Data I/O Corporation

Good afternoon and welcome to the DataIO Corporation fourth quarter 2020 financial results conference call. All participants will be in listen-only mode. Should you need assistance, please signal a 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 two. Please note, this event is being recorded. I would now like to turn the conference over to Jordan Darrow. Please go ahead.

Thank you, and welcome to the Data.io Corporation fourth quarter and year-end 2020 Financial Results Conference call. With me today are Anthony Ambrose, President and Chief Executive Officer 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 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, 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.io is under no duty to update any of these forward-looking statements. Now I would like to turn the call over to Anthony Ambrose, President and CEO of Data.io.

Well, thank you very much, Jordan. I'll begin my formal remarks by addressing our fourth quarter 2020 and full-year financial and operational performance, talk a little bit about the market and recent developments, and then I'll turn it over to Joel Hatlin, our CFO, for details on the numbers. If we step back a bit, 2020 was a year dominated by COVID. We're very pleased with the progress that's been made amid the fallout from the COVID-19 pandemic. I'd like to thank again and 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. In 2020, we had to react to global 19 pandemic. The COVID-19 has impacted all aspects of our business, from customer demand, supply chain integrity, employee safety, business processes, and financial management. As a global company, we had to manage each of these while working within the guidelines of local and national policies within the United States, China, and Germany, among other jurisdictions. Our philosophy at the start of the outbreak of the pandemic was very simple. Number one, keep our people and their families safe. Number two, keep our facilities safe and operational while we serve our customers as an essential business. And number three, preserve our capital and cash. We managed all these successfully to date with no known employee transmissions at work and preservation of our working capital throughout the year. Our resilient supply chain model kept our facilities open and serving customers globally. We supported customers rapidly transitioning to medical device support during the year. We did all of this while facing unique international travel restrictions, shipping delays, and inability to meet with customers in person. All the while, we persevered and slightly grew our cash balances, while moving more cash into the United States. We also discovered we have several interesting opportunities to re-engineer many of our business practices to become even more effective and efficient in the years to come. Bookings continue to recover from the Q2 bottom to $6 million in Q4. They were back-end loaded, and more than usual, the bookings carried over into Q1 as backlog and deferred revenue. Consumables were particularly strong in Q4 as we saw factories recovering and running at higher utilization. We're keeping an eye on two short-term factors, the chip shortages in automotive that have garnered a lot of press, as well as continued lockdowns in EMEA and Southeast Asia. The so-called chipageddon, where a number of automotive assembly plants have closed for lack of semiconductors, is big news all over the world. Obviously, anything that closes automotive plants is not good news for the automotive supply chain. But so far, we've not seen this impact our consumables business, and our funnel for automotive CapEx remains solid. On the R&D front, most notable is the continued advancement of our PSV family of products that is the global leader in the automotive electronics programming industry, and also the progress made in our Centrix platform. On Centrix, you've heard me talk throughout the year about simplifying scale. In the third quarter, we released our next generation Centrix systems and tools. With this release, we've now developed and control the critical intellectual property for security provisioning within the Centrix framework. This next generation Centrix system simplifies end-to-end the provisioning and deployment of robust Internet of Things and automotive security and enables an outsourced as-a-service business model with our partners. Centrix Product Creator is a powerful software suite that enables OEMs to securely, quickly, and easily define the security deployment for their products, and to securely deliver these product security definitions and secrets to a Centrix-enabled production facility remotely. The new Centrix product creator tool supports two deployment models in cooperation with leading embedded silicon vendors. The first, Centrix Go, and the second is 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 supports fully custom provisioning definitions. Both models enable product security definition collaboration between OEMs, silicon vendors, and programming partners to easily define, provision, and deploy robust IoT device security. During Q4, we announced supports for two new device families, the NXP SE050 Secure Element and the Infineon Optiga TPM family. We'll be presenting the tools and Centrix Go and the whole product creator family at the upcoming Virtual Embedded World event next week. We're once again nominated for the Best of Show Award and one of three finalists from amongst the entire exhibitor base. In the fourth quarter, we took a substantial non-cash charge. Our investments in strategic technology around second generation Centrix made the first generation obsolete. And we therefore wrote off these obsolete systems and prepaid royalties associated with them. We also completed the end of the service leg of legacy handlers at the end of 2020. This includes the old PS family, the old FLX 500 family, among others. We impaired the spare parts we'd kept to support these customers for many years. These actions significantly impacted the operating results in Q4, but again, were non-cash charges and will result in about 100K less in annual depreciation going forward. It will also allow us to focus more on our modern platforms for some of the process improvements I mentioned earlier. Looking towards 2021, we're well positioned to benefit as the market momentum cycles upward. The secular growth rates for automotive electronics are estimated by market participants and analysts alike at a compounded annual growth rate of 10 to 15% for the next decade. The recent short-term disruption of semiconductor supply only highlights the growth of semiconductors within the automotive industry. This is our market opportunity and why we continue to invest in R&D to extend our lead in automotive. During the year, we won orders for UFS, microcontrollers, and other automotive programming requirements, which drove our install based over 330 PSV systems in the field at the end of the year. With each unit sold, we reap ongoing consumable and other related recurring revenue. In conclusion, I'd like to address our outlook for 2021 based on our encouraging trends in the second half of 2020. For 2021, we're planning to grow in line with the automotive semiconductor market, which as we've talked about is estimated to have a CAGR of 10 to 15% for the next decade. We continue to control our production costs, so our gross margins are expected to be maintained in the mid to high 50% range, with efficiencies gained depending on output and benefits from revenue mix, including expanding recurring revenues. From lower levels of spending in 2020, we expect operating expenses to increase modestly by about 2% in 2021, with a continued emphasis on R&D. In terms of the bottom line and flow through to our balance sheet, We believe meeting these targets will deliver disproportionate improvements in profitability and cash flow. With that, I'll turn it over to Joel Hatland, our Chief Operating Officer and CFO. Joel?