Data I/O Corporation — Q1 2020 Form 10-Q Summary
Business context and reporting period
Data I/O Corporation designs and sells programming systems, adapters, software, maintenance and related services used to program and securely provision semiconductor devices. This unaudited report covers the three months ended March 31, 2020, compared with the three months ended March 31, 2019. The company is classified as a smaller reporting company and had 8,221,535 common shares outstanding as of April 30, 2020.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $4.785 million | $6.058 million | Down 21.0% |
| Gross margin | $2.784 million; 58.2% | $3.685 million; 60.8% | Down 2.6 percentage points |
| Operating income (loss) | $(609,000) | $29,000 | Deteriorated |
| Net income (loss) | $(554,000) | $26,000 | Deteriorated |
| Basic and diluted EPS | $(0.07) | $0.00 | Deteriorated |
| Operating cash flow | $452,000 | $(3.264) million | Improved |
| EBITDA | $(359,000) | $189,000 | Deteriorated |
| Adjusted EBITDA | $(110,000) | $476,000 | Deteriorated |
Revenue consisted of equipment sales of $2.587 million, adapter sales of $1.345 million, and software and maintenance sales of $853,000. Automated programming systems declined 28.8% to $3.418 million, while non-automated programming systems increased 8.9% to $1.367 million. International sales represented 94.3% of revenue.
Gross margin was pressured by lower revenue spreading fixed costs over fewer units and a 2.7-point adverse impact from U.S.-China tariffs. The mix shift toward adapters and recurring sales partially offset these pressures. Operating expenses declined 7.2% to $3.393 million, including R&D of $1.582 million and SG&A of $1.811 million.
Cash and cash equivalents were $13.814 million at March 31, 2020, compared with $13.936 million at December 31, 2019. Working capital was $18.413 million. The company reported no debt and stated that existing cash and internally generated funds are expected to fund operations and capital requirements for at least the next year. Capital expenditures were $340,000 during the quarter.
Material changes versus the prior comparable period
- Sales decreased $1.273 million, or 21.0%, primarily from seasonality, the cyclical downturn and COVID-19-related customer and country shutdowns.
- Bookings declined to $4.3 million from $6.2 million; backlog was $2.3 million at March 31, 2020, compared with $2.0 million a year earlier and $2.9 million at December 31, 2019.
- The company moved from near breakeven operating income and net income in Q1 2019 to operating and net losses in Q1 2020.
- Operating cash flow improved substantially, primarily due to collections of receivables and favorable working-capital changes, despite the quarterly loss.
- Cash declined only $122,000 from year-end, while foreign-exchange movements reduced cash by $238,000.
- Common shares outstanding increased modestly to 8.221 million from 8.213 million at December 31, 2019, principally from stock awards and the employee stock purchase plan.
Guidance, outlook, risks and unusual items
Management did not provide formal numerical annual guidance. It expects COVID-19 effects to continue into the second quarter and subsequent quarters. Chinese operations and factories were beginning to reopen, while many automotive electronics customers in the Americas and Europe had suspended operations in March and expected gradual reopening beginning in May.
Management reduced planned spending and deferred some engineering investments, while continuing development focused on automotive electronics, IoT, secure provisioning, automated programming and software. R&D and SG&A spending were expected to remain lower in the second quarter and increase as business conditions recover.
- The company is highly internationally exposed, with approximately 92% of 2019 sales generated outside the United States.
- COVID-19 may affect demand, customer-site access, installations, service, travel, manufacturing, component availability, supply chains and facility operations. Approximately 31% of employees are based in Shanghai, and the company manufactures equipment and develops adapters and algorithms there.
- Other material risks include cyclical demand, semiconductor industry changes, tariffs, foreign-currency volatility, inventory obsolescence, customer credit risk and the ability to restore business levels.
- The company maintained a $7.8 million valuation allowance against deferred tax assets. The CARES Act accelerated recognition of a $640,000 AMT credit refund as a current asset.
- Operating lease liabilities totaled $1.685 million, with undiscounted operating lease commitments of $1.881 million. Purchase commitments and other obligations totaled approximately $1.3 million, of which all but $269,000 were expected to be paid within twelve months.
- There were no material pending legal proceedings, no material changes to previously disclosed risk factors and no off-balance-sheet arrangements other than disclosed leases and commitments.
- Unamortized future equity compensation expense was $2.133 million at March 31, 2020, with a remaining weighted-average amortization period of 2.27 years.
Investor verification points
- Verify the pace and durability of customer and factory reopening, particularly in automotive electronics and other international markets.
- Monitor bookings, backlog, revenue conversion and deferred revenue for evidence of demand recovery.
- Assess whether gross margin can recover from the 58.2% level as volume improves and tariff effects change.
- Reconcile operating cash flow with the quarterly loss and monitor receivables, inventory and other working-capital movements.
- Confirm that cash reserves remain sufficient if COVID-19 disruptions or operating losses persist beyond management’s one-year liquidity assessment.
- Evaluate supply-chain, manufacturing and facility risks associated with the company’s China operations and international component sourcing.
- Review the deferred-tax valuation allowance, lease and purchase commitments, and the potential effect of future equity compensation.