Data I/O Corporation: Q3 2021 Form 10-Q Summary
Business context and reporting period
Data I/O Corporation designs and sells semiconductor programming systems, adapters, software and maintenance services for automotive electronics, IoT, industrial controls, consumer electronics and programming centers. This unaudited Form 10-Q covers the three and nine months ended September 30, 2021, compared with the corresponding 2020 periods. The company is a global business, with international sales representing 86% of third-quarter revenue and 91% of nine-month revenue.
Financial performance and liquidity
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Net sales | $6.730 million | $5.947 million | $19.478 million | $15.387 million |
| Gross margin | $4.088 million | $3.277 million | $11.263 million | $8.500 million |
| Gross margin percentage | 60.7% | 55.1% | 57.8% | 55.2% |
| Operating income (loss) | $0.142 million | $(0.100) million | $(0.078) million | $(1.587) million |
| Net income (loss) | $0.012 million | $(0.707) million | $(0.350) million | $(2.318) million |
| Basic and diluted EPS | $0.00 | $(0.09) | $(0.04) | $(0.28) |
- Q3 operating margin was approximately 2.1%, versus approximately negative 1.7% in the prior-year quarter; nine-month operating margin was approximately negative 0.4%, versus approximately negative 10.3% in 2020.
- Q3 net margin was approximately 0.2%, compared with negative 11.9% in Q3 2020. Nine-month net margin was approximately negative 1.8%, compared with negative 15.1% in the prior-year period.
- Revenue increased 13.2% in Q3 and 26.6% for the first nine months. Nine-month automated programming-system revenue rose 35.4%, while non-automated system revenue declined 1.1%.
- By revenue type, Q3 equipment sales increased 5.6% to $4.077 million, adapter sales increased 52.6% to $1.901 million, and software and maintenance revenue declined 10.5% to $0.752 million.
- Recurring and consumable revenue, including adapters, was $2.7 million, or 39% of Q3 revenue, compared with $2.1 million, or 35%, in the prior-year quarter.
- Gross-margin expansion reflected higher production leverage, improved factory variances and channel mix. SG&A increased 22.4% in Q3, primarily from higher sales commissions and incentive compensation; R&D increased 10.4%.
- Q3 EBITDA was $0.284 million and adjusted EBITDA, excluding equity compensation, was $0.564 million. Nine-month EBITDA was $0.374 million and adjusted EBITDA was $1.334 million.
- Operating cash flow was $1.263 million for the first nine months, compared with cash usage of $0.342 million in 2020. Capital expenditures were $0.361 million, and financing cash usage was $0.424 million.
- Cash and cash equivalents were $14.241 million at September 30, 2021, compared with $14.167 million at December 31, 2020. Working capital was $18.482 million, compared with $18.059 million at year-end 2020.
- The filing does not disclose conventional bank debt or borrowings. Reported obligations primarily include operating lease liabilities of $1.498 million and purchase commitments and other obligations of approximately $2.1 million, nearly all payable within 12 months.
- Accounts receivable increased to $4.051 million and inventories increased to $6.050 million from $2.494 million and $5.270 million, respectively, at December 31, 2020.
Material changes versus the prior comparable period
- The company moved from a Q3 2020 net loss of $0.707 million to Q3 2021 net income of $0.012 million, and from a nine-month loss of $2.318 million to a nine-month loss of $0.350 million.
- Bookings were $5.0 million in Q3 2021, down from $5.6 million in Q3 2020. Backlog was approximately $3.3 million at September 30, 2021, down from $5.0 million at June 30, 2021 but above $2.8 million at September 30, 2020.
- International sales decreased as a percentage of Q3 revenue to 86% from 93%, while U.S. sales more than doubled to $0.922 million.
- The company received approximately $0.64 million of previously accrued alternative minimum tax credit refund in September 2021.
- Shares outstanding increased to 8,621,007 at September 30, 2021 from 8,416,335 at December 31, 2020, primarily reflecting stock awards and employee stock purchases.
Guidance, outlook, risks and unusual items
Management did not provide specific quantitative revenue or earnings guidance. It stated that it expects sufficient cash and working capital to fund operations and capital requirements for at least the next year, while noting that additional cash could be needed if the business plan is not achieved, losses continue, growth accelerates, or funds must be repatriated from foreign subsidiaries.
- Management attributed Q3 booking pressure and demand delays to semiconductor shortages and related supply-chain constraints. It expects some continuing impact into 2022 but views the issue as shorter term and cited strong long-term automotive-electronics industry prospects.
- COVID-19 continues to affect customer demand, international travel, customer-site access, manufacturing, shipping, supply availability and operating procedures. The company is maintaining higher inventories, using additional local suppliers and duplicating selected production capabilities in China and the United States.
- Other identified risks include cyclical demand, customer shutdowns, foreign-currency volatility, trade issues and tariffs, inflationary costs, shipping delays, changing product mix, and restrictions on sales, installation and service visits.
- The company maintains an approximately $8.0 million valuation allowance against deferred tax assets because of its loss history and uncertainty regarding future taxable income.
- The Redmond headquarters lease was extended after quarter-end on October 4, 2021 through January 31, 2026. The Shanghai facility lease was extended through October 31, 2024.
- Management reported no material pending legal proceedings, no material indemnification claims and no material changes to the risk factors in the 2020 Form 10-K. Disclosure controls were assessed as effective.
Most important facts for investors to verify
- Whether semiconductor shortages and customer production constraints continue to suppress bookings, backlog and revenue in 2022.
- Whether the improved gross margin and return to slight quarterly profitability are sustainable after product mix, production leverage and channel effects.
- Conversion of the $3.3 million backlog and the company’s ability to rebuild bookings after the Q3 decline.
- Inventory and accounts-receivable growth, working-capital requirements and continued positive operating cash flow.
- Cash sufficiency under scenarios involving renewed operating losses, business expansion, acquisitions, share repurchases or foreign-cash repatriation.
- The realizability of deferred tax assets given the $8.0 million valuation allowance and continuing cumulative losses.
- The effect of COVID-19 restrictions, supply-chain disruptions, currency movements, tariffs and international operating conditions on future results.