Q4 2023 Data I/O Corp Earnings Call

Participants

Jordan Darrow; IR; Darrow Associates, Inc

Anthony Ambrose; President & CEO; Data I/OO Corporation

Gerry Ng; VP & CFO; Data I/O Corporation

Paul Xavier; Analyst; Devon Capital

Michael Weatherington; Analyst; Wild Glen Ventures

David Marsh; Analyst; Singular Research, LLC

Kevin Garrigan; Senior Research Analyst - Automotive & Semiconductors; WestPark Capital Inc

David Kanen; Analyst; Kanen Wealth Management

Presentation

Operator

Good afternoon, 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.

Jordan Darrow

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, Gerry Haines.
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 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 a 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 10 K and 10 Q with the Securities and Exchange Commission, press releases and other communications, the accuracy and completeness of forward-looking statement should not be unduly relied upon. Data I/O is under no duty to update any of these forward-looking statements.
And now I'd like to turn over the call to Anthony Ambrose, President and CEO of Data I/O.

Anthony Ambrose

Well, thank you very much, Jordan, 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 Yang, 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. And this marks our 3rd year in a row with over 20 new customers. And many of those were marquee wins in automotive locations globally during the year. Our PSP platform for programming is the most successful platform in the industry and now has over 485 deployments worldwide SentriX, our secure provisioning deployment platform grew 150% in software and pay-per-use revenue in 2023 versus 2022. Gross margins for the year were nearly 58% in line with our mid 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, point to our strong operating leverage, we delivered increased profits with adjusted EBITDA increasing to $2.3 million for the year, up over $1 million 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 year as we had excellent growth in the Americas region as well as Asia Asian region outside of China. In Japan. We're pleased with our new partnership launched in the first part of the year would know a leading company to establish the first SentriX security provisioning service in Japan as well as a separate collaboration, we formed with new Aton technology to support their latest generation of IoT microcontroller products with our SentriX platform. So mentioned earlier, SentriX overall grew our software and pay per use revenue 150% in the year. And I mentioned earlier that solar was one of the new markets we tapped into in 2023. And 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.
How does that how does a high impact to Data I/O markets while AI. plays into our business in a couple of ways. First, the air platforms need strong hardware based roots of trust to ensure datasets 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 of 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 will 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 has 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've 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, while 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, and we continue to win with new technologies as current and new customers expand their use of UFS flash memory, 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 at its highest level in several years. This is the basis for our 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 Yang was appointed our CFO during the third quarter of last year and is now really putting his stamp on the Company. I specifically ask Jerry to focus on tighter spending controls, process efficiencies and operating leverage 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 leading global operating environment, we expect double digit bookings growth in 2024. Gross margins are expected to be in the mid to high 50% range for the year. Operating expenses for 2024 are expected to be consistent with or moderately lower than operating expenses in 2023, excluding incentive comp sales, commissions and currency, the combination of spending control and top-line growth. It's 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, Richard Galanti, and I were hosted by small cap investor and Data I/O shareholder, Vishal Mishra of Bard associates on the topic of AI. programming and security requirements.
Next, we will launch an interview based off our hosted by semiconductor senior equity research analyst, David Williams of Benchmark Company. 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 Yang.

Gerry Ng

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 perspective, looking forward, Data I/O scenario, financial condition remains strong at the end of Q4 was $4.3 million in cash, up $831,000 from the prior year. Full year cash increase reflects improved operating profitability, lower inventory levels and higher interest earnings. 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 to the Company continues to have no debt inventories 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 a strategy, it's a strategy that now have unwound that increase improved supply chain conditions, disposition, the material for end-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 Q4 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 industry's 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 31st of this past year, automotive electronics at 63% of 23 bookings was 2-percentage-points higher than 2022 revenue remained steady for 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 onto operating expenses. Operating expenses, $3.8 million in Q4 represented two consecutive quarterly declines from the high of $4.2 million reached in 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 review spending, manage noncritical 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, right? Interest income growth also contributed to improved profitability while for her $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 namely sweep accounts and one to two months certificates of deposits. Net income of $144,000 for Q4 added to a 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 contributed 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 22. 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, 10-K 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.

Question and Answer Session

Operator

We will now begin the question and answer session. To ask a question. You may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before placing pressing the key. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. Also please ask one question and one follow-up. And if you have additional questions, please reenter 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.

David Marsh

And thank you so much for taking the questions. Um, first, guys are just one two ask about the guidance for 24 on the guidance?
Yes, it's around it's around bookings. And typically your bookings do translate to revenue reasonably quickly. Should we assume that the double digit bookings growth, it also translates to revenue growth in that our relative ballpark? Or is that trying to draw too much conclusion from it?

Anthony Ambrose

But David, it's 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 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. And so it depends exactly when you get the bookings and when they want the systems. But I think we're the expectation would be revenue would grow a little bit less than the double-digit bookings.

David Marsh

Okay. Thank you. And then for my second question, I'd like to do kind of a two-parter. Yes, we're it's with regard. You guys have talked a lot in the past about growth coming from EVs, and we're seeing some some headwinds in the news about EVs. Some of the manufacturers backing off of EV production. And I we're also hearing headlines about China, the recovery in China's being very slow and the economy is still not really hitting on all cylinders. So yes, 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 come to the table with a pretty decent on to booking growth guidance just in terms of the overall market, can you just give us a sense of what's going on and what do we look at what's the what's fact and what's fiction, I guess.

Anthony Ambrose

So um, you know, David, it's interesting. I think it was a pretty rough morning for the EV guys. I happen to turn on the business news this morning, and I think so maybe overused metaphor, there are 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 other leaders have also read that the Chinese market, they've cut prices pretty sharply, which is maybe not as great for them, but good for us because that should stimulate demand. And I'm always a little nervous on comparisons in China for 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 and opinions on. We'll see directly on the ground, but we see people in China continuing to buy systems. We see people in China and automotive, continuing to buy service and consumables and things like that. So, you know, 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 for them, but you don't need to be in 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 the predictions we're making today.

David Marsh

Thanks, guys. Very helpful. Appreciate it.

Operator

Next question comes from Kevin Kerrigan with WestPark Capital. Please go ahead.

Kevin Garrigan

Yes. Hey, Anthony. Hey, Jerry. Good afternoon and congrats on the results. On my first question, looking on looking at the IoT market in SentriX, 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 SentriX 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?

Anthony Ambrose

And I think where we're in a situation where we're happy with the traction that Centrix 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 10 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 continue to go find new customers, help them understand the benefits of SentriX. Some of these customers will be new to us. Some of these customers will come to us from our partners and that have programming centers and some of the customers will be well known to us that want to add SentriX capability to systems. They already have. I'm not going to call an inflection point yet, but you know, 150% growth year over year doesn't stop.

Kevin Garrigan

Yes. No, that makes a ton of sense. I appreciate the color on that, but can I just as a follow-up, so we're now two months into 2024 and you noted a few a few ones kind of in your prepared remarks, what kind of gets you most excited and what keeps you up at as you look out kind of the rest of the year.

Anthony Ambrose

And what gets me excited is looking at our sales funnel and looking again at the opportunities we have across automotive, industrial and programming center what keeps me up at night is 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. And obviously, if the world has a serious breakdown of global supply chains, that would impact us would impact everybody on. We're much more resilient than we were before by design. And so we're doing what we can to insulate ourselves. And as long as the world stays reasonably stable and i.e. about where it is right now, we think we'll be fine.

Kevin Garrigan

Yes. Got it. Got it. Okay, perfect. Thank you.

Operator

Next question is from [Paul Xavier] with Devon capital. Please go ahead.

Paul Xavier

Thanks for taking my call. And I think some of it was already answered with the first stone individual, but we 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 are the company that's supplying them with even companies like force talking about the Chinese EV industry being the biggest competition from. So what then wanting to expand the Chinese into Mexico, Latin America and other markets? Does this is there anymore color you can provide from what you said earlier about just your operating position and where you see this growing from an automotive electronics standpoint?

Anthony Ambrose

Well, Paul, thanks for the question. And I have a similar opinion to what I think the Ford CEO. has mentioned and others have mentioned that the their biggest threat in the Americas region is probably from very low cost imported electric vehicles from China come down for us. That's partially a threat. It's partially an opportunity, and 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 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 our goal is to be the supplier of choice and programming for the auto industry wherever it is.

Paul Xavier

Great. Excellent. Thank you.

Operator

The next question is from David Kanen with Kanen Wealth Management. Please go ahead.

David Kanen

I am Jerry. Thanks for taking my questions. First question is on SentriX on. 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 run rate in excess of $1 million a year exiting this year?

Anthony Ambrose

Hi, Dave, thanks for the call. We don't break out centric separately. As you know, we break it out with our software services and SentriX line, which grew substantially during the year. So I'm not going to give a separate SentriX forecast. I think if you look at where you would need to get to have the software and pay-per-use get to $1 million. That is that's not out of the question. I think this year would be, um, certainly more aggressive than we're forecasting, but the concept is to get this to the point where you can scale the platform to support that kind of volume and add money. Just to put it into scale, we have about 485 data programming systems in service around the world, which represent at roughly listed capacity, about 1.5 billion 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 of a seven-figure SentriX business. So the question is not 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 our way of doing it, which is SentriX. And the tagline that 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 it.

David Kanen

Okay. And then my 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 fund at this point in your prepared remarks. Honestly, as a shareholder, I don't think there's sufficient like you're saying that you expect operating expenses to be similar to down moderately for 2024 or 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 $0.08, $0.10 and $0.12, $0.15, again, like we've done in the past. So my question is and what is being done about looking at every OpEx expenditure that we feel are making right now and can we get to a savings of $2 million a year because otherwise, we're really firing on more than 10% growth. We're just never going to get there to where we have a successful stock because we're not done we feel we're not going to earn and not to we have attractive investment for shareholders. So if you could comment on that and then I and then I just wanted to know what you did in non adapter sales for the quarter, you hit that as well. Thank you.

Gerry Ng

I think that there's maybe the mixed comments regarding the expense side of things number one, first and foremost, as we look into 2024 for our primary objective, first objective is to cover what we anticipate could 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 to our 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 that performance. So examples of material cost reduction, logistics improvement of 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 3 point improvement this past year. Some of it is a function of volume, but a lot of it is also a function of operational efficiencies, 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. And so we're going to be looking across the whole P&L, looking at initiatives that can help drive improvements. And ultimately, we're going to see that fall through. We had a nice 42% pass through on net income from the growth in revenue. And our goal is to maintain that and hopefully improve that with these initiatives that cut across the overall P&L.

Anthony Ambrose

It is So Dave, I'll just 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 our earnings call right now. But on we understand your point.

David Kanen

Yes, if not, what was the adapter sales for the quarter?

Anthony Ambrose

Adapter sales of course.
Yes, Dave, while Jerry's looking that up, we'll go ahead and take the next call and we'll put the answer into the into the next call.

David Kanen

Thank you, Jacob.

Operator

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.

Michael Weatherington

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 a EV to sales ratio, that's it's kind of low as where it is today and so wanted to kind of get your idea what you think about that. What's it say about on kind of your valuation?

Anthony Ambrose

Well, Michael, thanks for the question on first, let me get back to Dave. So we did $2 million in adapters in Q4 and $8.1 million for the year. So that for those of you that are somewhat technical in nature on your analysis. And I would I guess at least most of you do some of some work there. We get questions a lot looking at the enterprise value 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 and 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 trying to understand what's going on there. And I think the other 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 microcap 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.

Michael Weatherington

Yes, fair point there. I also follow up just looking at your cash flow generation and the strong operating leverage. And as you exited 23 and your outlook for 24 for the exception of the one-timers in Q1 you talked about and what is the plans for excess cash going forward? And is a buyback, maybe one of those options?

Anthony Ambrose

So I think on the just the 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 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, can we do accretive M&A, obviously be pretty small. We have our radar up. Nothing's come across the radar yet that we can have 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 day-to-day working capital and each of our foreign subsidiaries as well as the United States is deployed effectively to earn and some interesting.

Michael Weatherington

Thank you.

Operator

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.

Anthony Ambrose

Operator, thank you very much, and 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.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now this Connect.