Q3 2023 Data I/O Corp Earnings Call
Participants
Jordan Darrow; IR; Darrow Associates, Inc
Anthony Ambrose; CEO & President; Data I/O Corporation
Gerry Ng; VP & CFO; Data I/O Corporation
Kevin Garrigan; Research Analyst; WestPark Capital, Research Division
David Marsh; Analyst; Singular Research
David Kanen; Analyst; Kanen Wealth Management
Michael Cooper
Presentation
Operator
Good afternoon, everyone, and welcome to the Data I/O third quarter 2023 financial results conference call. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. Please also note, today's event is being recorded. At this time, I'd like to turn the floor over to Jordan Darrow, Investor Relations. Please go ahead.
Jordan Darrow
Thank you, operator, and welcome to the Data I/O Corporation third quarter 2023 financial results conference call. With me today are the company's President and CEO, Anthony Ambrose, and Chief Financial Officer, Gerry Ng.
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, supply chain expectations, estimated impact of tax and other regulatory 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 from 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, parts shortages, pricing, and other activities by competitors. And other risks, including those described from time to time in the company's filings on Forms 10K and 10Q 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.
And now I would like to turn over the call to Anthony Ambrose, President and CEO of Data I/O.
Anthony Ambrose
Thank you very much, Jordan. I'd like to begin my formal remarks by addressing our 2023 third quarter financial and operational performance, and then I'll turn it over to Gerry Ng for more detailed look at the numbers.
We have a strong year-over-year revenue growth at 25% through the first three quarters of the year and more recent challenging business conditions in Q3. As I mentioned in the release, the third quarter was mixed. We won some very exciting deals and saw strength in adapter bookings, but system bookings were soft as customers deferred capital purchasing decisions into the fourth quarter.
We also saw customers move delivery dates from Q3 to early Q4, which we do not normally see. For whatever reason, whether it be the strike in North America, interest rates, people coming back from vacation, it appeared that customers wanted to take another look at their capital purchase decisions and did so by pushing from September into Q4.
Now what's interesting is Q4 is starting out extremely well as we booked five systems already in October. Several of these systems originally were planned for Q3 bookings, actually had the bookings occur in October. I was also happy this morning to see the news that Ford, and the UAW have reached a tentative agreement will likely ending their strike. This will remove some uncertainty in North American market.
When we look at Q4, given all the puts and takes, we have a strong sales funnel that supports a much stronger bookings than we saw in Q3, and operations that support stronger revenue than we saw in Q3, provided we get the orders in time to ship this year.
Despite the short-term gyrations, the driving forces and long-term growth thesis for Data I/O remain intact. Advanced semiconductors and microcontrollers are finding their way into more products and impacting virtually every business in a measurable ways. Programming is becoming more complex, and the amount of code is continuously increasing.
Our plan is to grow revenues in growing markets including automotive and industrial, continue to drive more revenue from consumables software and service, and deliver 40% operating leverage on that revenue growth.
Automotive represented about 63% of the bookings in the third quarter, consistent with our year-to-date numbers. Within automotive, we continue to see strength in EVs globally. And we like EVs not just because their electric vehicles, but because the platforms are newer and they tend to have more electronics for cars, they have comprehensive IVI, ADAS, and other features. With this, content in EVs is estimated to be about two to three times that a semiconductor content and other vehicles, and the programming requirements continue to require -- continue to grow in these EVs.
Regionally, we continue to see strength in North America. We have seen softness in AMEA. China is recovering from a soft first half, recovering slowly and steadily, which we believe will continue based on our channel checks.
In the third quarter, we added four new customers, which now brings us to 19 for the first nine months of the year, compared to the 20 of all last year and the prior year. Within those four new wins, we had two new EV factories internationally, and one of the new customers in the third quarter represents a major win for us on SentriX. We're excited to move further into expanding the SentriX market by winning our first major solar energy customer on our SentriX security deployment platform.
This continues to make progress for SentriX as a leading technology platform now including AI, EV, data center utilities, industrial and now, solar markets. That's a nice bridge here we go from solar to sustainability and ESG.
Greenpower, ESG, and climate disclosures are becoming an increasingly important for public companies like Data I/O. For us, we see three basic requirements for our environmental strategies. First, as a leading supplier to the automotive industry, we must comply with purchasing requirements set forth by our largest customers. Many of our large AMEA-based tier one automotive customers and many industrial customers have put forth their own ESG plans, calling for a significant reduction in greenhouse gas emissions from their suppliers.
Second, as a public reporting company, we must comply with appropriate rules and regulations set forth by the SEC and Nasdaq. There are new disclosures required for companies starting next year. As a smaller reporting company, these will become effective for us starting next year and continue to increase in disclosure requirements over the next several years. And finally, as a good corporate citizen, we need to look at smart ways to be more environmentally friendly, consistent with a good use of cash.
The importance of ESG and how it impacts our business operations will be the first subject in our next fireside chat series. The session will be entitled, Sustainability Strategies for the Auto Industry, and will be released and available for viewing later this month. In that session earlier, how we've made outstanding progress in our Scope 1 and Scope 2 emissions, well ahead of regulatory and supply chain requirements and are in the programming industry and sustainability.
In the months that follow, we plan to release five additional fireside chat sessions covering global perspectives on critical topics and emerging market trends from automotive to semiconductor growth opportunities. In addition to the fireside chats, we've expanded our investor communications content and channels with new technology discussions on LinkedIn. And we also recently joined the Webull Corporate Connect Service platform to enhance our communications with tech savvy retail investors. Webull will provide us direct exposure to the second largest app-based investment and trading platform.
As you can tell we're excited for the future growth of Data I/O, and look forward to sharing our progress and perspective with you and also with these new channels. This will include some fresh ideas from Gerry that goes well beyond our operational spending discipline that he demonstrated in the third quarter. He is focused on our ability to drive margins, improve cash flow, and invest in future growth.
With that, I'll turn the call over to Gerry, for a little bit more detail on the numbers. Gerry
Gerry Ng
Thank you, Anthony, and good day to everyone. I look forward to my first and future earnings update having taken over as CFO on August 16. I will start with the balance sheet and then move to the income statement. My commentary today will focus on specific points of interest and allow you to review the earnings to release for a more detailed understanding of our Q3 financials.
Data I/O's financial condition remains strong at the end of Q3. Well $11.9 million in cash, up $357,000 from $11.5 million at the beginning of the year. Cash and working capital at $18 million, had a comparable increase of $520,000 from $17.6 million at the beginning of the year. Receivables at $4.9 million increased $175,000 from the previous quarter.
Day sales outstanding or DSO was at 59 days at the end of Q3. Past due receivable balances greater than 30 days remain very low at less than $30,000 on September 30. Payables at $1.1 million decreased by $468,000 from the previous quarter.
Moving on to inventory, we finished at $6.4 million, a decline of $476,000 from the previous quarter. Inventory had been intentionally elevated in 2020 to address potential shortage risk. Earlier this year, we went to a more neutral supply chain strategy, improving supply chain conditions, this position and material for end-of-life products and our lean operational initiatives contributed to our overall reduction. Optimizing inventory levels remain a top priority while balancing anticipated customer demand going forward.
Moving to the income statement. Revenue at $6.6 million declined to [$651,000] from the prior year on lower bookings performance in the current quarter and strong shipping recovery in Q3 of the prior year, due to the supply chain disruption that occurred in the first half of the prior year.
Revenue through the first nine months of this year was $21.2 million, up $4.2 million or a 25% increase from the prior periods. Our Q3 ending backlog was $2.5 million, down from $3.8 million from the previous quarter. As Anthony indicated, automotive electronics continues to be our primary addressable market at 63% of year-to-date bookings.
Gross Margin at 54% in Q3 was down from 59% in Q2 due primarily to lower sales volume, lower inventory levels, and related absorption a relatively fixed cost for our manufacturing and service operations. Good news is direct material and other variable costs declined in line with revenue change. Operational expenses at $3.6 million increased 5% from the prior year, who have R&D representing the majority of the increase, while G&A remained relatively flat.
Great strides were made in reducing our Q3 costs with a decline of $626,000 from the prior quarter, a critical review of spending was performed, non-critical cost reduced or eliminated, and of course, operational efficiencies increase. Excluding costs related to sales volume changes, we expect to maintain this strong operational discipline in Q4 and 2024.
Currency transaction remit impact was minimal in Q3 were $15,000 loss compared to a $307,000 gain in the prior year, from, of course, a strengthening dollar. Net loss of $53,000 in Q3 compared to a net income of $847,000 for Q3 of 2022 was due largely to the change in revenue and lower FX gain from the prior year.
Net income remains positive. However, at $342,000 through nine months compared to a net loss of $1.6 million for the similar period in 2022. Adjusted EBITDA was $400,000 in Q3, an increase to $1.8 million through nine months of this year. This represents a year-over-year improvement of $1.3 million.
Overall, we remain very strong financially with no debt and in good position to navigate market dynamics. We have returned to profitability on a consolidated basis. We will be able to take advantage of our NOLs, which stood at $15 million on September 30. I am excited to be part of the Data I/O team, and look forward to working and partnering with Anthony and our global team to continue and improving our operational and financial performance.
This concludes my remarks for the third quarter of 2023. Operator, would you please start the Q&A process?
Question and Answer Session
Operator
(Operator Instructions) Kevin Garrigan, West Park Capital.
Kevin Garrigan
Hey, good afternoon, everybody, and thanks for letting me ask a question. On the EV front -- and congrats on the new EV factory customers. You're not saying that you'll supply every EV factory out there but is it a safe assumption that you'd supply kind of a one system per factory? or is there a possibility that multiple factories would use one system such as like a programming center or something like that?
Anthony Ambrose
Yeah. So Kevin, good to hear from you. In general, I would say, on average, we supply more than one system per factory in the automotive space. And that's just based on an analysis. I mean, it ranges from we have a number of customers, one factory or one system per factory. I've been in places that have 10 systems in a factory. So the average is certainly going to be more than one. For us, we see the growth in automotive coming from, again, the focus on new factory acquisition.
As customers expand in certain areas of the world, we want to be their choice as they put programming capacity in place in those new factories. We think that's a good predictor of what their future demand will be in that factory. And then, of course, people that have been with us for years are placing additional capacity orders as, again, they have more and more electronics going into their cars, and they need to add capacity. So it's purely a combination of both.
Kevin Garrigan
Okay. Got it, that makes sense. And then are you getting a lot of prior customers that already have a PSV system that are asking to add SentriX capabilities?
Anthony Ambrose
The customers -- the short answer there is most of our SentriX demand today continues to come from people that have the system already. That includes our programming center partners and a handful of non-programming center customers.
Kevin Garrigan
Okay, perfect. And then just one last quick question. So you're looking at your customer additions, you had started out the year adding 10 customers in Q1 and then the number is kind of come down as it gone through the year, but you're still on page to surpass your 2022 customer additions. What is kind of keeping some potential customers on the sideline?
Anthony Ambrose
I think the numbers in any quarter going to have some lumpiness to it, than is just the nature of our business. That's why we gave you the date on the quarter, and then also trying to provide some context for the year-to-date numbers as well.
For us in Q3, we probably would have had more new customers if people have bought more systems. As I mentioned, it seemed like people just didn't want to place any orders towards the end of the quarter. And then once the quarter flipped over, it's like the spigot turned back on. I don't know why they didn't want to have it on their books. I don't know whether it was the uncertainty created by the factors I described earlier strikes, other stuff as well, interest rates. But at the end of the day, we believe that they'll be more capacity demand because there's more of silicon going into cars, and it needs to get programmed. It's not really any more complicated than that.
Kevin Garrigan
Okay, perfect. Thank you very much.
Anthony Ambrose
Thanks, Kevin.
Operator
David Marsh, Singular Research.
David Marsh
Hey guys, thanks for taking my questions. I guess I'm just trying to -- Anthony, I am just trying to read the tea leaves here a little bit on comments on China. It sounds like there is some sort of recovering taking place, but it doesn't sound like it's a robust and fast paced recovery. I was just hoping that you could provide us a little bit more granularity there and just help us understand.
Anthony Ambrose
David, I think tea leaves is probably an appropriate metaphor for the future forecasting there. I think you nailed it, that's exactly what I'm trying to say. We've had continuous improvement throughout the year, but it's at a level of business that's lower than last year. We still haven't gotten to that level. I think it will -- you're going to continue to see more recovery there, and consistent with the fact that China produces and consumes an awful lot of cars, and 30% of them are EVs.
David Marsh
Right, right. That's -- yeah, that's helpful. I guess it's just -- it'd be really helpful that you have a better sense of what that pace is going to look like going forward. I guess it's really very difficult to predict.
Anthony Ambrose
Yes, I think there's a lot of third-party information there. I mean, you can sort of picked the forecast you want. A lot of people are nervous about the property market in China. A lot of people are nervous about, are people continuing to still build there. We just had a trade show there, very well attended, probably the best attendance in three or four years. And as I said, I would expect continuous steady improvement. I don't think you're going to get a massive sudden uptick, but I think it will be better as we go forward.
David Marsh
Got it, that's really helpful. And then just as my follow-up, I guess one of the things that could be be a bit by surprise, and I think you addressed it a little bit, but I would just kind of wanted to pull the thread on it. Backlog is down from 3.8 at the end of Q2, 2.5 at the end of the Q3. But based on your commentary, it actually sounds like bookings have picked up as we've entered the new quarter.
So just with all of that information, I'm reading into your commentary that Q4 could be sequencially better, but I was just wondering if you might just help us with the information that you have today, just kind of get better understanding around that.
Anthony Ambrose
Yes. I think the tough thing for us as we don't give quarterly guidance, but as I indicated in my remarks, I certainly think the bookings will be better in Q4 and Q3. And the revenue, given our sales funnel, we still have in the funnel that have not yet booked. We have an opportunity to have strong revenue quarter as well, provided the timing is such that we can book and ship some of those systems. So the funnel looks good. We just have to deliver on it, and we're off to a good start.
David Marsh
Great. That's helpful. Thanks. I will jump back in the queue.
Anthony Ambrose
Thanks a lot, Dave.
Operator
David Kanen, Kanen Wealth Management.
David Kanen
Hi, thanks for taking my questions. I've got a few. So if it's okay to bend the rules a little bit, I appreciate that. The first one is in regard to you said five system orders so far in the quarter, what are ASPs on systems?
Anthony Ambrose
I'm not going to get into that, Dave. They're consistent and typical with prior quarters, nothing strange either way.
David Kanen
Okay. And for the quarter, what were adapter sales?
Anthony Ambrose
The exact number will put in the queue, but I know that things were up pretty well quarter-on-quarter. Gerry, do you have the exact adapter numbers? Gerry will take a look at that, and we'll let you know. What's the next question?
David Kanen
Okay. On operating expenses, we're up year-over-year, revenues are down year-over-year, gross margins are down. It seems like an unsustainable posture going forward. Can you talk about opportunities to trim costs and to be more efficient, so that when we do report good revenues, we can get some leverage to the bottom line and if possible, quantify that? I'm assuming this is the works, but if not, I would be quite disappointed.
Anthony Ambrose
I think Gerry has clearly got some ideas on spending, and he started implementing those in Q3. I'll let him talk about that in a moment.
But I just wanted to clarify some things. The revenue is actually up 25% a year-over-year through the first nine months. So yeah, spending is up. Frankly, spending is up more than we would like it to be up. And the focus on spending control is something that Gerry is clearly digging into, and he has already got that started in Q3. But the whole concept is we want to -- we're delivering on our operating leverage of about 40%, pretty close to that. But we clearly want to do better. And I think your comments are how can we continue to get more efficient and deliver even better operating leverage to the bottom line, that will be better. So I think, Gerry, what was our revenue on the adapters in Q3?
Gerry Ng
$1.8 million.
Anthony Ambrose
$1.8 million.
David Marsh
Okay. And then last question, this seems like an inconsequential item, but it makes me question the seriousness and stewardship, how you're approaching the business at the current time. Interest income for the quarter was $41,000. Now this may seem trivial, but what it tells me, if I annualize that, on average, you're getting about 1.4%, a three-month T-bill is at 5.3, a six-months bills at almost 5.6.
You can get a multitude of money markets paying 5.25%. Why is that? And going forward, is that something you're going to pay attention to? Because on an annualized basis, we're talking about giving away, according to my math, like $400,000. Am I wrong? If so, please correct me, but if you can give an explanation and what we're doing going forward?
Gerry Ng
Yes, David, I can highlight that. As you know, we do have a fairly strong cash position. However, we do have operational needs both in the US, in our Shanghai manufacturing facility, and in Germany. We do have a very active method of deploying unneeded cash to maximize the interest earnings, but it's not the case where we deploy everything 100%. We are obviously looking at that and balancing operational needs as well as the earnings opportunity.
Anthony Ambrose
So Gerry, we're clearly looking at that, but also my understanding is that if you look outside the US, the interest rates available on cash deposits may not be the same as the current high rates that we enjoy in the US.
Gerry Ng
Right, correct.
Anthony Ambrose
So on a blended basis, we probably can't get 5%. But I think to Dave's point, we're certainly looking at it.
Gerry Ng
Yeah. And we are currently using nightly suites. We are also deploying some of our money into short term investments. So we are obviously looking at it and continuing to maximize the opportunity where we can.
David Kanen
How much of the $11.9 million in the US?
Gerry Ng
Approximately half.
David Kanen
Yeah. So even on that, we're not maximizing it. I mean you can put your money in money market and get 5.25%. I'm sure it's better than 1.4% in Europe and in China, I mean it across the globe, there have been numerous interest rate hikes. So just pointing it out, it would make me feel better if you guys were maximizing that and also, taking a look at every line item on the expense sheet.
Anthony Ambrose
Understood, Dave. Thanks.
David Kanen
Thank you.
Operator
Chris Kotowski -- actually, our next question comes from Michael Cooper.
Michael Cooper
Good afternoon. Anthony, can you talk a little bit more about the SentriX funnel? I've been watching the sales progression of SentriX over the past few years as you improve the product and then learn about the market a little bit more. And I think you've changed where you're going into the market, may be more on the design side of things.
But I'm still -- each quarter comes and goes and I'm waiting for a nice big uptick in revenue from SentriX, and I'm not exactly seeing it. But what I'm hoping is that in the background, you guys are very active may be and have been over the last three or four quarters on the design side, and maybe that is progressing through the funnel. I know that takes some time. But can you give us some metrics around that kind of dynamic, so that we can understand how the market opportunity on SentriX is performing?
Anthony Ambrose
Sure. I'll start, Michael by saying, we don't breakout SentriX separately. But in my comments, our pay per use revenue this year from units running through machines that are under that type of contract is up pretty close to 100% year-over-year. So that's a good indicator on the revenue side. On the designing side, I didn't give you the size estimate of the of win here in the solar market, but it's a pretty hefty win. Channel partner believes it's mid-six digits, okay, which would be a very, very nice volume run rate for us on the SentriX platform.
Having said that, we continue to refine our marketing to better tailor our message and focus, and we have customers that we're engaged with now on SentriX opportunities in automotive, industrial, and other markets. The key thing for us is to find the right person in the company to talk to about SentriX. And we've learned over the years that person is not a person we usually talk to for data programming. So part of the problem in the strategy is, okay, we have these relationships, how do we use them to find the right people in the company and talk about SentriX. And that's what we're doing on the marketing side.
Michael Cooper
Okay, excellent. Thank you.
And that half million potential number on your solar contract is very encouraging.
Anthony Ambrose
Yeah, like I said, mid six digits.
Michael Cooper
Sure, understood.
Operator
And ladies and gentlemen, at this time, and showing no additional questions, that will conclude today's question-and-answer session. I'd like to turn the floor back over to the management team for any closing remarks.
Anthony Ambrose
Well, operator, thank you very much. And I'd like to thank everyone who joined the call and asked questions today. We look forward to sharing the developments with you as we go through Q4 and will be at the Productronica trade show in Germany in November, in Munich. We also have an Investor Summit groups' Virtual Conference, and the Singular Research, Best of the Uncovered Conference in San Francisco in December, and we'd love to see you there. If you have any questions on that, please send a note to Jordan Darrow.
With that, I'd like to conclude today's call. Thank you very much.
Operator
Ladies and gentlemen, with that will conclude today's conference call and presentation. We thank you for joining. You may now disconnect your lines.
