Data I/O Corporation — Q1 2022 Form 10-Q Summary
Business context and reporting period
Data I/O Corporation designs and sells automated and non-automated semiconductor programming systems, adapters, software and maintenance services, with a focus on automotive electronics, IoT, industrial controls and secure semiconductor provisioning. The unaudited quarter ended March 31, 2022 was affected by the cyclical downturn, supply-chain and semiconductor shortages, the Russian invasion of Ukraine and a COVID-19 lockdown in Shanghai. International sales represented 94.2% of revenue.
Financial performance and liquidity
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net sales | $4.965 million | $6.015 million | Down 17.5% |
| Gross margin | $2.303 million | $3.338 million | Down 31.0% |
| Gross margin percentage | 46.4% | 55.5% | Down 9.1 points |
| Operating income (loss) | ($1.361 million) | ($0.330 million) | Loss increased |
| Net income (loss) | ($1.820 million) | ($0.333 million) | Loss increased |
| Diluted loss per share | ($0.21) | ($0.04) | Unfavorable |
| Operating cash flow | ($1.582 million) | $0.024 million | Down $1.606 million |
| Adjusted EBITDA | ($0.932 million) | $0.173 million | Down $1.105 million |
- Revenue declines were concentrated in automated programming systems, down 21.1%, and equipment sales, down 22.1%. Adapter revenue declined 15.0%, while software and maintenance revenue declined 3.2%.
- Research and development expense was $1.616 million, essentially flat year over year, while SG&A expense was $2.048 million, also approximately flat. Lower sales commissions were offset by higher marketing and rent costs.
- Cash and cash equivalents were $12.296 million at March 31, 2022, down from $14.190 million at December 31, 2021. Working capital was $16.896 million, down from $18.484 million.
- The company reported no debt. Current liabilities were $5.897 million, and operating lease liabilities totaled $2.138 million long term plus $0.623 million short term.
- Capital expenditures were $0.272 million. Cash was also affected by annual compensation and 401(k) payments, a $0.442 million China dividend withholding tax, operating losses and foreign-exchange effects.
- Inventory increased to $6.625 million from $6.351 million at year-end. Backlog was $4.1 million at March 31, 2022, compared with $2.9 million at year-end and $3.0 million a year earlier.
Material changes versus the prior comparable period
- Approximately $1 million of otherwise potential revenue, including five completed PSV systems, remained in inventory and backlog because the Shanghai lockdown prevented shipment. Management stated that no orders were cancelled and expected shipments to resume later in the second quarter.
- Lower sales volume and mix reduced gross margin percentage by 9.1 percentage points. Management estimated that the delayed Shanghai shipments would have added approximately five gross-margin percentage points.
- Operating losses widened primarily because of the revenue shortfall, continued investment in the security deployment business and the company’s largely fixed operating-cost base.
- Foreign currency transaction results changed from a $26,000 gain in Q1 2021 to a $60,000 loss in Q1 2022. Foreign currency translation produced a $70,000 comprehensive-loss adjustment.
- Income tax expense increased to $0.458 million from $0.032 million, primarily due to the China dividend withholding tax. The company maintained an $8.2 million valuation allowance against deferred tax assets.
Guidance, outlook, commentary and risks
Management stated that the company expected adequate cash resources and believed collections and cash could normalize before the end of the third quarter, although the timing of the Shanghai reopening could delay second-quarter collections. Management also stated that existing cash and internally generated funds should fund operations and capital requirements for at least the next year and beyond under its operating plan.
- Bookings were $6.2 million in Q1 2022, up from $5.4 million in Q1 2021 and comparable with Q4 2021. Automotive electronics represented 63% of quarterly orders.
- Management continued to invest in automotive electronics, IoT programming, automated programming systems, secure elements, authentication chips and secure microcontrollers.
- Key risks include COVID-19 restrictions and facility closures, semiconductor shortages, supply-chain delays, inflation, geopolitical uncertainty, tariffs, foreign-exchange volatility, customer shutdowns and cyclical capital-spending conditions.
- The company discontinued its Russian distributor relationship; Russian business was immaterial, and the company had no operations or distribution in Ukraine.
- Purchase commitments and other obligations totaled approximately $2.0 million, with all but $0.590 million expected to be paid within twelve months. Most arrangements were cancellable with short notice.
- The company reported no material pending legal proceedings, no material changes to the risk factors in its 2021 Form 10-K, and effective disclosure controls as of March 31, 2022.
Important facts for investors to verify
- Whether the approximately $1 million of delayed Shanghai shipments and five PSV systems were delivered and collected in Q2 2022.
- Whether revenue, gross margin and bookings recovered after the Shanghai lockdown and whether the projected cash normalization occurred by the end of Q3.
- The sustainability of the $12.3 million cash balance in light of operating losses, negative operating cash flow and continued security-business investment.
- Inventory aging, potential obsolescence reserves and the effect of semiconductor shortages or product transitions on gross margin.
- The company’s ability to maintain international manufacturing and customer support amid COVID-19 restrictions, supply-chain disruption, geopolitical conditions and currency volatility.
- The impact of the $0.442 million China dividend withholding tax and any future tax costs associated with repatriating foreign subsidiary cash.