Data I/O Corporation — Q2 2022 Form 10-Q Summary
Business context and reporting period
Data I/O develops programming, security deployment, security provisioning and intellectual-property protection solutions for electronics manufacturers using flash memory, microcontrollers and secure devices. Customers are primarily in Asia, Europe and the Americas; manufacturing is located in Redmond, Washington and Shanghai, China. The filing covers the three and six months ended June 30, 2022 and was filed August 12, 2022.
Financial performance and position
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $4.8 million | $6.7 million | $9.7 million | $12.7 million |
| Gross margin | $2.8 million; 57.8% | $3.8 million; 57.0% | $5.1 million; 52.0% | $7.2 million; 56.3% |
| Operating income (loss) | $(0.7) million | $0.1 million | $(2.1) million | $(0.2) million |
| Net income (loss) | $(0.7) million | $(0.03) million | $(2.5) million | $(0.4) million |
| Basic and diluted EPS | $(0.08) | $0.00 | $(0.29) | $(0.04) |
- Q2 revenue declined 29.2%; six-month revenue declined 23.6%. Equipment revenue fell 36.4% in Q2 and 30.0% for the six-month period, while adapter revenue fell 26.6% and 20.8%, respectively. Software and maintenance revenue increased 8.3% in Q2 and 2.2% year to date.
- Q2 gross margin percentage improved modestly year over year, but the six-month margin declined. Management attributed the quarterly improvement primarily to favorable variances, partly offset by lower volume relative to fixed costs.
- Q2 operating expenses were $3.5 million, including $1.6 million of research and development and $1.9 million of selling, general and administrative expenses. Expenses declined year over year, but revenue reduction drove an operating loss.
- Q2 EBITDA was $(0.4) million and adjusted EBITDA, excluding equity compensation, was $(0.1) million, compared with $0.2 million and $0.6 million, respectively, in Q2 2021.
- Net cash used in operating activities was $2.8 million for the first six months, compared with $0.2 million used in the prior-year period. Investing cash use was $0.6 million, principally for property and equipment, and financing cash use was $0.2 million.
- Cash and cash equivalents were $10.3 million at June 30, 2022, down from $14.2 million at December 31, 2021. Working capital was $15.9 million, down from $18.5 million.
- The filing reports no significant external debt. Liabilities included $2.6 million of operating lease liabilities, including $0.7 million current and $1.9 million long term. Total operating lease commitments were $2.8 million before imputed interest.
- Total assets were $25.5 million and stockholders’ equity was $17.4 million at June 30, 2022. Inventories increased to $6.9 million from $6.4 million at year-end.
Material changes versus the prior comparable period
- Revenue and bookings weakened materially. Q2 bookings were $6.4 million, down 28% from $8.9 million in the prior-year quarter.
- International sales represented 89.2% of Q2 revenue, compared with 93.0% in Q2 2021. The company remained highly dependent on international markets.
- Backlog was approximately $5.8 million at June 30, 2022, compared with $5.0 million at June 30, 2021 and $4.1 million at March 31, 2022.
- Q2 recurring and consumable revenue, including adapters, represented $2.1 million, or 45% of total revenue, compared with $2.6 million, or 39%, in the prior-year quarter.
- The six-month net loss included $0.5 million of income tax expense, including a China dividend withholding tax associated with first-quarter dividend repatriation. The company maintained an $8.5 million tax valuation allowance at June 30, 2022.
- Shares outstanding increased to 8.8 million at June 30, 2022 from 8.6 million at December 31, 2021, primarily reflecting equity awards and employee stock-plan activity.
Guidance, outlook, risks and unusual items
Management did not provide a specific quantitative revenue or earnings forecast. It stated that existing cash and working capital were expected to fund operations and capital requirements for at least the next year under its operating plan, while cautioning that losses, growth initiatives, share repurchases, acquisitions or weaker-than-planned results could reduce liquidity and require expense reductions or additional financing.
- The Shanghai COVID-19 lockdown ended in early June and the facility was operational at filing. Management said delayed Shanghai systems were shipped in June, adapter backlog was expected to normalize in August, systems backlog during the second half of 2022, and the related balance-sheet impact by the end of the third quarter.
- Key risks include COVID-19 restrictions, semiconductor shortages, supply-chain disruption, geopolitical uncertainty and the Russia-Ukraine war, foreign-exchange volatility, tariffs, inflation, cyclical demand, customer shutdowns and travel restrictions.
- Management is continuing strategic investment in automotive electronics, IoT, secure elements, authentication chips, secure microcontrollers, automated programming systems and software while maintaining cost-control measures.
- Purchase commitments and other obligations totaled approximately $3.0 million at June 30, 2022, with all but $0.5 million expected to be paid within twelve months. Most arrangements were cancelable with short notice.
- No material pending legal proceedings or material indemnification claims were reported. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether revenue and bookings recover as Shanghai operations normalize and delayed backlog converts to sales.
- Whether cash burn moderates after the first-half $2.8 million operating cash outflow and whether the $10.3 million cash balance remains sufficient.
- The effect of semiconductor shortages, supply-chain constraints, COVID-19 developments, geopolitical events and foreign-exchange movements on international demand and manufacturing.
- Whether the company can sustain R&D and strategic growth investments while returning to operating profitability.
- Inventory growth, potential obsolescence or excess-stock charges, and the conversion of the approximately $5.8 million backlog.
- The timing and tax consequences of any future repatriation of foreign subsidiary cash.