Data I/O Corporation (DAIO) CEO Anthony Ambrose on Q4 2019 Results - Earnings Call Transcript

Data I/O Corporation (DAIO) Q4 2019 Earnings Conference Call March 3, 2020 5:00 PM ET

Company Participants

Matt Kreps - IR

Anthony Ambrose - President & CEO

Joel Hatlen - CFO & COO

Conference Call Participants

Jaeson Schmidt - Lake Street

Robert Anderson - Penbrook

Jay Michaels - JM Capital

Operator

Good afternoon and welcome to the Data I/O Corporation Fourth 2019 Financial Results Conference Call. 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 Matt Kreps of Investor Relations. Please go ahead.

Matt Kreps

Thank you, and welcome to the Data I/O Corporation fourth quarter 2019 financial results conference call. With me today are Anthony Ambrose, President and CEO of Data I/O; 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 our forward-looking statements should not be unduly relied upon. Data I/O is under no duty to update any of these forward-looking statements.

I would now like to turn the call over to Anthony Ambrose, President and CEO of Data I/O.

Anthony Ambrose

Well, thank you very much Matt. I would like to comment on the 2019 fourth quarter results and our outlook and then I'll turn it over to Joel Hatlen for more detail on specific numbers. As expected and discussed in our last call we bounced back strongly on bookings in Q4 with a sharp increase from Q3. This was due to some business that pushed from Q3 to Q4 due to tariff related uncertainties as well as capacity driven orders and automotive electronics where we were especially strong again.

For the year however we sustained our first loss in six years due to the downturn and overall orders combined with increased investments in security R&D. As far as long-term trends go, we have not changed our views on the growth in auto electronics and security for IoT. There are clearly some short-term issues which we'll discuss shortly but as the market leader we plan to invest for the long term to retain and extend our leadership position in programming. Our strong cash position combined with our long term view of the market gives us the financial flexibility to make those decisions.

Regarding the short term statements I'm referring to the Corona virus which you've all heard about. We see impact here in two areas, supply chain and demand creation. On the supply side our global workforce has no reported incidents of contraction of Corona virus and our China-based team was required to close for an additional week after the Lunar New Year holiday in accordance with government mandates. However, we've been up and running since February the 9, the earliest possible date and are delivering product from China.

We also now seen cases nearby in the USA in Washington State for Corona virus. They've taken appropriate precautionary measures here in our Redmond office. Situation is highly fluid and changeable but this time we believe our multi source supply chain will see minimal impact from business interruption in the short term with no known intermediate or longer-term implications. While others in our industry are dealing with the risks of a sole source manufacturing strategy we are dual sourced in the USA and China and this has benefits not only today for Corona virus but tomorrow could be a hurricane or an earthquake that place a single source supply chains at risk.

On the demand creation side we've seen impacts primarily in Asia as a sales process is slowed but not stopped. While we're seeing lowered forecast across the board and electronics and guidance revisions downward from larger corporations, we're also seeing anecdotal indicators that perhaps we've bottomed in China. For example some of our customers are now seeing service tax and we're seeing increased restaurant activity near other customers in Shanghai. Now whether it’s overall impact on demand is a one-quarter deferral as we saw in Q3 last year, our a longer-term impact remains to be seen.

We had to deal with the Corona virus related cancellation of our presence at the Embedded World Trade Show in February in Germany. We're hoping to demonstrate some exciting new capabilities on our tools and supports for SentriX and unfortunately we're not able to do that at the Embedded World Show. Our strategy for SentriX is to continue to expand the presence and simplify and scale in 2020. We'll continue to look for ways to expand our market in other venues and through other channels besides trade shows as we believe that would be challenged for some time.

On the product side, we continue to invest for the long term focus towards expanding our markets and creating unique value for customers. This is true for our traditional business as well as the emerging security business. You've seen the award announcements for our newest handler the PSV2800, the focus here is high volume low mixed data programming. We've also released our turbo boost for EMMC and UFS capabilities on the Luminex programmer. With these we've increased performance nearly 4x from our original release two years ago.

We're offering upgrades to existing equipment as well as with new equipment purchases for the growing automotive flash marketplace. In these challenging times, we'll manage our business to avoid the short-term pitfalls with a focus on using our financial strength and technical vision to improve our position long term.

With that I'll turn it over to Joel Hatlen our Chief Operating Officer and Chief Financial Officer for more details. Joel?

Joel Hatlen

Thank you Anthony. Good day to everyone. Net sales in the fourth quarter of 2019 were $5.9 million as compared with $7.9 million in the fourth quarter of 2018 and $3.8 million in the third quarter of 2019. For the year 2019 sales were $21.6 million versus $29.2 million in 2018. The fourth quarter of 2019 bookings were 6.9 million as compared to 4.3 million in the third quarter of 2019 and 6.5 million in the fourth quarter of 2018. For the year 2019 bookings were 22.5 million as compared with 27 million for 2018.

On a geographic basis international sales represented approximately 94% of total net sales for the fourth quarter of 2019 compared with 92% in the 2018 period. Total capital equipment sales were 64% of revenues and adapters and consumables were 22% of revenues in the fourth quarter of 2019 compared with 65% and 24% respectively for the fourth quarter of 2018. For all of 2019, capital equipment sales were 58% of revenues and adapters, consumables and maintenance were 42% of revenues compared with 65% and 35% respectively for the full year 2018.

For the fourth quarter of 2019 gross margin as a percentage of sales was 55.9% as compared to 58.2% in the fourth quarter of 2018. For the fourth quarter of 2019 gross margin was primarily impacted by fixed costs being spread over lower revenues and tariffs increasing on U.S. and China trade in 2019. For all of 2019 gross margin remained in our expected range of the mid to upper 50s, 2019 gross margin of 58.2% compared to 59.4% for the prior year which included an estimated reduction of 160 basis points in 2019 resulting from increased tariffs.

So excluding the impact of tariffs, we actually did quite well on a gross margin basis for the year when you consider that sales were down by 26%.

Operating expenses were down compared to both the prior year and the prior quarter periods. The year-over-year change is primarily related to variable expenses including especially lower incentive compensation accruals and sales commissions as well as stock based compensation. Cost control measures also significantly contributed to the reduction.

We continue to actively engage in market development and the R&D initiatives for our SentriX as well as our key programming platforms addressing for the automotive, electronics and industrial and other sectors. At the same time we are emphasizing ongoing expense management practices. Although R&D spending was down compared with the prior periods our spending as a percentage of revenue increased which demonstrates our commitment to leading the industry and providing improved solutions for our customers.

In accordance with GAAP, net loss in the fourth quarter of 2019 was a loss of $496,000 or $0.06 per share compared with net income of $648,000 or $0.08 per diluted share in the fourth quarter of 2018. For the year the GAAP net loss in 2019 was $1.2 million or $0.14 per diluted per share as compared with net income in 2018 of $1.6 million or $0.19 per diluted share.

Backlog at December 31, 2019 was $2.9 million as compared with $1.7 million at September 30, 2018 and $1.9 million at December 31, 2018. Data I/O had $1.5 million in deferred revenue at the end of the fourth quarter of 2019 compared with $1.7 million at September 30, 2019.

Data I/O’s financial condition remains strong with cash of $13.9 million at December 31, of 2019. During the year we used $1.464 million to repurchase 302,000 shares in 2019 to complete the $2 million buyback that was authorized in October of 2018. During that buyback a total of 404,000 shares were repurchased during the buyback.

Our days sales outstanding or DSO and receivables collection measure at December 31 were below our 60 day target range but increased slightly from the end of the third quarter of 2019 given the accounts receivable resulting from higher revenues compared to the third and fourth quarter. Payables were reduced to $4.1 million at December 31, 2019 from $5.3 million at the end of the prior year and increased modestly from $3.6 million at September 30 of 2019.

Net working capital at the end of the fourth quarter was $18.5 million, up slightly from $18.4 million at the end of the third quarter. The company continues to have no debt. Finally we had 8, 212,748 shares outstanding at December 31, 2019.

That concludes my remarks. I'll turn the call back to Anthony.

Anthony Ambrose

Well, thank you Joel. At this time operator I'd like to open up for Q&A.

Question-and-Answer Session

Operator

We will now begin the question and answer session. [Operator Instructions] Our first question comes from Jaeson Schmidt of Lake Street, please go ahead.

Jaeson Schmidt

Yes. Thanks for taking my questions. Just curious if you could comment on the linearity of orders you saw in Q2 or Q4 and I guess relatedly I know it sounds like things have resumed since Lunar New Year but just if you could discuss what you're seeing from an order pattern standpoint here in the first couple months of the March quarter?

Anthony Ambrose

Sure Jaeson. I think that the linearity we talked about last call that October was pretty good. Really the strength continued throughout the quarter and it was a very good quarter from a booking standpoint. Some of that backlog rolled over into Q1, which will obviously help in Q1. I think again, we don't give formal guidance but for Q1 I think what you're hearing from a lot of people in the industry is obviously a big impact in China in terms of their economic activity since middle of January with the Corona virus, we mentioned earlier from a demand creation standpoint we've obviously seen an impact in China in Q1. The big question is, does it look like that's gone forever or things push out, we'll find out but as I mentioned earlier the anecdotal information is we think we're seeing the early indications of bottoming out at least around the Shanghai area just from your discussions with our sales people.

The other point is what we did see Q3 when things got a little bit stuck, it did release again in Q4 and we're certainly hopeful that that's the pattern we're going to observe here. Time will tell.

Jaeson Schmidt

Okay. That's very helpful. Thank you.

Operator

Our next question comes from Robert Anderson of Penbrook. Please go ahead.

Robert Anderson

Good afternoon Anthony and Joel.

Anthony Ambrose

Hey Bob.

Joel Hatlen

Hi Bob.

Robert Anderson

Hi. You didn't as far as I recall say too much about the Internet of Things Anthony. How about letting us know whether we'll start to see some orders in that category during 2020?

Anthony Ambrose

Yes, I think on the IoT side Bob we are planning to have a little more public presence at the Embedded World Show. The focus on IoT for the data business is obviously with our, the 2800 to do the high mix. I'm sorry the high volume low mix programming and on SentriX as we mentioned earlier we did see some traction on SentriX. We're in late stages of negotiation for some additional systems. We're seeing some additional supports. So basically we're continuing to see the growth on SentriX.

Robert Anderson

And you're still sticking with shall we say a leased model rather than an outright sale model.?

Anthony Ambrose

That's correct.

Robert Anderson

Okay. Thank you.

Operator

[Operator Instructions] Our next question will come from Jay Michaels of JM Capital. Please go ahead.

Jay Michaels

Thank you. In light of the Corona virus, how do you see this changing the landscape in terms of market demand for your programming products and your competitors also to win deals and deliver on? Thanks.

Anthony Ambrose

Sure. So Jay as we mentioned in the release and the comments, I think it's a shock to the system and we've talked about what we saw on the demand side especially in Asia. I don't have any better macro prognostications than what you're probably able to read from some of the larger companies. We're taking it from an approach of what's it going to mean for us, what's going to mean for our competition because Data I/O is the largest company in our industry and we have the strongest balance sheet, we're better prepared than anyone else to ride out whatever may come forward. We're debt-free. We will clearly see some short-term disruptions and push outs in China.

Prior to Corona virus, industry forecasts from people such as Dan Niles we're predicting more of a semiconductor rebound and growth in 2020 whether that gets displaced or moved back from Q1 remains to be seen, but our plan -- long term investment plan is unchanged. Short term we're still seeing a sales funnel puts and takes etc. But it's obviously a very fluid situation.

Jay Michaels

Thank you.

Operator

This concludes our question and answer session. The conference has now also concluded. Thank you for attending today's presentation and you may now disconnect.