics in the second quarter. We're seeing the earliest and most significant resumption in China and parts of Asia in that business. EMEA, Americas, and other regions within Asia still have impediments to a full recovery, including COVID-19, as well as a cyclical downturn. We're keeping a close eye on the so-called second wave in EMEA and other countries, and we're looking forward to see how Q4 unfolds in those regions. DataIO's award-winning support, installed base and automotive, and performance for value were key factors in our ability to capture some key customer wins in the third quarter. Among them was a significant multi-system order for UFS and other programming requirements at a large multinational tier one electronic supplier. We also had good order flow throughout the quarter above our internal forecasts. The end of the third quarter we deployed our 320th PSV family system. Automotive electronics customers represented about 60% of third quarter bookings, up from 50% in the second quarter. It seems that our commitment to leading the industry with consistently investing in technical innovations, particularly during cyclical downturns, is delivering the intended results with these recent wins and early strength in the recovering automotive electronics sector. On the R&D front, most notable was our continuing advancements made for our Centrix platform. You may have heard me talk about simplify and scale for Centrix as our 2020 strategy. Yesterday, as highlighted in a press release, It showcased what we did in Q3 when we released our next generation Centrix system and tools. The next generation Centrix system simplifies end-to-end the provisioning and deployment of robust IoT and automotive security solutions and enables an outsourced as-a-service business model for our customers. Centrix Product Creator is a powerful software suite that enables OEMs to securely, quickly, and easily define the security deployment for their products and securely deliver their product definitions, secrets, and other certificates and keys to Centrix-enabled production facilities remotely. The new Centrix product creator tool supports two deployment models in cooperation with our leading embedded silicon partners, Centrix Go and Centrix Custom. Centrix Go streamlines IoT security deployment and provisioning using pre-configured use cases and a simplified developer experience. Centrix Go supports the most common use cases for creating and managing device identities, secure boot, cloud onboarding, device authentication, and other use cases. Centrix Custom fully supports custom provisioning definitions. Both models enable product security definition collaboration between OEM, silicon suppliers, and programming partners to easily define, provision, and deploy robust IoT device security solutions. At September 30th, our cash position remained strong at about 13 million U.S. dollars, down about 300K from the end of the second quarter, largely due in part to a one-time tax expense of a quarter million dollars paid to China in order to repatriate over $2 million in cash from that country to the U.S. Cash repatriation will provide additional flexibility and should reduce quarterly currency fluctuations. Joel Hatton will go into more detail about that in his remarks. And with that, I'll turn it over to Joel. Go ahead, Joel.
spk03: Thank you, Anthony, and good day to everyone. Net sales in the third quarter of 2020 were $5.9 million as compared with $3.8 million in the prior year period and $4.7 million in the second quarter of 2020. Third quarter bookings were $5.6 million as compared with $4.3 million in the third quarter of 2019 and $5 million in the second quarter of 2020. With first quarter 2020 bookings of 4.3 million, we have seen sequential growth during the first three quarters of the year. On a geographic basis, international sales represented approximately 92.5% of total net sales for the third quarter of 2020, compared with 89.8 in the 2019 period. Total capital equipment sales were 65% of revenues, adapters, 21%, and software services, 14% of revenues for the third quarter of 2020 compared with 41%, 35%, and 24% respectively for the third quarter of 2019. 2020 third quarter bookings composition included 60% from the automotive sector, 24% from the IoT and industrial controls and other sectors, and 16% from programming centers. Gross margin as a percentage of sales in the third quarter of 2020 was 55%, as compared with 52.6% in the third quarter of 2019, and 52.4% in the second quarter of 2020. For the third quarter of 2020, Gross margin was primarily impacted by fixed costs being spread over a higher revenue amount compared with prior periods and a favorable channel and revenue mix as compared to the second quarter of 2020. Operating expenses were $335,000 higher than in the prior year period. R&D was $60,000 higher than the third quarter of 2019. and relates to continued advancements in our technology solutions, as Anthony discussed in his remarks. SG&A of $1.8 million was $275,000 higher than in Q3 of 2019, with the primary increases relating to higher stock-based compensation, contractor costs, and business-level variable expenses, such as higher sales commissions related to channel mix and volume. Partially offsetting these were certain reductions in work hours, pay cuts, various government assistance programs taken in response to COVID-19, which impacted a portion of our Q320 results as this flowed into the period from actions taken during the second quarter. Also due to COVID-19 limitations, we continued to reduce travel, trade show, and other promotional activities. In accordance with generally accepted accounting principles gap, net income in the third quarter of 2020 was a loss of $707,000 or nine cents per share compared with a net loss of 844,000 or 10 cents per share in the third quarter of 2019. Foreign currency transaction loss was 271,000 in the third quarter of 20 as compared with a gain of $226,000 in the prior year period. Due to the repatriation of cash from China to the United States, we were required to pay a dividend withholding tax in China of $240,000, bringing the company's consolidated income tax for the period to $340,000 as compared with $55,000 in the third quarter of 2019. Backlog at September 30, 2020 was $2.8 million, unchanged from the June 30, 2020, and up from $2.3 million at March 31, and $1.7 million at September 30, 2019. Data.io had $1.2 million in deferred revenue at the end of the third quarter of 2020, which was down from $1.4 million at June 30, 2020. Our days sales outstanding, or DSO, a receivables collection measure at September 30th was below our target measure at 58 days as receivables increased 1.4 million from the end of the second quarter as revenues increased sequentially by 1.2 million from the second quarter. Net working capital at the end of the third quarter was 18.3 million as compared with 18 million at June 30th of 2020 and 18.5 million at December 31st, 2019. Dedo's financial condition remains strong with cash of 13 million at September 30th of 2020. Our cash position is down from 13.3 million at June 30th and 13.9 million at the beginning of the year. From a financial perspective, we entered into the crisis in a position of strength and remain healthy. We believe that we continue to benefit from data being the largest company in our industry sector and with a highly resilient business model supported by the strongest financial position, including the large cash balance and no debt. As previously disclosed early in the second quarter, we implemented cash conservation and expense management initiatives. Most of these actions continued during the third quarter with a minimal amount of costs increasing as business and travel began to resume. We have not and still do not expect to accept funding from the SBA PPP plan in the United States or in any subsequent stimulus bills. At the beginning of the fourth quarter, we issued shares to directors to pay two quarters of deferred compensation and restored the executive and board level compensation, which had been cut 20% since the start of the second quarter as part of our cash conservation and expense management. Finally, we had shares outstanding of $8,395,600 at September 30th of 2020. That concludes my remarks, and I'll turn the call back to the operator to begin the Q&A segment. Operator, would you please start the Q&A process?
spk01: We will now begin the question and answer session. To ask a question, you may on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing . To withdraw your question, please press . At this time, we will pause momentarily to assemble our roster. Our first question comes from Jason with Lake Street.
spk06: Hey, guys. Thanks for taking my questions. I know there's a lot of moving parts with the macro, but just curious if you could comment on how you're feeling about your overall visibility. And I guess more specifically, how does visibility compare today compared to how it was three months ago?
spk09: That's like saying if you're stuck at the bottom of a pool in the dark and you come up and you have a flashlight, you're better off. So, yeah, we're better off clearly than we were three months ago. What appears to be happening, Jason, is, you know, in Asia I think we have a little bit better visibility. You know, business has been pretty good there, pretty predictable. I won't say things are back to normal, but they're reasonably close. You know, I think I was feeling better about Europe until a couple weeks ago. Now, you know, they're having a huge spike in cases. You know, hopefully that abates pretty quickly. We'll just have to see. I think the common thread throughout everything is the automotive electronics industry, which had shut down for a decent portion of Q2, came back in Q3 and is getting closer to full production in Q4. That's pretty clear. And I think you've heard that from maybe some of the other companies that reported today in the automotive electronics segment. So that's our primary factor on visibility. And then on the Centrix side, obviously with the new tools announcement, we're also starting to see some more interesting deal flow in terms of the quantity of potential deals. I'm sorry, the quantity of units associated with each potential deal.
spk06: OK, that's helpful. And then in regards to the multi-system order win, can you just provide some color on is this an existing customer and how should we think about the delivery timeline?
spk09: Yeah, it's an existing customer, and they had to scale out. We've had a good relationship with them for a while. You know, it was a good win for us. You know, we had to compete effectively in order to win it. And we did. You know, think about it hitting in Q4 predominantly. Some of them might be in Q1. But, you know, that's pretty typical on these types of orders.
spk06: Okay. And the last one for me, and I'll jump back into Q. I think you mentioned about 16% of bookings were related to programming centers. Can you just provide an update on sort of how you're thinking about that market coming back online?
spk09: I think the, you know, there's no, I think the capacity, they have generally adequate capacity. You know, we do a decent business with programming centers, whether or not they need capacity or not, just from, you know, the consumables and service and support. There are some that probably will be buying some equipment, others that are probably okay for a while. I don't see that mix moving substantially one direction or another over a sustained period of time. You know, you can always get something to happen in a quarter that can move the needle one way or the other. But, you know, it sort of feels like that's going to be steady for a while.
spk06: Okay. Thanks a lot, guys.
spk01: Our next question comes from Jeff Patterson with Austin Capital.
spk07: Thanks, Anthony and Joel, for taking my questions. I'd like to ask about the how should we think about Centrix. First, you talk about the simplifying scale. Can you define what that means relative to the system available for the past year?
spk09: Yeah, sure. So we've been talking about that as our strategy for pretty much the balance of 2020. And I would encourage you to read the announcement that we made yesterday. I think that has a lot of the details in it. But what we realized from our early work in Centrix and our Gen 1 platform is that the product was great. It was highly secure. Customers could make it work. But we found that the customers that were drawn to the product were really wanted to have a simpler user experience, a better user experience, one that was a lot easier for them to implement a model where they had to work with perhaps a certificate authority or do simple things like get on board to a cloud. And what we decided to do was make the whole tools experience much simpler, not only for the customer, the end customer, but our programming center partners as and potentially partners in certificate authorities and other places so that things that you would need to have to have a successful job created could be easily managed in one place that had a common look and feel and was much easier to use. And that was the biggest thing we've done with our Centrix tools on Simplify. On scale, what we've done is, as you know, we have about 320 PSV systems around the world And it's always been our intent, you know, long-term to make those become opportunities to upgrade to Centrix at the right time. And, you know, with our second-generation architecture, that becomes a lot easier for us to do both financially and logistically.
spk07: Okay, thanks. Very helpful. Regarding your announcement earlier this week, did you develop this internally?
spk09: Yeah, what we've done is all the tools, it's our common tools flow that's built around our existing integration of our existing data programming tool flow and internally developed security tool flow. So that portion of the product has been internally developed. We've been working hard on that for a while. And, you know, while the world was paying attention to COVID, we had a lot of our developers busy getting this thing done.
spk07: Great, helpful, thank you. One last question is, can you talk about your security and how it has evolved with the partnerships you've entered into? And are there any key wins you can discuss to demonstrate the key players who are adopting your technology?
spk09: Yeah, so I think that the key thing is, I'd refer you to the announcement we made last quarter where Cypress, now an Infineon company, announced their support for a direct-to-Amazon cloud version of their PSOC 64 microcontroller. And that's obviously supported on Centrix. And what we're seeing, again, if you look at the big changes in some of our partners, what they're trying to do is also pick up on the simplify mantra. If you look at the NXP website, for example, you can see how they've broken up their secure elements into a model where the customer can get predefined use cases done. They can go full custom. They can also go direct to a cloud onboarding. And I think you're going to see further announcements in this regard from the leading secure element and secure microcontroller companies. Again, we're trying to make it all much easier for the customer to just do what they want quickly, easily, and with a minimum of design-in time.
spk07: Thanks, and that's helpful. That's all the questions. Thank you.
spk02: Operator, would you please take the next caller?
spk01: Our next question comes from Mr. George from MKH Management.
spk05: Thank you, Operator. Hi, Anthony and Joel. How are you?
spk09: Hey, George. Hey, George. How are you doing?
spk05: Good. Thank you. Quick follow-up on the Tier 1 auto, the multi-system deal. This was an existing customer, but did they previously only use your tools, or did they use competitors' tools, and is this kind of a win from a unit perspective for you guys? Yes.
spk09: Well, George, it's, you know, they have been a previous customer. We think on pre-programming they've been largely working with Data.io. You know, I can't say it's 100% type of thing. But, no, it was a clear situation where they had a decision to make and they decided that, you know, as they added capacity here, it was best to work with Data.io going forward. And, you know, we're very grateful to have been selected. Thank you. You know, this is one of those cases where, you know, we talk about it, you know, I hope we're not getting boring on the subject, but, you know, even when times are tough, people need to buy equipment to support new technology, and they're willing to do that. And if you don't have the new technology, then you're not considered. If you do have the new technology, then you're in the running, and, you know, then you get to talk about all the other great things you can do for them. So that was the case here, and as I said, we're very happy to have that in Q3.
spk05: Great. And the competitor, the people you were competing with, were they domestic providers or was it an international provider?
spk09: I think they were more of an upset provider than any of the other two, George.
spk05: Okay. Okay. Great. And then just a quick question on Centrix. The market on the whole seems to have been sort of rather slow to adopt that kind of technology? Is it that the market, is it the IoT market is really not quite well secure at this time, or have they sort of adopted a different way to secure their devices and the data that flows?
spk09: I think, George, you know, if you look at it, obviously we were hoping that Centrix would have ramped faster than it has. And, you know, we've done our own looking at this problem, and we realize, you know, part of it was us, You know, we need to make our tools easier to use, which we've done and just announced. Part of it was our semi-partners. You know, they had, in some cases, delayed their own products. And part of it was the market that, you know, didn't know how to get security in, maybe didn't know the best way to do it, wasn't sure they needed it. And I think, you know, all three, there's been improvement on all three fronts. And so, you know, again, steady progress. Wish it were faster. We're doing our part. We're starting to see the semi-companies doing their part, not only with getting their products into the market, but getting them positioned in a way that makes them easier to use, and also taking care of some of the things that we've talked about, getting direct-to-cloud onboarding, doing things that, again, make it very easy for customers to do certain things that they want to do as part of IoT security. So it's a combination of all three, and, you know, we hope that gives us better results going forward.
spk05: Okay, great. Thank you very much. Appreciate it.
spk09: Thank you, George.
spk01: Again, to ask a question, please press star then 1. Our next question comes from Mr. Todd from Engage Management.
spk04: Hi. Thanks for taking my question. You talked about the bottoming out in the second quarter of the automotive electronics sector, and I just wonder if you had a few more specifics on what you'd seen in the industry and data I.O. specifically that may support the ongoing rebound?
spk09: Yeah, Todd, thanks very much for the question. You know, as we mentioned earlier, I think Joel had indicated we're about 50% of less business in Q2 was automotive and 60% of more business in Q3 was automotive. So we clearly saw it in the bookings. We also saw it in terms of our customers' factories actually being open in Q3. A number of them had closed anywhere between two and six weeks in Q2 for either COVID-related reasons or demand-related reasons. And, you know, they largely came back. Some of them were operating at less than full capacity, but they were largely back answering the phone, answering emails, things like that, and buying consumables. So, you know, those are the big indicators on our side. And then I think you've got some, you know, confirming indicators from some of the big boys. I mentioned NXP. Aptiv, Vistion were out today with their earnings, and, you know, all were positive on automotive electronics.
spk04: Great. What might a recovery look like based on prior business cycles? Again, acknowledging we have the COVID with flashlights in the swimming pool. I like that. But do you have some thoughts, I mean, going forward on what that recovery might look like in the automotive industry?
spk09: Yeah, as I just cautioned, we don't give forward guidance because it's just real hard for us to do a good job there. But what we look at going forward is if you step back, whether you look at Gardner Group or some of the other industry forecasters, whether you look at the semiconductor companies and their own prognostications, they seem to believe that automotive electronics is a big growth area today. in a secular manner over the next five to 10 years. And we can talk about the reasons why, the advances in electrification, autonomous driving, infotainment, connectivity, mobility, et cetera, et cetera. So we believe that thesis that automotive electronics is the place to be. Now, from our standpoint, as that business grows and we can grow our support in automotive, I'd encourage you to look and see what happened the last time we had a big up cycle led by automotive. We were able to show very strong operating leverage as a company. Close to 40 cents of every new revenue dollar ended up coming down to the operating income line. And, you know, as we go forward doing that with some intelligence around tariff management, tax planning to use our NOLs and things like that, I think we'll be able to do pretty well on the bottom line.
spk04: Great, thanks. And one last thing, relative to last business cycle, I think one of the things we have right now is, you know, autonomous driving seems to be coming on. I just wondered, is that, did you view that as a catalyst going forward and any other catalyst in particular that might make it a little bit different than the last business cycle? I think you're correct.
spk09: Autonomous driving, in fact, the whole advanced driver assist system marketplace or the ADAS marketplace, the infotainment marketplace, and also, as I mentioned, electrification, not just full EVs and hybrids, but 48-volt systems in internal combustion engines. That's why I think the analysts are pretty excited about the long-term future of semiconductor content in cars.
spk04: Great. Thank you very much. Thank you.
spk01: Our next question comes from Mr. Hobart Anderson with Ben Brooke.
spk08: Good afternoon, Anthony. Nice quarter.
spk09: Thank you, Bob. How are you doing?
spk08: Good. Thank you. Rainy day here in Connecticut, but we're moving ahead. I had a two-part question. The first part is summarize data I.O. relative to the competition, both in automotive and the centrics area. And then I have a specific centrics question. But let's just talk about the competition, where they are.
spk09: Sure. So, Bob, I'll just mention that, you know, we don't have the luxury of having a lot of public information out on our competitors' What we understand is from our own internal analysis. It's pretty clear, though, that we're by far and away the largest supplier in our industry, about double the size, we believe, of the next largest competitor. And we're also the only really truly global company. That gives us a really good selling point with the automotive electronics companies, all of whom are global. all of whom need to have a consistency of product, support, and understanding, and frankly, they like doing business with companies that have money in the bank. So it's hard to give you a precise market share for automotive pre-programming, but again, we're the largest in the industry, and if we're at 60% in automotive electronics and we're at least double the size of our nearest competitor, If you do the math, that means our automotive business is bigger than anyone else's total business. So that's how we feel about the automotive sector. On Centrix, we have a truly unique value proposition in architecture, tools, system configuration with Centrix. We also have relationships that are very strong with the semiconductor companies, and our technology is patent-protected. So, you know, we just don't see anyone out there with something that's exactly like Centrix. You know, as with everything in programming, there are substitute ways to do things. You know, you can provision at the wafer level. You can provision at the end of the line. You can provision over the air. But we believe our approach offers the best combination of security, flexibility, and value, and that's why we like it.
spk08: Okay, that's good. And my second question relates to your Centrix announcement yesterday. Explain the economics of it. You said you have 320 PSVs. So somebody comes along and says, Anthony, I'd like to upgrade it and install some of your new Centrix offerings. What approximately would somebody pay to upgrade their PSV?
spk09: Well, Bob, I wish I could tell you that, but that's a pretty good trade secret, and I'm pretty sure my competitors like to listen to this call. But let me tell you, though, that we could have offered that two years ago to anyone. It would have been significant in terms of a cash outlay on our part to provide a full centric system to a customer. What we can do now is substantially reduce whatever capital outlay we might need to make to upgrade a system to allow a customer to use Centrix as a service on an existing PSV system. So we've eliminated a barrier to deployment. Now we still got to go out and win the business because people aren't going to want to upgrade unless they have a reason to. But I think when we are able to do that, we'll have a much easier time supporting that demand ramp.
spk08: So if I understand you correctly, it's not an outright purchase. It's a kind of a use charge or a rental or something like that.
spk09: Yeah, it's a pay-per-use fee. That's exactly correct. So think of your mobile phone, right? If you want to buy a brand-new iPhone... you know, you've got to pay for it. Maybe you've got to pay monthly installments. If you want to buy a feature phone, the network operator will just give you the phone and they get paid back in minutes.
spk08: Right. Okay. Thank you.
spk09: Thank you, Bob. Take care of yourself.
spk08: Yep.
spk01: This concludes our question and answer session. I would like to turn the conference over to the company for any remarks.
spk09: Thank you very much, operator. I'd like to thank everyone for joining the call and appreciate the good questions. At this point, our Q3 earnings call is now closed.
spk01: The conference has now concluded. Thank you for attending today's presentation. You may now
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