Data I/O Corporation: Q2 2017 Form 10-Q Summary
Business context and reporting period
Data I/O Corporation designs and sells automated and non-automated semiconductor programming systems, related consumables, software and services. The company is focused on automotive electronics, Internet of Things, industrial controls, consumer electronics and wireless markets, with development initiatives in managed and secure programming.
This unaudited Form 10-Q covers the three and six months ended June 30, 2017, compared with the corresponding 2016 periods. International sales represented approximately 90% of second-quarter revenue. The company reported 8,172,491 common shares outstanding as of July 27, 2017.
Key financial metrics
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $9.135 million | $5.801 million | $16.359 million | $10.414 million |
| Gross margin | $5.202 million | $3.088 million | $9.369 million | $5.616 million |
| Gross margin percentage | 56.9% | 53.2% | 57.3% | 53.9% |
| Operating income | $1.268 million | $391,000 | $2.072 million | $216,000 |
| Net income | $1.206 million | $444,000 | $2.185 million | $276,000 |
| Diluted EPS | $0.14 | $0.06 | $0.26 | $0.03 |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $1.298 million | $(805,000) |
| EBITDA | $1.451 million | $584,000 | $2.599 million | $533,000 |
| Adjusted EBITDA | $1.721 million | $789,000 | $2.966 million | $833,000 |
Second-quarter operating margin was approximately 13.9%, compared with approximately 6.7% in the prior-year quarter. Six-month operating margin was approximately 12.7%, compared with approximately 2.1% in the prior-year period.
At June 30, 2017, cash and cash equivalents were $12.033 million, total current assets were $24.742 million, current liabilities were $7.880 million and working capital was $16.862 million. The company disclosed no significant debt; liabilities included $464,000 of long-term other payables. Stockholders’ equity was $18.432 million.
Material changes versus the prior comparable period
- Q2 net sales increased 57.5% year over year, while six-month sales increased 57.1%.
- Automated programming system sales increased 61.1% in Q2 and 68.9% for the first six months. Non-automated system sales increased 42.7% in Q2 and 18.9% year to date.
- Management attributed growth primarily to stronger automotive electronics and IoT demand from original equipment manufacturers and programming centers. The company shipped its 100th PSV7000 system and 150th PSV family system during the quarter.
- Q2 order bookings were $10.1 million, described as a 17-year high and 75% above the prior-year quarter. June 30 backlog was $4.7 million versus $3.2 million a year earlier.
- Deferred revenue increased to $2.8 million from $1.1 million at June 30, 2016, and from $1.4 million at March 31, 2017.
- Gross margin improved due primarily to higher volume and leverage of relatively fixed factory costs. Management cautioned that future margins may vary with volume, product mix, channel mix, pricing, inventory, warranty costs and foreign exchange rates.
- R&D expense increased 51.1% in Q2, primarily from higher personnel, incentive and stock-based compensation costs and SentriX nonrecurring engineering charges. SG&A increased 41.8%, primarily due to higher incentive, commission, stock-based compensation and travel costs.
- Cash flow from operations improved to $1.298 million for the first six months from an $805,000 use in the prior-year period. Working capital investment included increases in accounts receivable and inventory.
Guidance, outlook, risks and unusual items
Management did not provide specific quantitative revenue or earnings guidance in the filing. It stated that it is managing the core programming business for growth and profitability while investing in automotive, IoT, secure supply chain and managed programming technologies.
- Management expects capital expenditures to support operations and to increase internally developed rental, sales demonstration and test equipment. These expenditures are expected to be funded with existing and internally generated funds.
- Management believes available cash and working capital are sufficient to fund operations and capital requirements for at least the next twelve months, but noted that additional cash could be required for U.S. operations. Repatriation of foreign-held cash could be subject to tax and other impediments.
- The company maintains a $10.7 million valuation allowance against deferred tax assets because of its historical loss record and industry cyclicality. It expected to reassess the allowance during the second half of 2017 as forecast visibility improved.
- A $291,000 gain on sale of assets was recognized in the first six months, including $80,000 in the second quarter. Foreign-currency transaction results were a $62,000 loss in Q2 and a $92,000 loss for the first six months, compared with gains in 2016.
- Six-month share-based compensation expense was $367,000, with $2.392 million of unamortized future equity compensation expense remaining at June 30, 2017.
- Operating lease commitments totaled $3.686 million, and purchase commitments and other obligations totaled $2.117 million, of which all but $23,000 were expected to be paid within twelve months.
- The company reported no material pending legal proceedings, no material changes to the risk factors in its 2016 Form 10-K and no material changes to internal control over financial reporting.
- The company plans to adopt the new revenue recognition standard on January 1, 2018, using the modified retrospective method. The potential financial statement impact had not yet been reasonably estimated.
Most important facts for investors to verify
- Whether the unusually strong bookings, backlog and deferred revenue convert into sustained revenue and cash flow.
- The durability of the 56.9% quarterly gross margin as product mix, volume, pricing and foreign exchange conditions change.
- Customer and geographic concentration risk arising from approximately 90% international sales and cyclical semiconductor capital spending.
- The recoverability of receivables and inventory, which increased materially during the first half, and the adequacy of warranty and sales-return reserves.
- The potential effect of the $10.7 million tax valuation allowance and any future reversal or continued limitation of deferred tax assets.
- The eventual impact of adopting the new revenue recognition standard in 2018.
- Execution risk associated with R&D investments in automotive, IoT, managed programming and secure programming initiatives.