Data I/O Corporation (NASDAQ:DAIO) Q4 2023 Earnings Call Transcript February 23, 2024
Data I/O Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
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 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 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 the timing of product deliveries and installations, market acceptance of new products, changes in economic conditions and market demand, part 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 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: 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 Gerry Ng, 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 is 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 third year in a row with over 20 new customers, and many of those were marquee wins in automotive locations globally during the year.
Our PSV 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 50%s 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 Asian region outside of China. In Japan, we're pleased with our new partnership launched in the first part of the year with a leading company to establish the first SentriX security provisioning service in Japan, as well as a separate collaboration we formed with Nuvoton Technology to support their latest generation of IoT microcontroller products with our SentriX platform. As 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 AI impact Data I/O markets, while AI plays into our business in a couple of ways. First, the AI platforms need strong hardware-based routes of trust to ensure data sets 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 the customer of ours, securing an AI accelerator card for the hyper cloud. 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.
We'll continue to target the automotive, industrial and programming center markets worldwide, and we'll be adding to that the spending discipline and focus that Gerry 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 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?
Well, 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 in 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, it is 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.
A technician working diligently with a soldering iron, assembling a circuit board.
We believe those are largely behind us. We continue to keep our great team and add to it. As you may recall, Gerry Ng was appointed our CFO during the third quarter of last year, and he's now really putting a stamp on the company. I have specifically asked Gerry to focus on tighter spending controls, process efficiencies and operating leverage as 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 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 is an exciting combination for us in 2024. Before I turn it over to Gerry 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, Rajeev Gulati, 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 week, we will launch an interview based -- 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 guests. With that, I'll turn it over to Gerry Ng.
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's financial condition remains strong at the end of Q4 with $12.3 million in cash, up $831,000 from the prior year. The 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.
The company continues to have no debt. Inventory 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 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 fourth quarter 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 industries, 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 31, of this past year. Automotive electronics at 63% of '23 bookings was 2 percentage points higher than 2022. Revenue remained steady with 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 on to operating expenses. Operating expenses at $3.8 million in Q4 represented two consecutive quarterly decline 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 non-critical 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 growth. Interest income growth also contributed to improved profitability was $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 [90-day] (ph) 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 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?
