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spk01: Good day and welcome to iAccessAlpha's BuySide Best Ideas Summer Conference 2024. The next presenting company is DataIO Corporation. If you would like to ask a question during the webcast, you may do so at any point during the presentation by clicking on the Ask Question button on the left of your screen. Type your question into the box and hit the send button to submit your questions. I'd now like to turn the floor over to today's host, Mr. Anthony Ambrose, President and Chief Executive Officer of Data.io Corporation. Sir, the floor is yours.
spk02: Well, thank you very much and good morning, everyone. I'd like to take the next half hour or so to talk to you a little bit about Data.io, what we do, our position in the industry, our focus on automotive electronics, and the opportunities that lie ahead of us. We'll start with our usual safe harbor statement and remind everyone that we're in the quiet period here, so I'll be talking about long-term items and certainly not the current quarter. So what DataIO does is we are an enabler for electronics manufacturing globally, focusing on the automotive and industrial markets. We build programming equipment that goes into factories worldwide that enables customers to put their initial load of software, often called firmware, into semiconductor chips as electronic products are being produced. It's a very important function. It gives us the opportunity to do the initial work with customers on their products. We have over 500 systems of our modern generation that we've shipped in the last 10 years called the PSV family deployed globally. And that represents an installed base of capacity of about 1.5 billion devices per year. The company has about 100 people, roughly half in the US and half internationally. We have a number of patents. And we have sales and service in over 40 countries with customers in over 80 countries. And again, what we do is we take a silicon chip from our customer. It could be very small. It could be very large. It's usually flash memory, a flash-based microcontroller, or some sort of security device. And it goes into our system here, shown the Centrix PSV. And that allows us to use a very high-speed robotics handler to put the chips into a programmer. And when they're in the programmer, the data are pumped into the chip, validated and confirmed that it's been done accurately, and then it's sent to output media. And it goes into a whole variety of devices. Again, the focus is on automotive. But it can be medical, it can be consumer, it can be industrial, it can be IoT as well. And we have this central position because of our ability to support customers globally. And that's our big advantage, really, over anyone else in our industry is the tremendous breadth of sales, service, support, relationships that we have all over the world. Now, with that worldwide presence, we do have a focus on the automotive electronics industry. And that's been our prime focus now for seven or eight years. We chose to focus on the automotive electronics industry years ago because we saw the need and growth in automotive electronics demand consistently over that time period. We started by focusing on in-vehicle infotainment and that broadened the focus to other automotive applications. Because of our position, we are a trusted supplier to 18 of the top 20 automotive electronics suppliers globally.
spk03: We support them in Europe. We support them in North America.
spk02: We support them in Asia. And you might think that because we have such a great concentration of the leaders in the industry that it would be tough to find new customers. That's actually not the case. We've been able to deliver 20 or more new customers, and by new customer, I mean a new customer or new customer location, for three consecutive years. That's a big focus for us on our sales and marketing activities as well. Being 60% focused on automotive gives us an opportunity to grow in an industry that long-term is expected to grow 12% to 15% per year in terms of automotive silicons. And so you can see here on the right list of names, it's the proverbial who's who in automotive electronics, IoT and industrial, as well as programming centers and EMS. And you can also see from the automotive side, it's not just the Western automotive companies that we've done great business with, but a number of the new and emerging companies coming up from China and other markets worldwide.
spk03: So let's take a look at our overall growth strategies and market outlooks.
spk02: You can see here that we've identified a number of areas that we look at in order to grow. I mentioned our global service and support. This is the anchor for us. This is our ability to really differentiate versus others in the industry. We have the ability to be in your time zone for service and support in your language across the world. And no one else in the programming industry can say that. Anchoring that global service and support are our teams, engineers, service technicians that back up all of our products globally. I won't talk too much about partnerships and M&A here for obvious reasons, but I will focus on the two items at the top of this chart, innovation and market expansion as we go forward. One of the things that we are seeing is growth across a broad range of industries that can be cobbled together under the umbrella of edge AI. Now, what does edge AI mean? Obviously, many of you have heard about AI and think of chat GPT, and that's more of a cloud AI application. But more and more artificial intelligence machine learning is being pushed down to a system or an application where it does not need to go up to a cloud for interpretation. And you can see here a number of different applications fall into that category. The automotive industry, it's ADAS or Active Safety. ADAS stands for Advanced Driver Assist System. So think of all the applications there, the collision warning, lane departure warning, side indicator warning of a car sneaking up on your blind spot, things like that. You're not going to be transmitting information up to the cloud on that. You're going to want to have a real time response. And so all of the AI information that's required for machine learning in any of those applications has to be contained in the application itself. Similarly for something like a wearable or a smart home, smart city application, as well as things like smart meters. They're obviously connected, but they also have a significant amount of interpretation and machine learning and AI that's included in the application and the device itself. Now, this is interesting to data IO because one of the ways we grow is by having larger and larger files that need to be programmed into the parts. So as we look at the growth of AI, as we look at the growth of edge AI in particular, it's a great opportunity for us to grow because the applications that are contained in each of these devices is getting bigger and bigger all the time. So we talked about here, applications get larger. They also get more complex. And it also creates unit demand because edge AI is exciting. It offers tremendous value to the customer and it's spurring demand for these applications globally. Now, when we look at our business, I mentioned earlier that we have about 63% of our business in automotive. That's the blue slice of pie over here in the middle of the chart. The industrial market IOT is about 26% of our business. So taken together, AI and Edge AI affects about 90% of our end customer demand. And that's for both our data platform and our security platform. Both of them benefit from growth in AI.
spk03: Now, if we dive a little bit more deeply into automotive, automotive is one of those markets that
spk02: you would think would be much more steady state. But ever since COVID, there's been a lot of choppiness in the supply chain. Not enough parts, too many parts, new platforms, are there the right platforms? And so there's a lot of up and down in the automotive industry on a short-term cycle. On a long-term cycle, though, we're all in agreement that more and more silicon are going into cars. Why is that? Well, if you look at various applications, we talked about advanced driver assist. This also leads to autonomous driving. A huge growth in silicon is required to make a car be ready for autonomous driving. These are cameras, sensors, and the intelligence associated with that to make a car ready for any kind of autonomous driving. We also see a tremendous growth in infotainment and IBI. Just think about the size of a screen on a 10-year-old car versus the size of a screen you get on a new car today and the applications that are driven from that screen. One of the areas that offers both new content capability for automotive manufacturers as well as a cost reduction is to put more and more of the applications into software and launch from that screen as opposed to a dedicated button or dedicated switch. I think Tesla is probably the best example of that in terms of pretty much everything gets launched from the screen and other manufacturers are moving towards that as well. Electrification is also a big driver of growth for semiconductor content. Now electrification has been hot and cold It was all the rage about a year ago, and now it seems everybody doesn't understand how we're going to grow in electrification. I think if you look worldwide, the trend is a little less hype and a little more strong, steady growth in electrification for a couple of reasons. Number one, the lower end markets, what used to be called the third world or emerging markets, are having a tremendous opportunity to have electric vehicles hit new price points for cars and so you look at a lot of the chinese manufacturers for example they're building capacity in china primarily for export markets and they're building those export markets not only with the traditional internal combustion engine but also with electric cars So taken together, you can see the chart on the right shows a forecast from McKinsey, but basically the tripling of the automotive semiconductor market. And that's really the foundation of our growth strategy is to be the leading supplier in automotive as those components go into the market. And this just details a little bit more about what's in each of the areas. I won't spend too much time on this, but you can see different applications. again, provide opportunities for data IO programming. Now let's shift over to our second largest market, industrial and IoT. One of the areas that's important for IoT, because all these devices are connected, is they need to be secure. And what we've been able to do is take our data programming platform and with multiple patent-granted and patent-pending technologies create a secure provisioning platform we call Centrix. And what this does is it allows us to provide a solution that's very, very easy to deploy in manufacturing and provide the necessary security for IoT. Now, we've been doing this for a while. Markets developing a little bit more slowly than our original forecasts. But this clearly is an opportunity long term for the industry as more and more devices get secured. And as an example, who's using this technology today? You can see, again, metering companies, logistics providers, companies that are trying to protect their consumable revenue, in this case, ink from an industrial marketing company, as well as an AI cloud provider that's using data technology to secure their accelerator platform for the hypercloud and AI.
spk03: Very exciting application. So let's take a look at the numbers.
spk02: A company snapshot. We've been doing about 27 million on market cap with about 9 million shares. Our trailing 12 month revenue is about 27 million. And we have an adjusted EBIT of about 1.4 million. And this is as of March 31st. We've talked about some of the key snapshots there. One of the big differences with DataIO and other microcap companies is we have no debt. We have $12 million of cash in the bank, about $1.36 per share, and no debt. And that gives us a lot of stability and protection in an industry that's historically very cyclical.
spk03: Now, what we're trying to do in our business is not only grow our system sales,
spk02: but grow our recurring revenue that comes with an ever larger installed base of systems. So this chart here on the right shows the penetration we've had over the last decade on our PSV family. You can see here early 2024, we announced our 500 system. If you look at our revenue mix, about 58% of our business is selling systems and 42% is selling adapters, which are consumable products that go with each system, and then about 13% of our revenue is software and services that also go with every system. And so our strategy here is, as the installed base grows, is to continue to grow our adapter and software and service business to support that ever increasing installed base.
spk03: Now, what an adapter is here, as you can see on the right,
spk02: Every chip has a different footprint. If you look in the middle here and we support a very, very broad range of chips, memory cards, things like that. And so every one of those has a custom socket that gets put on a PCB board that ultimately interfaces to the system. And those adapters wear out over time, the sockets wear out. And that's really the opportunity for us to sell more and more consumable technology. The other growth area for us outside of systems is more and more software sales and more and more opportunities for us to sell upgrades, new capabilities to our existing installed base of customers. More and more of our technology and value is delivered in software every day. And that gives us an opportunity to choose how we go to market, with unique software technology that's licensable on a per system basis. Or we can choose to bundle it with hardware technology. It's really up to us. But it gives us more and more of an opportunity to grow that 13% of our revenue, which is associated with software and service, as well as our Centrix pay-per-use technology.
spk03: So we talked about our financial outlook.
spk02: Again, we're looking for double-digit bookings growth, but everything here is going to be back-end loaded. And our margins are going to be in the 50% range, mid to high 50s percent range. And we continue to have no debt, and we continue to maintain strong operating leverage in our models. So when you pull it all together, we look at the investment merits, why you might want to consider data IO. We're positioned for long-term growth and we're in the right markets, automotive, IOT, and industrial. We have a very strong balance sheet that gives us the flexibility to continue to invest, continue to look at inorganic options. We have an increasing recurring revenue strategy, a very experienced management team, And we're global in nature, which means we can much better weather regional challenges than anyone else in our industry. You put that together, it's the long-term growth story in automotive with operating leverage that can create something that's very, very interesting for investors.
spk03: So with that, I'd like to thank everyone, and we'll move it over to Q&A.
spk02: So question here, gross margins were down 5% in Q1 to 53%. What does this mean for lower sales volumes, et cetera, mix? It's a great question. What we have always told investors is based upon the nature of our business and the fact that we sell some systems directly and some systems through distribution, we will have a variation quarter to quarter on gross margin. Obviously, the total volume of business will have an impact on gross margin since we build products in our own factories as well. So when we talk about gross margin, we're talking about the long-term four-quarter view, and there certainly will be variation quarter-to-quarter in that gross margin. Next question we talked about, can you talk about the current environment in America and Mexico regions? We talked about at the end of our Q1 earnings call that we did see a slowdown in the Americas and Mexico and things pushing out into the second half of the year. Certainly have no change in that opinion based on what we see now. And I think there's going to be, again, More and more of the automotive industry is going through sort of a reckoning or rebalancing here. And I think it'll sort itself out. And when it does, we'll see continued growth in that space again. Long term, we do see Mexico as a growth area because more and more people, more and more companies, I shouldn't say, are going into Mexico in order to have a North American presence, in order to have a tariff-free way to import into the USA. And no matter who wins the election in November, I don't think that will change. All right. One other question. Supplier to 18 of top 20 automotive customers globally. Impressive share. Do you have competition? We always have a lot of competition. Predominantly direct competition. People that build pre-programming systems are largely Asia-based. They're also substitutes. You can program other different ways. We've always had competition in automotive, but what we try to do in the automotive space is remind people about the things that really matter in automotive. Quality, consistency, and You really can't ever afford to shut down a production line. The penalty for missing deliveries or shutting down a line is so large that customers understand that they really need to be going with a high quality market leader in data IO. And so that's really how we compete in a tougher market with competition globally. Next question is backlog growth is strong with the highest bookings quarter in 11 quarters. What makes those orders and what makes up the backlog? We generally do not discuss too much about specifics on backlog. At the end of Q1, when we announced the strong bookings, we did indicate that those orders would primarily be back-end loaded this year. And again, we have no change in that order.
spk03: that commentary. All right.
spk02: I think we've gone through most of the questions and I'll give people a chance to put any other questions into the queue. all right we got one more here okay can you talk about the business model to address the edge ai market i think the business model to address edge ai is the same business model we've had historically if you look at those applications smart metering smart cities automotive, IOT, those are applications that we've been talking about for quite some time. And so that's the opportunity we have is to continue to go after those markets and those applications in a way that we sell today globally. So we don't think we need a fundamentally different distribution strategy to achieve those targets. Then one final new question here, how do EVs impact the auto segment? I think I may have covered some of this earlier, but the bottom line is EVs were the rage two years ago, one year ago. I think they might have gotten ahead over the tips of their skis a little bit, certainly in some of the Western markets. But what we see globally is a steady demand on EVs. Certainly in China, they're almost 50% of the market, especially in the cities. And we see the Chinese manufacturers looking to export their very, very price competitive EVs globally. So I think EVs will continue to have a strong impact in automotive. I think maybe it was overhyped, certainly here in the U.S. But, you know, they're going to be a bigger and bigger point, bigger and bigger share, I should say, of the market going forward. Okay, with that, I think we've finished up the questions, and I'd like to thank everyone for joining us today. I'd encourage you, if you want more information, to go to www.dataio.com and look at our website, look at the investor relations. We have some excellent content there, some deeper dives on technology, what we call our Fireside Chat series, and other additional information that investors find useful. Thank you very much.
spk01: Thank you. That concludes DataIO Corporation's presentation. You may now disconnect. Please consult the conference agenda for the next presenting company.
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