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spk09: And welcome to the Data I.O. Fourth Quarter 2023 Financial Results Conference Call. All participants will be in 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 Jordan Darrow, Investor Relations. Please go ahead.
spk01: Thank you, Operator, and welcome to the Data I.O. Corporation Fourth Quarter 2023 Financial Results Conference Call. With me today are the company's President and CEO Anthony Ambrose and Chief Financial Officer Jerry Eng. Before we begin, I'd like to remind you that the statement is made in this conference call concerning future revenues, results from operations, financial position, markets, economic conditions, supply chain expectations, estimated impact of tax and other regulatory reform, product releases, new industry partnership, 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 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.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. Well, thank you very much, Jordan,
spk04: and welcome, everyone. I will begin my formal remarks by addressing our 2023 financial and operational performance, and then I'll turn the call over to Jerry Eng, our CFO, for a more detailed look at the numbers. We delivered very strong financial performance in 2023 with a 16% growth in revenue and a return to profitability. We also experienced encouraging business momentum, which has carried over into 2024. A quick summary of 2023 shows that our top line grew 16%. The automotive market represented over 63% of our bookings in 2023. We had over 23 new customer wins in 2023. And that was worldwide and across all segments. This marks our third year in a row with over 20 new customers. And many of those were marquee wins in automotive locations globally during the year. Our PSV platform for programming is the most successful platform in the industry and now has over 485 deployments worldwide. Centrix, our secure provisioning deployment platform, grew 150% in software and -per-use revenue in 2023 versus 2022. Gross margins for the year were nearly 58% in line with our -to-upper 50s guidance on gross margin for the year. Inventories declined nearly $900,000 as we unwound our COVID-era supply chain strategies. And cash grew about $830,000 for the year, reflecting operating profitability, inventory reductions, and spending controls. Finally, pointing to our strong operating leverage, we delivered increased profits with adjusted EBITDA increasing to $2.3 million for the year, up over a million dollars from the prior year. And net income was positive, as I mentioned earlier. 2023 was an interesting year. Our global reach proved very positive for the years. We had excellent growth in the Americas region as well as Asian region outside of China. In Japan, we're pleased with our new partnership launched in the first part of the year with NOAA Leading Company to establish the first Centrix security provisioning service in Japan, as well as a separate collaboration we formed with Nuvaton Technology to support their latest generation of IoT microcontroller products with our Centrix platform. As I mentioned earlier, Centrix overall grew our software and -per-use revenue 150% in the year. And I mentioned earlier that solar was one of the new markets we tapped into in 2023, as well as multiple customers coming into production. Today especially, AI is top of news these days for very good reasons. And people continue to ask us, you know, how does AI impact data I.O. markets? Well, AI plays into our business in a couple of ways. First, the AI platforms need strong hardware-based roots of trust to ensure data sets that for machine learning, training, and other learning are accurate, and that their software is secured. This is a use case we have talked about with a customer of ours securing an AI accelerator card for the hypercloud. We also see AI coming into play in the automotive space as we see more autonomous driving applications and other use cases as automotive electronics become more sophisticated and more centralized. In 2024, in addition to these markets, our focus will be on what we call disciplined growth. We'll continue to target the automotive, industrial, and programming center markets worldwide, and we'll be adding to that the spending discipline and focus that Jerry's brought in in the second half of 2023. For growth, automotive electronics at 63% of our business is foundational for us moving forward. As we said multiple times on multiple calls, we have applications driving the increase in semiconductor content continuously. These include advanced driver assist systems or active safety, in-vehicle infotainment, electrification, connectivity, and security. We continue to see strong growth worldwide, and even though we are a dominant supplier in automotive, people ask us how can you continue to grow in automotive if you have 18 of the top 20 customers? Well, we continue to win new customers as new entrants come into the market. We continue to win new sites as existing customers expand new factories worldwide. We continue to win with new technologies as current and new customers expand their use of UFS Flash memory in all applications that I mentioned earlier. So we see continued momentum in automotive going into 2024, and across the board not only in automotive but industrial and programming centers, our sales funnel has added significant opportunities in the past quarter and is at its highest level in several years. This is the basis for a positive outlook for the year. Second is people continue to be a big asset for Data I.O. Our global team did an amazing job navigating through the COVID closures, supply chain disruptions, and inflation spikes that we've had to deal with over the past several years. We believe those are largely behind us. We continue to keep our great team and add to it. As you may recall, Jerry Eng was appointed our CFO during the third quarter of last year, and he's now really putting a stamp on the company. I have specifically asked Jerry to focus on tighter spending controls, process efficiencies, and operating leverage, as improvements here will turbocharge our financial performance as we grow the company's top line revenues. I'll reiterate what we provided in our earnings release regarding 2024 expectations. Based on continued strength amid a stable global operating environment, we expect double-digit bookings growth in 2024. Gross margins are expected to be in the -to-high 50 percent range for the year. Operating expenses for 2024 are expected to be consistent with or moderately lower than operating expenses in 2023, excluding incentive comps, sales commissions, and currency. The combination of spending control and top line growth is an exciting combination for us in 2024. Before I turn it over to Jerry for his commentary, I'd like to invite investors and other interested parties to listen to our recent fireside chat interviews. Late last month, we launched an interview where our CTO Rajiv Gulati and I were hosted by small cap investor and data I.O. shareholder Vishal Mishra of BART Associates on the topic of AI programming and security requirements. Next week, we'll launch an interview based hosted by semiconductor senior equity research analyst David Williams of Benchmark Company where we talk about semiconductor programming growth opportunities in general. Also in April, we invite you to join us at the annual industry trade show APEX Expo in Anaheim, California. If you're in the area, please contact Jordan Darrow if you'd like to attend as our guest. With that, I'll turn it over to Jerry Eng.
spk06: Thank you, Anthony, and good day to everyone. I look forward to my second earnings update, having joined data I.O. mid-2023 and working with the team to enhance our operational capabilities and financial results. My comments today will be focused on key points of interest for the fourth quarter and full year 2023 performance and our perspectives looking forward. Data I.O.'s financial condition remains strong at the end of Q4 with $12.3 million in cash, up $831,000 from the prior year. The full year cash increase reflects improved operating profitability, lower inventory levels, and higher interest earnings. In the first quarter, cash and working capital at $18.4 million had a slightly greater increase of $846,000 from $17.6 million at the end of 2022. The company continues to have no debt. Inventory at $5.9 million declined $876,000 from the prior year. The change, as Anthony mentioned, addresses earlier market conditions during the COVID aftermath and is a strategy that now has unwound that increase. Improved supply chain conditions, disposition of material for -of-life products, and lean operational initiatives contributed to our overall reduction efforts. Optimizing inventory levels remain a top priority while balancing anticipated customer demands in 2024. Moving to the income statement, fourth quarter revenue at $6.9 million reflects lower coming into the period backlog because of booking delays from the third quarter, which resulted in a decline of $397,000 as compared to Q4 2022. However, with a strong fourth quarter bookings recovery at $7.2 million, fourth quarter revenue at $6.9 million increased 314,000 or 5% from the preceding quarter. For all of 2023, sales were $28.1 million, up 16% from $24.2 million, again reflecting continued growth in the automotive, electronics, and IoT industries. A favorable comparison to post-lockdown recovery one year ago and a strong backlog of $4.8 million at the start of 2023. Backlog has returned to a more normalized level at $2.8 million as of December 31 of this past year. Automotive electronics at 63% of 2023 bookings was 2 percentage points higher than 2022. Revenue remained steady with systems revenue at 58% and recurring and consumable revenue at 42% for 2023. Gross margin for both Q4 and full year 2023 was 58%, up 3 percentage points from the comparable prior periods. The improvements were driven by a combination of higher sales volume, favorable mix of new systems and recurring revenue growth, material cost reductions, and of course operational efficiency improvements. For example, lower inventory levels, which contributed to our increased cash, also contributed to lower freight, tariff, obsolescence, and carrying costs. Moving on to operating expenses, operating expenses at $3.8 million in Q4 represented two consecutive quarterly declines from the high of $4.2 million, reaching the second quarter of 2023. Cost containment and efficiency improvements undertaken in the third quarter contributed to lower operating expenses and improved profitability in the second half of 2023. We continue to critically reduce spending, manage non-critical costs, and increase operational efficiencies. Excluding costs related to sales volume changes, we expect to maintain this strong operational discipline, which will generate near-term cost savings and longer-term operating capacity growth. Interest income growth also contributed to improved profitability, well $190,000 for 2023 compared to $34,000 for the previous year. Increase was due to stronger cash position, higher interest rates of return, and greater deployment of operating cash into short-term investments, such as nightly sweep accounts and one- to two-month certificates of deposits. Net income of $144,000 for Q4 added to our profit of $486,000 for the full year, which compares to a net loss of $1.1 million for the prior year. The 23 revenue increase of $3.8 million, the 320 basis point improvement in gross margin, and the second half operating expense reductions contribute to a net income increase of $1.6 million, or 42% leverage from 2022. Similarly, adjusted EBITDA was $514,000 for Q4 and $2.3 million for 2023, again representing a full-year improvement of $1 million. Looking forward to 2024, we expect double-digit bookings growth, as Anthony highlighted earlier, to be weighted more in the second half of the year. The timing of orders and subsequent deliveries may impact our full-year revenue outlook. On a full-year basis, we expect operating expenses to decrease, which will help offset sales volume and compensation-related expense increases. As is always the case in the first quarter, our operating expenses will be substantially higher due to annual expenses including year-end audit fees, 10K and proxy filings, and similar public company costs. Overall, we remain very solid financially with a strong cash position, no debt, and a return to full-year profitability. I look forward to continuing to partner with Anthony and the Data I.O. team in improving our operational capabilities and financial performance. That concludes my remarks for the fourth quarter of 2023. Operator, would you please start the Q&A process?
spk09: We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. Also, please ask one question and one follow-up, and if you have additional questions, please re-enter the question queue. At this moment, we will pause momentarily to assemble our roster. The first question comes from David Marsh with Singular Research. Please go ahead.
spk05: Thank you so much for taking questions. First, I just wanted to ask about the guidance for 2024. The guidance is around bookings. Typically, your bookings do translate to revenue reasonably quickly. Should we assume that the double-digit bookings growth also translates to revenue growth in that relative ballpark, or is that trying to draw too much of an inclusion from it?
spk04: David, a really good question. I think what we're saying with our sales funnel is we see the opportunities have gone up sharply in our sales funnel, and we believe that translates into double-digit bookings growth. The exact timing of when we get the bookings, when they turn into revenue is a little bit less certain. We do believe that it will be more back-end loaded from a revenue perspective just overall. We think that's pretty clear across what we're hearing from test companies as well. It depends exactly on when you get the bookings and when they want the systems. I think the expectation would be revenue would grow a little bit less than the double-digit bookings.
spk05: Okay, thank you. Then for my second question, I'd like to do kind of a two-parter. With regard, you guys have talked a lot in the past about growth coming from EVs. We're seeing some headwinds in the news about EVs, some of the manufacturers backing off of EV production. We're also hearing headlines about China, the recovery in China being very slow and the economy still not really hitting on all -and-so. Kind of tying those two things together, can you just talk about what gives you the confidence in light of those headwinds to come to the table with pretty decent booking growth guidance just in terms of the overall market and just give us a sense of what's going on and what's fact and what's fiction, I guess.
spk04: David, it's interesting. I think it was a pretty rough morning for the EV guys. I happened to turn on the business news this morning and I think to maybe overuse a metaphor, they were backing up the bus over the EV guys this morning, except of course for Tesla and except of course for BYD and maybe some of the other leaders. I also read that the Chinese market, they'd cut prices pretty sharply, which is maybe not as great for them but good for us because that should stimulate demand. I'm always a little nervous on comparisons in China this part of the year because the Chinese New Year is in a different month this year than it was last year and it would be like having Christmas shift from December to January and then wondering why your comparisons year over year were distorted. So I'm going to form a first-hand opinion. We'll see directly on the ground but we see people in China continuing to buy systems. We see people in China in automotive continuing to buy service and consumables and things like that. I don't know what to tell you other than we see what we see from our customers and there's continued business in the market there. The other thing that I want to mention is EVs are one leg of the five legs that we see as driving growth overall in automotive. We've talked a lot about them and one of the reasons we like EVs is because they also have a lot of the new advanced driver assist systems or a lot of the new IVI platforms that tend to consume a lot of programming. But you don't need to be an EV to have those new systems in there. And there's been no talk of slowdown in advanced driver assist or active safety. There's been no talk of let's cut back on the features in our infotainment platforms in the car. Quite the opposite. And so again when you look at everything and you look at our sales funnel which includes automotive globally as well as industrial as well as programming centers, we like what we see on our funnel and that's motivated us to make the predictions we're making today.
spk05: Thanks guys, very helpful. Appreciate it.
spk09: The next question comes from Kevin Garrigan with West Park Capital. Please go ahead.
spk08: Yeah, hey Anthony, hey Jerry, good afternoon and congrats on the results. Thanks Kevin. From the first question, looking at the IOT market centrics, I think in the past you, Anthony, you had noted that you were early to the security market. 2023 it seemed like things were kind of picking up steam with centrics doubling revenues. Are things now kind of starting to play out as you had originally imagined or are we still kind of early? In the process?
spk04: You know, I think we're in a situation where we're happy with the traction that centrics is gaining. It's obviously, we've said multiple times, it's taken us a lot longer. But the fundamental fact, the belief we have is that, and we've said this before, ten years from now you won't be able to buy a microcontroller that doesn't have security on it. And that's a 30 billion with a B unit market. And so what we've done is we've made some investments in the platform. Those are largely complete at a platform level. We still make investments to support new devices and add new features and capabilities for customers. But what we need to do now is just continue to go find new customers, help them understand the benefits of centrics. Some of these customers will be new to us. Some of these customers will come to us from our partners that have programming centers. And some of the customers will be well known to us that want to add centrics capability to systems they already have. I'm not going to call it an inflection point yet, but 150% growth year over year doesn't suck.
spk08: Yeah, no, that's kind of... I've created a couple of questions around that. Okay, and just as a follow-up, so we're now two months into 2024 and you noted a few tailwinds kind of in your... What kind of gets you most excited and what keeps you up at it as you look out kind of the rest of the year?
spk04: You know, what gets me excited is looking at our sales funnel and looking again at the opportunities we have across automotive, industrial and programming centers. What keeps me up at night is, you know, will people just be in a situation where the world is a lot messier place than it already is? We don't have any control over that. Obviously, if the world has a serious breakdown of global supply chains, that would impact us, it would impact everybody. You know, we're much more resilient than we were before by design. And so, you know, we're doing what we can to insulate ourselves and as long as the world stays reasonably stable, i.e. about where it is right now, we think we'll be fine.
spk08: Yeah, got it, got it. Okay, perfect. Thank you,
spk09: guys. The next question is from Paul Xavier with Devin Capital. Please go ahead.
spk03: Hello, thanks for taking my call. I think some of it was already answered with the first individual, but you know, you read all the time, as you said, about the EV industry, the growth, the changes, the marketplace, and it seems like every day there's new information out there from the companies that are in it or the companies that supply it. You know, so with even companies like Ford are talking about the China's EV industry being, you know, the biggest competition. So with them wanting to expand the Chinese, you know, to Mexico, Latin America, and other markets, is there any more color you can provide from what you said earlier about just your operating position and where you see this growing from an automotive electronic standpoint?
spk04: Well, Paul, thanks for the question. I have a similar opinion to what I think the Ford CEO has mentioned and others have mentioned that their biggest threat in the Americas region is probably from very low-cost imported electric vehicles from China. Now for us, that's partially a threat, it's partially an opportunity. You know, we believe we're number one in China on supplying the automotive electronics industry because we've had a focused strategy to do that for a decade. And as those companies grow and expand, we want to be in a position to grow and expand with them. We're a good supplier to the global electronics industry for automotive, period. And so, you know, as it goes forward, I think you'll see a lot of change in where and how cars are supplied, especially in what used to be known as emerging markets, Mexico, Eastern Europe, Africa, Southeast Asia. And, you know, our goal is to be the supplier of choice and programming for the auto industry wherever it is.
spk03: Great. Excellent. Thank you.
spk09: The next question is from David Canan with Canan Wealth Management. Please go ahead.
spk07: Hi, Anthony. Jerry, thanks for taking my questions. First question is on Centrix. Do you have a line of sight on the ramp this year with various design wins and customers that you already have? And can that business get to a seven-figure front rate in excess of a million a year exiting this year?
spk04: Hi, Dave. Thanks for the call. We don't break out Centrix separately. As you know, we break it out with our software services and Centrix line, which grew substantially during the year. So I'm not going to give a separate Centrix forecast. I think if you look at, you know, where you would need to get to have the software and -per-use get to a million dollars, that's not out of the question. I think this year would be certainly more aggressive than we're forecasting. But, you know, the concept is to get this to the point where you can scale the platform to support that kind of volume. And, you know, just to put it into scale, we have about 485 data programming systems in service around the world, which represent at, you know, roughly listed capacity about a billion and a half units a year of installed base of capacity. And so that in and of itself is more than enough to get you by an order of magnitude or more a seven-figure Centrix business. So the question is not, you know, can we get there? The question is how fast will the world convert to security overall? And then with a subset of that, how fast will they be converting to, you know, our way of doing it, which is Centrix? And the TAM that we're going after is 30 billion units of microcontrollers. It's not going to happen this year, okay? But in a 10-year period, as I mentioned, I just don't see how microcontrollers are not sold without security deeply embedded in them. Okay. And then my
spk07: follow-up is on our expense structure. I believe last quarter you talked about looking at ways to bring OPEX down, and I know Jerry was kind of getting his feet wet. But, you know, at this point, your prepared remarks, honestly, as a shareholder, I don't think they're sufficient. Like, you're saying that
spk01: you
spk07: expect operating expenses to be similar to down moderately for 2024. I don't think that's sufficient. I mean, we earned $144,000 this quarter. In order to have a successful return for shareholders, we need to be printing 8, 10, 12, 15 cents again, like we've done in the past. So my question is, what is being done about looking at every OPEX expenditure that we, you know, are making right now, and can we get to a savings of $2 million a year? Because otherwise, really, barring, you know, more than 10% growth, we're just never going to get there to where we have a successful stock, because we're not going to, you know, we're not going to earn enough to, you know, be an attractive investment for shareholders. So if you could comment on that, and then I just wanted to know what you did in adapter sales for the quarter. If you could hit that as well. Thank you.
spk06: I think that they maybe give mixed comments regarding the expense side of things. Number one, first and foremost, as we look into 2024, our primary objective and first objective is to cover what we anticipate to be increases from an inflation perspective. So we're going to have higher expenses associated with revenue growth. We're going to have higher expenses associated with compensation and so forth. So first order of business is we've got to find operating efficiencies to cover that. Number two, the next focus is really on improving bottom line, which is a function of both operating expenses as well as gross margin improvement. And so we've got initiatives underway to basically look at the rest of the P&L in terms of opportunities to improve the performance. So examples, material cost reduction, logistics improvement, lower inventory and the associated impact on obsolescence and carrying costs. All those initiatives will help us improve the gross margin line. We made a three-point improvement this past year. Some of it is a function of volume, but a lot of it is also a function of operational efficiency, and that translates to improved profitability. On the OPEX line, separate from gross profit, there's opportunities there as well that the team is looking at. So we're going to be looking across the whole P&L, looking at initiatives that can help drive improvement, and ultimately we're going to see that fall through. We had a nice 42% fall through on net income from the growth and revenue. And our goal is to maintain that and hopefully improve that with these initiatives that basically cut across the overall P&L.
spk04: So Dave, I'll just echo. Here the message, I think there's more going on than maybe we're willing and able to talk about on an earnings call right now. But we understand your point. And what
spk07: was adapter sales for the quarter?
spk04: Adapter sales. I'll tell you what, while Jerry's looking that up, we'll go ahead and take the next call and we'll put the answer into the next call. Thank
spk09: you. Again, if you have a question, please press star then one. The next question comes from Michael Weatherington with Wild Glen Ventures. Please go ahead.
spk02: Hi, thanks for taking my question. So if you look at approximately kind of a four-year cycle, it appears that your stock appreciates when it's trading at an -to-sales ratio that is kind of low as where it is today. So I wanted to kind of get your idea. What you think about that? What's it say about kind of your valuation?
spk04: Well, Michael, thanks for the question. First, let me get back to Dave. So we did 2 million adapters in Q4 and 8.1 million for the year. So for those of you that are somewhat technical in nature on your analysis, and then I guess at least most of you do some work there, we get questions a lot looking at the enterprise -to-revenue ratio, and it seems to follow the four-year semiconductor cycle, not necessarily in the ways that you would think it should, but it seems to be on a four-year cycle. We hit one of those bottoms recently. I don't know what it portends for the future, but it's certainly a case where I'd want to at least try and understand what's going on there. And I think the other interesting tidbit, Michael, I heard this morning again on the Business News Channel was the historic divergence between the multiples paid for large cap and the multiples paid for small cap or micro cap in the market right now. I'm not a technical analyst. I think you guys are probably a lot smarter on this than I am, but it's just an interesting setup in terms of, you know, if you believe in reversion to the mean, there might be some interesting things going on there.
spk02: Yeah, fair point there. Also, a follow-up, just looking at your cash flow generation and the strong operating leverage as you exited 23 and your outlook for 24, with the exception of the one-timers in Q1 you talked about, what are the plans for excess cash going forward and is IBAC maybe one of those options?
spk04: So I think we get that question a lot. We need a certain amount of cash to manage the business, the excess cash at least right now. And I guess we're doing a better job since Dave did not bring up this question on the call around interest income. Or actually get paid for our cash, which is good. We're constantly looking for ways to deploy that cash for maximum possible return for shareholders. We've said we're interested in, you know, can we do a creative M&A, obviously be pretty small. We have our radar up. Nothing's come across the radar yet that we can, you know, get to our liking, but we're always looking. We've done buybacks historically in the past. Given the increased cost of capital right now, I don't see a buyback in the short-term future based on, again, what the real cost of capital is and the potential to find something accretive for us. In the meantime, we'll look at our finance team to make sure that the surplus cash that we don't need for the -to-day working capital in each of our foreign subsidiaries as well as the United States is deployed effectively to earn some interest income.
spk09: Thank you. Ladies and gentlemen, thank you. This will conclude our question and answer session. I would like to turn the conference back over to Anthony Ambrose for any closing remarks.
spk04: Operator, thank you very much. I'd like to thank everyone that had a question today. Given that there are no more questions, I now close this earnings call. Thank you very much.
spk09: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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