Data I/O Corporation

Good day and welcome to the Data.io third quarter 2021 financial results conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch-tone phone. 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 Jim Finucchi, Investor Relations. Please go ahead.

Thank you, and welcome to the Data.io Corporation third quarter 2021 financial results conference call. This is Jim Finucchi filling in today for Jordan Darrow, who will be available starting tomorrow. 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 statement 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 upon 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, Jim. I'll begin my formal remarks by addressing our 2021 third quarter financial and operational performance, talk a little bit about how we see the long-term future And then I'll turn it over to Joel for more detailed discussion of the numbers. Company reported good results in 2021 third quarter, driven primarily by the substantial backlog developed during the first half of the year and continuing strong adapter demand. Adapter bookings in the third quarter of 2021 continued their strength that we've seen all year. Our increasing installed base of PSV machines provide recurring and consumable revenues, which supplement our capital equipment sales. Additionally, we've seen customers qualifying second sources for short semiconductor components, and this requires new design support and new adapter support from DataIO. Additionally, we've also seen increased software and services bookings year to date, which will transfer into increased revenue as it is recognized. Recurring revenue is about 40% of the total revenue this year to date, and our long-term goal is for this to continue to increase. On the CapEx side, we had an excellent win rate on new systems where customers actually ordered systems. We did see some customers push some orders out of third quarter until they had better visibility on their silicon supply chain to justify new capital investment. Earlier today, you may have heard that GM and Ford indicated the worst of the automotive-induced semiconductor shortage was behind them, with a full recovery expected sometime in mid-22. Our resilient supply chain delivered extremely well in Q3. Our factories in Redmond and Shanghai were able to ship despite the global shortages of semiconductors, shipping issues, and ongoing concerns with COVID-19 in many customer locations. Our strategy to extend our purchase commitments and create inventory for the PSV family late last year has paid dividends for us and our customers. As a result, we're able to maintain our lead times on the PSC family and are ready to respond quickly to the next uptick in orders. So regarding COVID-19 and its associated impacts, all are still safe and our facilities are fully operational. We're over 98% fully vaccinated here in Redmond without any company mandate. Global operations are over 90% vaccinated and are working without interruption. Our strategy for maintaining our workforce without layoffs in the depths of COVID is continuing to pay off in our ability to rapidly support operations, as well as our continued progress in R&D. DataIO is formally converted to a hybrid model for the workforce here in the USA, where people work some of the time in the office and some of the time at home, unless, of course, they're on the operation floor where they're here 100% of the time. We are returning to more normalized activities, including participation in trade shows and more business travel. We recently participated in the NEPCON trade show in China, and next month we'll be participating at the Productronica trade show in Germany. Since October is when we review our long-term planning, I'd like to share with you some of our thoughts on the data we use to plan our business and how we see the future unfolding. As we've been talking about for a long time, at least five years, automotive electronics is our primary market. And we are very, very bullish about the short, medium, and long-term future in automotive electronics. The automotive semiconductor total available market is expected to grow from $33 billion in 2020 to $59 billion in 2025, representing about a 12% compounded annual growth rate over that period. That's according to IHS Market, an industry analyst firm. This is right in the middle of the range we have used, which is a 10% to 15% compounded annual growth rate. Recent Deutsche Bank research is very revealing and validates what we've been talking about and seen and also our own forecasts. In almost every quarter going back to 2017, growth in automotive semiconductor revenues has outperformed global growth in automotive production in terms of units by about 10 percentage points. So our main thesis for Data.io is that the automotive semiconductor market, which requires programming, is growing faster than the unit market, And ultimately, that's the source of our optimism in the market. Today, about $300 to $400 of semiconductor content goes into a typical mid-range vehicle, according to Deutsche Bank, with the bulk of that in microcontroller and analog parts. IC Insights, another analyst group, reported that microcontroller sales in automotive this year surged 23%, despite the supply chain shortages. Again, we've all been talking about and hearing about shortages in the supply chain. We need to remember that it's shortage to the vastly increased demand, not necessarily short of where they were a year ago. So what's behind the growth in the automotive silicon demand? So the catalysts for growth really are around several areas that we've talked about several times. Number one are electric vehicles and alternative energy vehicles. Number two, autonomous driving. Number three, inclusion of connected and secure vehicles with infotainment options. And number four, advanced safety features. So we dig into each of these. The major bets on EVs and alternative energy are well known to anyone, and this is all public information. Toyota plans to spend about $13.5 billion on EV battery technology. Hyundai plans to launch hydrogen versions of all their vehicles by 2028. On October 16th, GM announced plans to double their annual revenues by the end of the decade as it relates to all-electric vision. GM has already announced plans to invest $35 billion through 2025 in all-electric and autonomous vehicles and launch more than 30 EVs. So as global light sales recover from bouncing around the sub 90 million units, the penetration of electric vehicles is expected to move from about 4% in 2020 to 30% by 2030, implying a global fleet of about 130 million electric vehicles. And again, this is interesting to us because Deutsche Bank points out that an electric vehicle has a substantially larger silicon content than an internal combustion engine automobile. So again, we factor this in. This is why we expect to see automotive silicon content continue to grow 10% to 15% per year for a very long time. Moving away just from EVs, you also have silicon growth and advanced driver assistance systems, or ADAS, also known as active safety. These are the systems that are necessary to enable autonomous driving. This includes a lot of sensors and a very large amount of flash memory, which we program. We also see file sizes and the number of bits or code in each device getting larger and more complicated, regardless of the vehicle type. This is especially true for the infotainment market, where hundreds of gigabytes of NAND flash memory are used in each car. Additionally, we're also seeing interfaces changing, which represents a technology hurdle that DataIO has already solved. Markets moved from eMMC to UFS, which we program. And that UFS performance gives customers an even better reason to add more and more content to the car. So with these new releases of UFS, it gives us good demand not only for capital equipment, but also upgrades to the installed base and new adapter and device support revenue. So in addition to these trends going on in automotive, there are other basic trends going on in how programming everywhere is being done. Number one, there's increased connectivity of programming systems to factory MES control systems. In other words, the programming system 10 years ago used to be a separate activity. 15, 20 years ago, it was all manual. We've talked several times over the years about how manual has been moving towards automated programming, but it was still automated programming separate from the SMT line. Now we're hearing increased demands from customers to link the programming system to their MES shop floor control for better job control, enhanced yield, better asset utilization, and also the ability to link the data that's produced from programming into their analytics platforms to better manage their entire process. We're starting to see this happen in automotive and also in leading industrial accounts as well. And then also security. We've talked a lot about security in the Centrix platform, but we continue to see across the automotive and industrial space a growing demand to protect the supply chain and protect firmware intellectual property. We're continuing to see additional security requirements come to us in the automotive and industrial markets. Our Centrix platform and the ability to upgrade existing PSV family systems in the field is core to our security strategy. So these market conditions and our strategies lead us to the following long-term goals. We believe double-digit silicon growth in automotive will lead to double-digit DataIO revenue growth over a full business cycle. We'll continue to see cyclicality, especially acute, until the semiconductor shortages are behind us. We believe our operating leverage and scale will drive adjusted EBITDA growth faster than revenue growth. And we also see increased recurring revenue in absolute and percentage terms from adapters and services across the growing installed base. So I mentioned the industry market analysts are telling us they see a decade of 10 to 15 percent long-term growth rate in silicon for automotive electronics, and DataIO is extremely well positioned in this space with over 60% of our sales to the automotive industry and hundreds of programming systems in the installed base. While we expect some short-term turbulence and demand as silicon remains constrained, we're investing for this long-term growth trend. With that, I'll turn it over to Joel Hatlin.