This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk07: Good afternoon and welcome to the Data.io second quarter 2022 financial resource conference call. All participants will be in listen-only mode. To give you assistance, please signal 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 start and 1 on your telephone keypad. To withdraw your question, please press start and 2. Please note this event is being recorded. I will now turn the conference over to Jordan Darrow, investor relations. Please go ahead.
spk02: Thank you, operator, and welcome to the Data.io Corporation second quarter 2022 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, silicon chip shortages, supply chain expectations, 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 of COVID-19 including the 2022 outbreaks in China, the Russia war with Ukraine, including any related international trade restrictions, along with continued reopening and recovery efforts within the relevant global supply chains 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, 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 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. And now I would like to turn over the call to Anthony Ambrose, President and CEO of Data.io.
spk03: Thank you very much, Jordan. I'll begin my formal remarks by addressing our 2022 second quarter financial and operational performance, and then I'll turn over the call to Joel Hatlin for a more detailed look at the numbers. Strong bookings through the first half of the year, an encouraging business development pipeline, and a record backlog at June 30, 2022, are expected to give rise to significantly improved financial performance in the second half of 2022. It appears as if the slowdown in the automotive industry during the past three years is slowly beginning to unwind, with semiconductor allocations gradually returning as consumer electronics and enterprise demand wanes. For example, Bloomberg reported last month the following. Mercedes-Benz, Daimler Truck Holding, and BMW are among automakers now getting enough of their high-tech components to produce at full capacity after experiencing crippling outages for months. BMW expressed similar optimism. saying all plants are up and running and the company's not experiencing any stoppages due to chip supplies. Additionally, NXP announced a few days ago their quarterly results in highlighted strength in automotive and industrial markets. We think there's a pattern here. DataIO has seen firsthand these same positive indicators. For the third consecutive quarter, we've achieved bookings in excess of $6 million, the second quarter bookings of $6.4 million, reaching the highest level within this nine-month period. Automotive Electronics represented 58% of all of our orders so far in 2022, and we had six new customer wins this quarter alone. Our new business success was distributed across automotive, industrial, medical, and a new programming center customer. Our sales funnel in the second quarter continued the momentum from the first quarter when we added millions of dollars of new opportunities. Increased demand is coming primarily from customers in Asia and the Americas. This has been partially offset by weakness in Europe due to the war, currency adjustments, inflation, and other factors. Bookings were back-end loaded in the second quarter with nearly 50% coming in June, contributing to our very high backlog. Dataio's Shanghai operations partially reopened in May and fully reopened in June following the most recent COVID-19 lockdown restrictions imposed by the Chinese government. From an operations perspective, lead times are now back to normal, although we still see some spot shortages in parts and assemblies. So from an operational perspective, we're nearly back to normal. From a balance sheet perspective, we expect accounts receivable, inventories, and cash flow to return to more normal levels by the end of the current third quarter. On Centrix, we had a customer go into volume production and have orders for two Centrix-ready systems. These are data programming customers looking to add Centrix capability in the future. We also received patent extensions in the United States and a new Centrix patent from China. Throughout the unusual circumstance of a pandemic and ensuing supply chain issues, global economic gyrations, the Russia-Ukraine war, I once again would like to acknowledge the great performance of our team, particularly in China, where many of our team members made personal sacrifices to support operations and customers from home, while they were locked down. Turning now to our 50th anniversary celebration, as you know, we've been planning to have celebration activities throughout the year, and we're conducting a series of interviews that we've dubbed Fireside Chats. Formats are open and informal, focusing on specific topics with leaders in media, finance, and technology. In June, we published the first interview, which talked about Data.io's opportunity as a business and an investment, The guest host was Tim White-Trout of Alpha Wolf Trading. Then earlier this month, we published the second installment entitled The Future of Semiconductors for Automotive Electronics, guest hosted by Suji Da Silva, the equity research analyst at Roth Capital. We liked that. We had a lot of fun, and the session was highly informative. During the session, we covered how DataIO ascended to become the leader in automotive technology for programming. We talked about the long-term growth rate we see in semiconductors, between 10 and 15 percent for automotive electronics semiconductors. We talked about the growth catalysts, including electrification, secure programming, autonomous driving, connectivity, and other factors. We also talked about how DataIO's PSV family of programming systems has become the platform of choice for automotive electronics manufacturers. And then we also talked a little bit about the global semiconductor supply chain and capacity in automotive, which appears to be improving, as I discussed earlier. We have several additional fireside chats planned for the year, and I look forward to them. As we see the business looking out towards the second half, there are really two competing global narratives. First one is the weak macroeconomic picture you hear discussed daily in the business press, talking about inflation, stagflation, recession, war in Europe, and all sorts of other negative indicators. The other narrative is what we see in our business. It's a very strong backlog with a strong sales funnel, as we see data IO specific items that are much stronger than the general macro picture. As other companies have reported, automotive and industrial, which are our largest markets, are strong relative to consumer and enterprise right now. Automotive electronics supply chains are also benefiting from drops in demand elsewhere. The ability of automotive electronics and industrial companies to be better supported with chips means they ultimately need more programming capacity. Our plan is to stay very close to the market, continue to expand our available markets wherever possible, and prepare our operations to build a demand we already have in backlog and that we see in our sales funnel. Q3 orders tend to be back-end loaded in September, and that's when we'll have another structured look at the second half demand overall. To net it out, supported by a very significant backlog, we're more optimistic for the second half than the general stagflationary business conditions would indicate. With that, I'll turn it over to Joel Hatlin.
spk01: Thank you, Anthony, and good day to everyone. I'd like to start by providing a review of our second quarter of 22, starting with cash in our balance sheet and then moving on to the income statement. Data's financial condition remains strong with cash at $10.3 million, on June 30th of 22, down from $12.3 million at March 31st of 22, $14 million at the end of the prior year, and $13 million at the end of the second quarter of 2021. The change in cash from prior periods relates primarily to the Shanghai COVID shutdown and one-time China dividend withholding tax of $450 million. 42,000 taken in the first quarter of 22. As a part of our global positioning strategy, the Shanghai COVID shutdown caused working capital adjustments as we pulled through delayed shipments and make collections against them relating to the 1 million in order delays that we had announced last quarter. This should be smoothed out by the end of the third quarter with most revenue recognized upon shipment inventory and receivable offsets, followed by reductions based on shipping schedules, and then cash collection. Days Sales Outstanding, or DSO, a receivables collection measure at June 30th of 2021, at 22, was 74 days, reflecting the unusual quarter. Net working capital on June 30th of 2022 was $15.9 million. down from $16.9 million at March 31st. Inventory of $6.9 million on June 30th was approximately $1.3 million higher than at the end of the prior year and up $300,000 compared to the start of the quarter. The increase of inventory related to the decision to hold additional inventory to address shortage risk as well as to improve the resilience as a supplier and support the record backlog level. Now onto the income statement. For the second quarter, revenue of 4.8 million was down 28% from the 6.7 million in the second quarter of 2021. The decrease was due to weakness in Europe from the economic upheaval of the war and approximate decline of roughly 12% in currencies and delays in shipping associated with the lockdowns in China. I should remind everyone that approximately 90% of our revenues are derived from outside of the United States. As many overseas currencies, particularly in Europe, have been devalued against the greenback, our reported revenues on a consolidated basis will reflect that reduction even though there is no associated impact on our regional market share and operations in local currencies. Automotive orders represented 58% of year-to-date bookings and continued to be our primary addressable market. Consumables were up to 31% of revenue year-to-date compared to 30% in the prior period. Software and services revenues at 15% of revenue to date in the second quarter were up from the prior year period of 11%. On a geographic basis, International sales represented approximately 89.2% of revenue for the second quarter compared with 92.5% in the same period last year. Second quarter bookings for 2022 were $6.4 million, up from $6.2 million in the first quarter, but down from the $8.9 million in the second quarter of 2021, which was when our business cycle appeared to be turning up after more than three years of decline, but seems to have been interrupted more recently by supply chain shortages and additional COVID-19 variant issues, as well as the war. While business activity in Asia was considerably held up with the COVID containment process in China during parts of the first and second quarter, it has picked up considerably in recent months. Activity in the Americas has also been stronger over the past several months, as European activities remain subdued due to the local economic conditions, currency, and the impacts from the Russian-Ukraine war. The lockdown in China delayed shipments, which contributed to backlog increasing to 4.1 million at the end of the first quarter of 2022. The resumption of operations and shipping in Shanghai was reached during later in the second quarter, yet with strong bookings in the period and our backlog grew to 5.8 million at June 30th of 2022. This is up from 5 million at the end of the second quarter of 21, even though that period had 8.9 million in bookings. Gross margins at 57.8% in the second quarter were up slightly from the 57% in the second quarter of 2021. The increase was primarily due to favorable variances offset in part by the sales volume impact on fixed cost items. Funding our R&D as an integral component of our growth initiatives has continued. R&D expense was at $1.6 million in the second quarter compared to $1.7 million in the prior year period. Selling general and administrative expense was $1.9 million in the second quarter of this year compared to 2.1 million in the prior year period. The second quarter of 2021 SG&A comparable reflected higher sales commissions associated with the channel mix and sharply increased demand last year for programming equipment, as well as higher incentive compensation as the company had returned to profitability on an operating basis in that period. Deferred revenues were $1.5 million at the end of the second quarter of 2022, down from $1.7 million at the end of the first quarter, and up from $1.3 million at the end of the second quarter of 2021. Taxes during the quarter consisted solely of foreign taxes with no U.S. income tax. During the first quarter of 2022, a dividend withholding tax of $442,000 occurred on the China dividend repatriation. Net loss in the second quarter of 2022 was $176,000, or $0.08 per share, compared with a net loss of $29,000, or $0 per share, in the second quarter of 2021. We had 8,814,279 shares outstanding on June 30th of 2022. Adjusted EBITDA loss of 64,000 in the second quarter of 2022, compares with adjusted EBITDA earnings of 597,000 in the prior year period. Overall, we remain very strong financially and continue to have no debt. Combined with our resilient supply chain strategy, these represent key competitive advantages as the best capitalized supplier and reliable producer in the global programming industry. That concludes my remarks for the second quarter, but before we turn the call back to the operator, I'd like to remind investors of what our long-term modeling and metrics look like, particularly since we've had a few quarters with very unusual circumstances. On the top line, we continue to believe that long-term, we can track the growth of our primary market for automotive electronics. As Anthony stated earlier, we are looking at a CAGR of 12 to 15 percent for semiconductor content in automobiles annually for years to come. Although, depending on machine deliveries or circumstances which are out of our control, like we've experienced this year, our quarterly results may be higher or lower, so we encourage investors to model out things on a 12-month basis. The record backlog is expected to return to normal levels by the end of the year. By mid-August, The large-level backlog orders for consumables will return to normal levels by the end of the year. Sorry about that. System orders in backlog will mostly ship during the quarter, but a significant backlog is expected to build in September and carry over into Q4 before they become more normal. For gross margins, they are typically in the mid-two. high 50s range. R&D spending has been in the 1.6 to 1.7 million per quarter range, and SG&A has been seen as under 2 million per quarter on average, other than generally the first quarter, with variations primarily tied to sales commissions and incentive compensation. On taxes, we strive to be tax efficient, and this is enabled by our carry forward of U.S. net operating losses of approximately $18 million at June 30th, resulting in no current U.S. taxes. We expect to incur taxes on our foreign subsidiaries' operating income and expect that to continue to be similar to prior periods that did not include a dividend withholding tax. Moving on to cash flow in the balance sheet, capital expenditures is used for traditional investment in property, plants, and equipment. as well as to build demo units and trial sales units, which can be later monetized. Including only the property planting equipment as opposed to the demo, we invest about a half million dollars per year. So we're really a capital equipment light tech company and very capital efficient organization. For cash, we end up in the second quarter with 10.3 million and expect that we should restore approximately 600,000 during the quarter. We have no debt and do not see a future where we will have debt unless it is part of a large and transformative acquisition. On collections and receivables, DSO average about 55 days typically, and we expect to return to approximately that level in the quarter. Networking capital is expected to bounce back to the mid to upper $16 million level. We expect that that should provide you with a good framework to model our growth going forward. Operator, will you please now start the Q&A process?
spk07: We will now begin the question and answer session. To ask a question, press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before passing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question will come from Craig White with Devon Capital. You may now go ahead.
spk04: Hello. Thanks for taking my call. Can you hear me okay? Great. I'm a little new to the story, and I think I missed some of what you said earlier. But, you know, given your markets and given the fact that you supply a lot to automotive OEMs, I would assume you're you know, you're impacted by capital equipment, um, cyclicality, uh, outside of just the regular, um, unusual, I shouldn't say regular, the unusual things that have happened the past few years with the pandemic and the supply chain constraints. So, you know, putting that all together with cyclicality and with the demand trends you're seeing, are you, it sounds like you're confident you're heading back towards like the top line levels achieved. I think it was around 2017, 2018. Is that fair to say?
spk03: I think what we're trying to indicate is that since COVID hit, we've had a number of additional items on top of the normal industry cyclicality. The semiconductor industry has been cyclical ever since it's been born. I think I've been through nine complete cycles in my business career, and COVID has just thrown additional things on top of that. Between the lockdowns, the shortages for automotive, What we're saying here is that we thought we were coming out of it last year. Then I think the shortages really impacted automotive. We thought we were coming out of it earlier this year. And then the China lockdown hit in Shanghai in Q2. Assuming we can stay open, and we don't have any reason to doubt that, we have a tremendous backlog. Our operations are open. They're well supplied with product to build our systems. And so, you know, we think we can just focus on shipping product and getting orders for product that we have in our funnel that people are telling us they want to buy. You know, we should have a very strong second half. Beyond that, I'm hoping the cycles begin to dampen out just a little bit, partly because we see, again, a long-term trend of substantially increased semiconductor content in cars. And we also see our business overall becoming a little less cyclical on the CapEx side. You know, in 2017, we were, I think, almost 70% CapEx at the top of the cycle. Our long-term model today, we're, I think, closer to 55% CapEx. And our long-term model is to be closer to 50% CapEx and 50% consumable software and other recurring items.
spk04: Okay, great. That makes sense. Just a couple other questions here. You have a good, you know, you have a solid backlog, as you mentioned. And, you know, with the lockdowns in China and with the supply chain constraints, it's interesting that customers have continued to place orders, put down payments, even while goods are sitting in ports. So is that just being driven by just robust demand, or are you doing anything now to try and alleviate these bottlenecks that you've experienced the first six months of the year?
spk03: That's a good question. We see, again, our customers in China and Asia have been pretty strong through the first half, and we put in a good growth plan for the year for them, and we're actually exceeding that now. And we continue to get good signals for demand from Asia. So, knock on wood, that held up very well through the lockdowns. I think it's important to remember that the lockdowns didn't hit every city all at once in China. Chinese growth will be lower this year. I think that's pretty clear. We're still seeing good demand from our customers. And that's reflected in our sales funnel. On the semiconductor shortage, I think my remarks earlier around Perhaps some of the weakness in consumer and enterprise or freeing up capacity for automotive and industrial appears to be a theme that we're hearing a lot in the industry.
spk04: Okay. And you mentioned earlier that you want to have, I guess, long-term roughly 50% of the business tied to CapEx. Can you just give a little more color about the other markets, the revenue potential and just what you see going forward in the non-capital equipment space?
spk03: Sure. Well, in addition to selling the capital, we have adapters and other consumable items. And as our installed base grows, we have over 420 PSV, which is really the modern generation of systems in the field. And that continues to grow. It provides a great base for us to have improved consumable sales every quarter. And, you know, that's been a long-term focus for us, so we expect that to continue to grow. Consumables were 31%, Joel, I think, in the quarter this time. You know, that'll bounce around a little bit, but long-term, that will trend upward, and that's a key component to getting us to 50% recurring revenue.
spk04: Great. Thank you so much.
spk03: Thank you.
spk07: Again, if you have a question, please press start at once. Our next question will come from Mary Ellen Cushing, private investor. You may now go ahead.
spk06: Yes, thank you. I wanted to touch upon R&D for a moment, please. I know you've stayed reasonably close to break even in some of the most challenging business climates of the modern era. Would you like me to repeat the question? Yeah, please go ahead. Oh, sorry about that. Okay. Can you hear me fine? Yep. Okay, great. I wanted to talk about R&D. You've stayed reasonably close to break even in some of the most challenging business climates of the modern era. Yet at the same time, you've maintained your R&D spending. You said the same level at about approximately 1.6 million per quarter. Can you discuss your strategy behind this investment in the company's future, please?
spk03: Sure. So, you know, one of the things I learned early on is in a cyclical business that's heavily dependent on R&D, you can't manage R&D in a cycle. You have to set priorities and be consistent, hire the right people, keep them on board, and keep them focused. So we believe R&D is very important because the innovation drives design wins, revenue, and margin. We're focused on leading in programming, primarily to support automotive and industrial industries. We think that's the best place to be in the market. And in addition to our programming investments around handling technology, programming technology, systems integration technology, We've added the Centrix platform, which is really secure provisioning technology, and integrated all those together. We see the market continuing to demand programming technology, and more and more of that will be requiring security capabilities seamlessly integrated into what's known today as data programming.
spk06: Okay. All right, two more questions. What is your overall IP position, including the number of patents? And what sort of moat does this create for you from a competitive positioning standpoint?
spk03: So we think we have an increasing moat around the business, to use your terminology, and more importantly around security provisioning. We have over 20 U.S. and international patents for Centrix and security provisioning technology. As I mentioned earlier, we got some extensions and enhancements here in the U.S., as well as a groundbreaking patent awarded in China. We also have over 50 patents overall on programming technology, which we believe is more than anyone else has in the industry. This gives us a good position. We want to increase the moat, but at the same time, we want to use the R&D dollars to make sure that we can, you know, deliver capabilities that customers want to buy in their systems. So it's a balancing act. We think we have a very good moat. We'll plan to increase it. and also keep the R&D investment focused on features and capabilities that customers can pay for.
spk07: Our next question will come from David Wright with Henry Investment Trust. You may now go ahead.
spk05: Anthony, Joel, good afternoon. Good afternoon. Good afternoon. Hey, question. The fireside chat series that you're on, are you hoping for that to result in any analyst coverage? And if so, have you made any progress that way?
spk03: I think the fireside chat's primary objective is to inform investors, potential customers, and really use it as a platform to articulate a vision of where we see things are going. Been thinking about this for a while and we finally got around to doing it this year on our 50th anniversary. As far as analyst coverage, we're always looking to talk to firms that want to provide coverage. Increasing analyst coverage is something I think that we might be in a position to see more of in the third quarter. Just stay tuned to this channel. And we're always willing to talk to firms that want to do coverage. The big challenge right now is firms are getting stretched, really stretched thinly. And they tend to focus their energy, and this is completely understandable from their part, on clients that need banking services. As Joel mentioned earlier, we have plenty of cash. We have really no need for banking services to raise money right now. We don't need to offer debt. We don't plan to go into debt. You know, that would all change, of course, if we found something out there that we really wanted to buy. But really, a lot of firms want to tie analyst coverage to banking services. And so that's something that, you know, we need to be cognizant of going forward.
spk05: Okay. Well, I'll look forward to anything that might develop in the third quarter. Thanks for that answer, and good luck going forward.
spk04: Thank you.
spk07: Ladies and gentlemen, this will conclude our question and answer section. I would like to turn the conference back over to Anthony Ambrose for any closing remarks.
spk03: Operator, thank you very much, and I'd like to thank everyone who joined the call and asked the questions. What I'd like to do is remind everyone that our next fireside chat will be with guest host Jean Inger of the Inger Newsletter, and that should appear about August 17th. With that, I'd like to conclude today's call. Thank you very much.
spk07: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
Disclaimer