Data I/O Corporation (DAIO) Q3 2019 Earnings Report, Transcript and Summary

Good day, and welcome to the Data I/O Corporation Third Quarter 2019 Financial Results Conference Call and Webcast. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Jordan Darrow. Please go ahead.

Thank you, and welcome to the Data I/O Corporation third quarter 2019 financial results conference call. With me today are Anthony Ambrose, President and CEO of Data I/O Corporation; and Joel Hatlen, Chief Operating Officer and Chief Financial Officer of Data I/O. Before we begin, I'd like to remind you that statements made in this conference call concerning future revenues, results from operations, financial position, markets, economic conditions, estimated impact of tax reform, product releases, new industry partnerships and any other statements that may be construed as a prediction of future performance or events are forward-looking statements, which involve known and unknown risks, uncertainties and other factors, which may cause actual results to differ materially from those expressed or implied by such statements. These factors include uncertainties as to levels of orders, 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 I/O is under no duty to update any of these forward-looking statements. With that, I would now like to turn the call over to Anthony Ambrose, President and CEO of Data I/O.

Well, thank you very much, Jordan. I'll start by commenting on 2019 third quarter results and our outlook on the overall market. And then I'll turn it over to Joel Hatlen for more detail on our specific numbers. Third quarter was very much best of times, worst of times quarter. From an absolutely brutal summer, we saw a meaningful pick-up in orders in September and continuing in October. We also completed development on several exciting new products and saw a solid traction on our SentriX platform. In Q3, our revenues were $3.8 million and we had a $4.3 million in bookings. This low-level of revenue led to a loss of $844,000, our first quarterly loss since 2015. Adjusted EBITDA which excludes equity compensation was negative $306,000. We anticipated a challenging quarter and entered 3Q with minimal backlog but these results were below our internal forecasts. The months of July and August were particularly weak for new bookings, we made back some ground in September. Octobers also much better than the depressed levels of the summertime. Softness in automotive and uncertainty created by tariffs international trade tensions have been wreaking havoc on the global supply chain and freezing CapEx investments at many of our customers. As I mentioned last quarter, this is the worst CapEx environment since 2012. Forecast when the sector will fully recover very between Q4 of this year and mid of 2020. While we do not give quantitative revenue guidance, we feel better now than we did in the summertime and hope we've seen the bottom of the cycle. Since we've been through several market cycles through the past 30 plus years, we understand how to navigate them. We did an excellent job of controlling spending in the third quarter, discretionary and variable spending were down as designed. As we remain focused on continued improvements on efficiencies in our profitability. Our recurring revenue from software service and maintenance contracts in consumerable sales for adapters helped cushion margins as equipment sales dropped sharply. At the end of the third quarter, we supported over 270 PSV units in the field, globally. Despite these very core short-term market conditions we stayed the course and continued to invest for the future. This ensures we have the best solutions to resume growth as sectors reverse course and were best position to take market share and grow when the market grows. In the third quarter, we delivered multiple enhancements to our existing platforms as well as introducing new platforms and device supports. Earlier this week, we announced the PSV2800 platform. This is our first ever entry into the ultra-fast segment of the market with performance up to 3000 parts per hour. Our performance is much faster enhanced delivers a much lower total cost of programming for our customers. This allows us to serve new customers and pursue new applications versus end-of-line programming. Our approach is much more flexible and cost effective compared with traditional end-of-line programming applications and that this makes the PSV2800 the perfect complement to our PSV3000, PSV5000, and PSV7000 family members. Earlier this month, we also received a 2019 Mexico Technology Award in the category of device programming for our Job Composer Software Application at the SMTA Guadalajara Expo & Tech Forum. Our Job Composer Software streamlines the process for customers to manage and control job creation from a central design location and seamlessly transfer the job configuration to a local production site for final compilation and programming. This saves significant time and reduces human error in the job creation process. This allows us to aid and optimize the automation of all factory floors across the enterprise. This is especially important when we talk about connected in autonomous cars, car infotainment and other like applications. We continue to make great strides with our centric security deployment platform in Q3 as well. Key performance matrix increasing in the third quarter include a number of customers, design wins, device type supported and our overall sales funnel. Our customer engaged since 2019 have doubled from the same period last year and our partners are seeing enclosing more deals as we increased the number of devices supported on the platform and they get experienced with the presales process. We've also been awarded numerous patents to protect our unique intellectual property and have additional patent filings spending. Based upon our encouraging results to-date we will be increasing our SentriX platform investment even as we manage spending tightly elsewhere. Next month, we intent to showcase our new products and security solutions at Productronica: the major biannual electronics manufacturing show in Munich, Germany. We have three speaking engagements and plan to demonstrate our latest announced products and perhaps even showcase a surprise or two. If you are in the Munich area, please join us at Productronica and contact Data I/O for free badge to the show. With that, I'd like to turn it over to Joel Hatlen, our Chief Operating Officer and Chief Financial Officer to provide more details on the quarter. Joel?

Thank you, Anthony. Good day to everyone. Net sales in the third quarter of 2019 were $3.8 million as compared with $6.5 million in the third quarter of 2018 and $5.8 million in the second quarter of 2019. Anthony discussed the down cycle in his remarks as well as addressed the bookings event the third quarter and for October to-date. On the geographic basis, international sales represented approximately 90% of total net sales for the third quarter as compared with 88% of revenue in the 2018 period. Total capital equipment sales were 56% of revenue during the quarter and adapters and consumables were 44%. Year of year-to-date in 2019 compared to 65% and 35% respectably for the full-year of 2018. For the third quarter of 2019, gross margin as a percentage of sales was 52.6% as compared to 63% in the third quarter of 2018 and 61.4% in the second quarter of 2019. Third quarter gross margin reduction is due to the reduced sales volume and as a percentage by the inefficiency of fixed cost related to that reduced sales volume. For the full-year, we continue to model gross margin percentages in the mid-to-upper 50s. At this -- at the nine month mark, gross margin has been 59%. Tariffs continue to cause uncertainty in our outlook but have been and should continue to be manageable. Tariffs impacted gross margins as a percentage of sales by 1.7 points in the third quarter. Operating expenses were down compared to both the prior year in the prior quarter periods. The change is primarily related to variable expense including lower incentive compensation and sales commissions as well as stock-based compensation. Cost control measures were also significantly contributed to the reduction. We continue to actively engage in market development in R&D initiatives for our SentriX platform as well as our key programming platform initiatives addressing the automotive and industrial and other sectors. At the same time, we're emphasizing ongoing expense management practices with the expectation of increased SentriX related spending, we are modelling next quarters operating expenses at approximately $3.3 million. In accordance with U.S. GAAP, net loss in the third quarter of 2019 were a loss up to $844,000 or $0.10 per share compared with a net income of $342,000 or $0.04 per deluded share in the third quarter of 2018. Bookings in the third quarter of 2019 were $4.3 million compared to $7 million in the third quarter of 2018 and $5.1 million the second quarter of 2019. Backlog at September 30th, 2019 was $1.7 million compared with $1.4 million at June 30th of 2019. With the increase due to late September orders. Data I/O had $1.7 million in deferred revenue at the end of the third quarter compared to $1.5 million at the end of the second quarter. Data I/O's financial condition remains strong with cash of $15.2 million at September 30th of 2019. As Anthony mentioned, we used $244,000 in the third quarter to repurchase 56,000 shares. It is important to note that even though we had a loss in the quarter and spend money to buy back stock, we did not burn cash in the quarter. Cash closed just slightly higher from the end of the second quarter. On Days Sales Outstanding or DSO, receivables collection measure was better than expected at 47 days, at the end of the third quarter an improvement from 51 days at the end of the second quarter. Networking capital at the end of the third quarter was $18.4 million down from $19.5 million at the end of the second quarter, again primarily due to the loss as well as these share buyback. The company continues to have no debt, finally we had 8,211,000 shares outstanding at September 30th 2019. That concludes my remarks, I'll return the call back to Anthony.

Thank you very much, Joel. And before we open it up for Q&A, I just like to remind investors that we'll be participating in the LD Micro Conference in Los Angeles on December 10th this year and if you like to talk with Data I/O, please let Jordan Darrow know and we'll get you scheduled. With that operator I'd like to start the Q&A process, please.

Thank you. [Operator Instructions] Your first question comes from Jaeson Schmidt from Lake Street. Please go ahead.

Hi guys, thanks for taking my questions. I just want to start with the clarification. Joel, the split between equipment and adapters are 56% and 44%. Were those year-to-date figures or was that the split in Q3 as well?

I'm sorry, for the quarter that was the split. And then but there was being compared to last years on a total year figures.

Okay, thank you. And then, it sounds like orders have been picking up here over the past couple of months. Could you just comment on if visibility has improved at all, I know it never extends too far out, just the nature of the sandbox you play in. But any additional color on overall visibility would be helpful.

Yes sure Jason, this is Anthony I'll take that one. Whence we talked about there the July and August were absolutely brutal and we did see a pickup in September and October is actually been a little bit better than September. What it feels like is happening, I'm not sure we're getting more visibility but I think a lot of things happen towards the end of the second quarter that just simply froze people. And it looks like some orders were released in September and October simply because our customers absolutely needed them. And so, I think it's more of a case of that happening. I think visibility is pretty much as we've always had it. Although, the reality is when decisions are being made or held back at a corporate level, we tend not to be actively engaged with the people that might be holding back purchasing we're typically engaged with the local people when they're buying equipment. So, when you have a top economic situation, the visibility inherently goes down because CFOs like to put the kibosh on spending.

Now, that makes sense. And then, just the last one from me and I'll jump back in the queue. You noted the number of customer engagements that doubled on the SentriX platform. How should we think about their revenue contributing meaningfully to the models? Sorry about timetable there.

Yes, I'll be pretty consistent with what we talk about, it's not this year for quote-and-quote meaningful. That'll happen more like next year. But we're anxious and happy to see is that our sales channels or figuring out how to sell this in closed business. As our supports grow, it means customers can get to market faster. So, all those things are happening and as I mentioned, we continue to be very excited about SentriX.

Okay, thanks a log guys.

Thank you. [Operator Instructions] Your next question comes from Robert Anderson from Penbrook. Please go ahead.

Good afternoon, gentlemen.

Hi, Bob.

Hello.

Yes, hi. A two part question. You've completed the authorized stock buybacks. So, do you anticipate initiating the new stock buyback, first question? And then, what was the backlog at the end of October, you did mention a backlog at the end of September.

So Bob, let me answer the second question first. I actually don’t have a backlog number end of October, I won't get that till tomorrow. It's just typically we don’t give out backlog numbers in the first month of a quarter and I'm not sure be terribly meaningful. We did see an acceleration in September and October. The anticipation is those order get fulfilled in time be recognized in Q4. And so, that's what we'd expect. And then, the first question on the buyback, we just completed the buyback. I don’t anticipate that we'll be doing another buyback shortly. We just met on that yesterday with the Board. We'll always keeping eye on things but don’t anticipate that changing any time soon.

Okay, thank you.

Thank you. Your next question comes from Arthur Winston from Pilot Advisors. Please go ahead.

Hi, guys. Tony, I was just curious as to what prompted you to decide that increased spending on SentriX. Why now as opposed to some other?

While we're looking at a number of areas, in part to the demonstrated traction, partially some new and interesting things that we're adding to the platform. We just completed our internal strategic review. This is the time here when we do that, we try and take a three-year look at our opinion on where the best growth opportunities are in the market. And we just completed the 2800 which is a very exciting new handler product. So, most of the R&D is done on that. We'll be showcasing that product and now that gets into the sales cycle in earnest. We had a number of enhancements on our other platforms as well, significant releases for our programmers, for our handlers. And so, that part if you're on the core business, that R&D is largely been done. And I think on the SentriX side, looking forward we continue to reinforce our opinion that the world is moving to security, the world is moving there in certain segments ahead of others. Namely, automotive is doing it very quickly and IoT is happening as well. And that we had some additional new opportunities. It's a little too early to describe them in detail here on the earnings call but that was our thought process in the strategic planning.

Are you far enough along to really on this thing has the modals, did they in terms of recurring revenue one time sales in terms of follow on sales to keep it going. Is that premature to know how the models going to play after this way.

No, I think that's a good question. We certainly have our own internal model. As I've indicated, we'll be sharing more that with investors. We've described that our principle models to provide SentriX the SentriX security deployment platform as a service primarily. And that helps for a number of reasons both for market reasons as well as internal reasons. The specific terms of how that works out that's something I know my competitors to figure out pretty easily which unfortunately they would be able to do if I told you on the call. So, we'll keep that those cards a little close to the best for now.

Okay. This is not a question but if you could please pass me guess on the board then at least one of you back off disappointed that the company is sure by you know not the buy backs here? It's quite disappointing but not a question.

Yes. Okay thanks, Art.

Thank you. Your next question comes from Jeremy Lavine [ph] from Web-Car [ph]. Please go ahead.

Gentlemen, and the positions I've held in life, as I went to my Bosses and I said that extremely short because of the other failings of these sector that I was involved in, my Bosses would have said "Well, I don’t really what your sectors doing, if you don’t grade on the curve, we're only interested in what you're doing." And I would have been in a lot of trouble because we can up quarter-after-quarter and say there is a secular issue and that's the problem. It's nice if you get awards and you get special products where achievements that you make from Mexico or wherever but I mean shareholders are really only interested in the share price which is dismal. So, would you have to figure out possibly do another strategic review why going down the ramp that you've been going down it's not producing the results. That would make this company shine and then you have to figure out how to beat expectations, not through an award given out by Mexico but maybe an enhancement of a $100 million of unexpected sales, something on that nature. Because if really you do that, your company is grading on a curve and I don’t invest in companies that grade on the curve.

Okay, thank you very much. Let's move to the next question.

Thank you. [Operator Instructions] Your next question comes from Robert Anderson from Penbrook. Please go ahead.

Anthony, I would echo the thought that that's a comment. Now my question is about the PSV2800. And you talked about end-of-line and I'm a little confused, is that putting code on the chips such as would be done by Teradyne equipment? So --.

In other words, you're -- test equipment and also ethical. Yes, so as we've discussed before right you can program products in a few different ways technically. Data I/O's primary approach is we program the parts when their components which is prior to placement down in SMT line. You can also program parts when they're panelized on an SMT line and we generically call that programming end-of-line whether it's a dedicated piece of programming equipment or you can program a test. I was specifically referring more to dedicated pieces of programming equipment, they tend to be pretty expensive and somewhat inflexible and with the capabilities we're able to get on the 2800. That brings some replacement of that type of business into our served market.

So, then I was right. It takes volumes off Teradyne type equipment and moves it to your equipment?

Correct.

Okay, alright. I didn’t understand then. Now on SentriX, what's your install base now of SentriX equipment?

We have five systems to deploy globally.

Great, okay. I'm all set, thank you.

Thanks, Bob.

Thank you. Your next question comes Vishal Mill. Please go ahead.

Oh hi Anthony, this is Vishal. But the core - if you could clarify even more why the board and the on your strategic would be defined not to continue the share buyback. And second, what is the reason you read that much cash on balancesheet about almost $15 million there's no cash burn now. But do you expect an investment or cash burn to pick-up, that's the reason you have that much cash from the two part question. Thank you.

Well, I think the question is we just completed a $2 million share buyback, that's the largest share buyback we've had in six years. So, I think we've been very clear that we are returning capital to shareholders. The $15 million is not all in the United States. Okay, we have to fund operations not only in the United States but in China and in Germany. At the same time, we're in a down cycle on the business. So, I think we've looked at a number of alternatives and we frankly believe that the cash is best served by doing what we're doing right now.

Okay, thank you.

Thank you. This concludes our question and answer session. I would like turn the conference back over to Anthony Ambrose for closing remarks.