Data I/O Corporation: 2019 Q3 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, consumer and programming-center customers. The filing covers the unaudited quarter and nine months ended September 30, 2019, compared with the same periods in 2018. The company reported 8,210,884 common shares outstanding as of October 31, 2019.
Key Financial Metrics
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Net sales | $3.808 million vs. $6.533 million | $15.700 million vs. $21.367 million |
| Gross margin | $2.002 million; 52.6% vs. 63.0% | $9.270 million; 59.0% vs. 59.8% |
| Operating income (loss) | $(1.040) million vs. $0.404 million | $(0.936) million vs. $0.994 million |
| Net income (loss) | $(0.844) million vs. $0.342 million | $(0.691) million vs. $0.958 million |
| Basic and diluted EPS | $(0.10) vs. $0.04 | $(0.08) vs. $0.11 |
| Adjusted EBITDA | $(0.306) million vs. $1.024 million | $0.897 million vs. $2.867 million |
Quarterly operating and net margins were approximately negative 27.3% and negative 22.2%, respectively. Nine-month operating and net margins were approximately negative 6.0% and negative 4.4%.
- Revenue mix: Nine-month equipment sales were $8.815 million, adapter sales were $4.223 million, and software and maintenance revenue was $2.662 million. Software and maintenance increased 9.4% year over year, while equipment and adapter sales declined.
- Bookings and backlog: Third-quarter bookings were $4.3 million versus $7.0 million in the prior-year quarter. Backlog was $1.7 million at September 30, 2019, versus $3.1 million a year earlier and $1.4 million at June 30, 2019. Deferred revenue was $1.7 million.
- Cash flow: Nine-month operating cash flow was an outflow of $0.719 million versus an inflow of $1.840 million in 2018. Investing cash flow was an outflow of $0.396 million, including $0.456 million of capital expenditures. Financing cash flow was an outflow of $1.676 million, including $1.465 million for share repurchases.
- Liquidity: Cash and cash equivalents were $15.178 million at September 30, 2019, down from $18.343 million at December 31, 2018. Working capital was $18.413 million, down from $21.065 million. Management stated that available cash and working capital should fund operations and capital requirements for at least the next year under its operating plan.
- Debt and leases: The filing does not disclose conventional borrowings or senior debt. Operating lease liabilities totaled $1.995 million, consisting of $0.661 million current and $1.334 million long-term liabilities.
- Equity activity: The company completed its $2.0 million share repurchase program during the third quarter, repurchasing 403,685 shares from November 2018 through September 2019 at an average price of $4.95 per share.
Material Changes Versus the Prior Comparable Period
- Third-quarter sales declined 41.7%, and nine-month sales declined 26.5%, primarily due to a cyclical capital-spending downturn and international trade and geopolitical issues.
- Automated programming systems revenue declined 50.2% in the quarter and 28.5% year to date; non-automated programming systems declined 8.7% and 19.0%, respectively.
- International sales, which represented 89.8% of quarterly revenue and 91.4% of year-to-date revenue, declined 40.3% and 22.7%, respectively. U.S. sales declined 51.9% and 51.6%.
- Gross margin fell to 52.6% from 63.0% in the quarter, primarily because fixed costs were spread over lower revenue. Nine-month gross margin declined modestly to 59.0% from 59.8%.
- Research and development expense declined 17.5% in the quarter and 12.3% year to date. Selling, general and administrative expense declined 18.7% and 14.4%, respectively, reflecting lower commissions, headcount-related costs, incentive compensation and stock-based compensation.
- Cash declined primarily because of 2018 accrued incentive compensation payments, share repurchases and the year-to-date loss. The company adopted ASC 842 lease accounting on January 1, 2019, adding right-of-use assets and lease liabilities without affecting operating income.
Outlook, Commentary, Risks and Unusual Items
Management characterized the operating environment as cyclical and rapidly evolving and stated that the company was experiencing a capital-spending downturn. Management noted that orders improved in September and continued in October, which it hoped indicated the downturn had reached or was near its worst point. No quantitative revenue, earnings or margin guidance was provided.
The company is investing in security provisioning, automotive electronics, IoT programming technologies, automated programming systems, secure elements, authentication chips and secure microcontrollers while implementing cost reductions and geographic and real-estate adjustments. Management expects capital expenditures to be funded by existing and internally generated funds.
- Key risks include cyclical and seasonal demand, international trade issues and tariffs, geopolitical developments, foreign-exchange volatility, customer and geographic concentration, rapidly changing semiconductor technologies, inventory obsolescence, warranty claims and the ability to convert bookings into revenue.
- Management stated that it may require additional cash at the U.S. headquarters and that repatriating foreign cash could involve tax or other impediments. Failure to achieve the operating plan could require additional expenditure reductions or financing.
- Deferred tax assets remain subject to a full valuation allowance; the valuation allowance was approximately $7.3 million at September 30, 2019.
- Operating lease commitments totaled $2.217 million before $0.222 million of imputed interest. Purchase commitments and other obligations totaled approximately $1.3 million, with all but $0.406 million expected within twelve months.
- The company reported no material pending legal proceedings, no material changes to previously disclosed risk factors, and no material off-balance-sheet arrangements beyond disclosed lease and other commitments.
- Foreign currency transaction gains were $0.226 million in the quarter and $0.190 million year to date, while foreign currency translation losses in other comprehensive income were $0.478 million and $0.468 million, respectively.
Investor Verification Checklist
- Verify whether September and October order improvement continued and translated into higher bookings, backlog and revenue in subsequent quarters.
- Assess the durability of software and maintenance growth and whether equipment and adapter demand recovered from the capital-spending downturn.
- Monitor gross-margin recovery as revenue volume improves and fixed costs are absorbed.
- Reconcile cash usage, share repurchases, capital expenditures and operating cash flow against management’s stated one-year liquidity outlook.
- Review international exposure, trade and tariff developments, foreign-exchange effects and potential restrictions or taxes on repatriating foreign cash.
- Evaluate inventory levels, obsolescence reserves, warranty claims and the company’s ability to manage technology transitions.
- Confirm the status of operating lease obligations, purchase commitments, deferred tax valuation allowances and remaining share-based compensation expense.