Data I/O Corporation 10-Q Summary
Business context and reporting period
Data I/O Corporation is a global provider of programming, security deployment, security provisioning, and intellectual-property protection solutions for electronics manufacturers. Its customers are concentrated in Asia, Europe, and the Americas, with manufacturing operations in Redmond, Washington, and Shanghai, China. This unaudited Form 10-Q covers the three and nine months ended September 30, 2022, compared with the same periods in 2021.
Key financial metrics
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Net sales | $7.2 million | $6.7 million | $16.9 million | $19.5 million |
| Gross margin | $4.1 million | $4.1 million | $9.2 million | $11.3 million |
| Gross margin percentage | 57.0% | 60.7% | 54.1% | 57.8% |
| Operating income (loss) | $0.7 million | $0.1 million | ($1.4 million) | ($0.1 million) |
| Net income (loss) | $0.8 million | $0.01 million | ($1.6 million) | ($0.4 million) |
| Basic and diluted EPS | $0.10 | $0.00 | ($0.19) | ($0.04) |
| Net cash from operating activities | Not separately provided for Q3 | Not separately provided for Q3 | ($1.5 million) | $1.3 million |
- Q3 operating margin was approximately 9.9% and net margin was approximately 11.7%; nine-month operating margin was approximately negative 8.1% and net margin was approximately negative 9.6%.
- Q3 bookings were $7.1 million, compared with $5.0 million in the prior-year quarter. Backlog was approximately $4.9 million at September 30, 2022, versus $3.3 million a year earlier and $5.8 million at June 30, 2022.
- Recurring and consumable revenue, including adapters, was $3.2 million, or 44% of Q3 revenue, compared with $2.7 million, or 39%, in Q3 2021.
- Cash and cash equivalents were $11.0 million at September 30, 2022, down from $14.2 million at December 31, 2021. Working capital was $16.5 million, down from $18.5 million.
- The filing does not report significant debt or borrowings. Operating lease liabilities totaled $2.4 million, including $0.8 million current and $1.7 million long term. Future operating lease payments totaled $2.6 million.
- Capital expenditures were $0.8 million during the first nine months, compared with $0.4 million in the prior-year period.
- Adjusted EBITDA, excluding equity compensation, was $1.4 million in Q3 2022 versus $0.6 million in Q3 2021; nine-month adjusted EBITDA was $0.4 million versus $1.3 million.
Material changes versus the prior comparable period
- Q3 net sales increased 7.2%, but nine-month sales declined 13.0%. The nine-month decline reflected lower equipment and adapter revenue.
- Q3 equipment revenue was essentially flat, adapter revenue increased 22.6%, and software and maintenance revenue increased 12.0%. For the first nine months, equipment revenue declined 19.7% and adapter revenue declined 6.5%, while software and maintenance increased 5.6%.
- Q3 automated programming systems revenue declined 2.1%, while non-automated programming systems revenue increased 49.6%. Nine-month automated systems revenue declined 18.2%, while non-automated systems increased 9.6%.
- Gross margin declined to 57.0% from 60.7% in Q3 and to 54.1% from 57.8% for the first nine months. Management attributed the Q3 decline primarily to the stronger U.S. dollar, partly offset by favorable factory variances.
- Operating expenses declined 13.9% in Q3 and 7.0% for the first nine months, reflecting lower incentive compensation, consulting costs, foreign-currency translation effects, and spending discipline.
- Operating cash flow changed from $1.3 million provided in the first nine months of 2021 to $1.5 million used in 2022. The change was driven partly by the operating loss and increased inventory investment.
- Foreign-currency transaction gains were $0.3 million in Q3 and $0.4 million for the first nine months, compared with a Q3 loss of $0.03 million and a nine-month loss of $0.06 million in the prior-year periods. Foreign-currency translation losses in other comprehensive income were $0.5 million in Q3 and $1.1 million for the first nine months.
Outlook, management commentary, risks, and unusual items
Management continues to invest in automotive electronics, IoT, secure supply-chain solutions, automated programming systems, and security provisioning for secure elements, authentication chips, secure memory, and secure microcontrollers. Management expects cost-control measures to continue through the fourth quarter of 2022 and believes existing cash and working capital are sufficient to fund operations and capital requirements for at least the next year.
- Key operating pressures include the cyclical electronics industry, COVID-19 effects, semiconductor shortages, supply-chain disruptions, customer shutdowns, inflation, tariffs, geopolitical uncertainty, the Russia-Ukraine conflict, and foreign-exchange volatility.
- The Shanghai COVID-19 lockdown ended in early June 2022, and the Shanghai facility operated throughout Q3. The company continues to maintain certain pandemic-related safety procedures and restrictions.
- Management stated that annual spending, growth, product mix, and profitability projections may be revised substantially as conditions change. The filing does not provide specific revenue or earnings guidance.
- Deferred revenue was approximately $2.0 million at quarter-end, including one delivered system awaiting final acceptance, compared with $1.5 million at December 31, 2021.
- Inventory increased to $7.1 million from $6.4 million at December 31, 2021. Rapid technological change, weaker demand, or product transitions could increase obsolescence charges and reduce gross margin.
- The company maintained an $8.3 million valuation allowance against deferred tax assets. Nine-month tax expense included dividend withholding tax.
- Purchase commitments and other obligations totaled $2.6 million, with all but $0.5 million expected to be paid within twelve months. Most arrangements are cancelable without significant penalty.
- The company reported no material pending legal proceedings, material indemnification claims, or material changes to the risk factors in its 2021 Form 10-K. Management concluded disclosure controls were effective.
Most important facts for investors to verify
- Whether the Q3 recovery in bookings, adapters, and non-automated systems is sustained and converts into revenue and cash flow.
- Whether nine-month revenue weakness, negative operating cash flow, and the accumulated deficit improve during Q4 and 2023.
- The effect of foreign-exchange movements, semiconductor availability, supply-chain costs, and customer demand on gross margin and backlog conversion.
- Whether the $11.0 million cash balance remains sufficient given operating losses, lease obligations, purchase commitments, capital expenditures, and potential investment initiatives.
- Potential inventory obsolescence, warranty exposure, deferred tax realization, and the continued $8.3 million deferred-tax valuation allowance.
- The timing of final customer acceptance for the delivered system included in deferred revenue and the resulting revenue recognition.