Data I/O Corporation (DAIO) Earnings Call Transcript & Summary

During the course of the pandemic and so on, what shortages have you had to deal with, with third parties, with parts? And how is that progressing if there's even been a problem?

Yes. No, it's most definitely been a challenge for us. As with everyone in any electronics industry, we've had to deal with shortages and silicon components and sole-source parts that are non-silicon. Again, COVID set this up and we realized almost 2 years ago now that inventory was going to become harder to get. So we extended our supply and purchase commitments at the end of 2020. And I think it helped us out really in the first part of '21, not only for availability, but for pricing. But we've been keeping ahead of the shortages. Like everyone else, we've had to deal with it. You get a dear-customer letter in the morning. Your own price was $6, your new price is $100, and you'll be lucky to get parts. But by and large, we've been able to work through that because when we took the initial decision to extend our purchasing commitments, it has cost us time. So instead of fighting an issue on a part that we're going to get in 2 weeks, we're fighting an issue on a part that was potentially going to be short in 2 quarters. And most of these things can be worked out if you have enough time and you have people like we have that understand the market. So that was our biggest issue predominantly with shortages in silicon. We've seen the price increases on parts, a lot of older silicon technology that suddenly became very scarce. And we manage that by buying at the higher price or designing it out, and I think that's pretty much what everybody has been doing. And then the last part is a lot of these shortages really exacerbated price increases in freight. And so we've had to manage that with an eye on keeping our costs under control. The interesting thing, Gene, is people think this is a brand-new phenomenon because of COVID. And I think it has been exacerbated because of COVID. But anyone that's been around the semiconductor industry for 38 years as I have, understands it's fundamentally a cyclical business. And supply and demand is very rarely in balance. And you saw that from some of the announcements from some silicon companies. Micron, a few weeks ago, and I think NVIDIA came out last night, and just indicated that they have gone from a situation of being constrained to now probably having too many parts. And it happens just like that in semiconductors. So the hope we have is that the shortages will continue to lessen as they have been. And ironically, softness in consumer and enterprise demand, which everyone is seeing, may have a salutary effect on the automotive supply chains because it frees up more semiconductor capacity to support some of the backlog issues they've had in automotive.

Which brings me to a topic that I've been closer to because without naming other companies, I don't think you're in competition though. I've been looking at silicon carbide, which certain semiconductor companies like ON and maybe now Wolfspeed soon are getting into and testing companies like AEHR. Are you competing or complementing what they do, for example?

I think when you look at any kind of semiconductor test company, they would be ahead of us in the value chain. Once the semiconductor is tested and it's known good and packaged, then if it has memory, and it needs to have firmware, then it's a candidate to be programmed by Data I/O. And generally, that's technologies that we program today are flash memory and flash-based microcontrollers. But there are a whole bunch of products that have flash memory in their FPGAs, other items as well that are candidates to be programmed by Data I/O. So the companies that you mentioned there, I think, would be complementary. Increasingly, over time, I think you're going to see more connectivity or interconnectedness between the silicon and the board ecosystem on things like traceability of semiconductors for -- to avoid fraud or avoid counterfeits, linking software bill of materials with the physical value chain and that starts with the semiconductor technology and all the way through to the end of a system being completed and put into service. So more and more of those companies that maybe 10 years ago, we wouldn't have had too much to deal with. I think in the future, more and more of the systems are going to be linked at least from a data standpoint.

So most recently, a lot of people were thinking that you had a gut punch and you turn things around and now you're moving forward. And maybe the Avnet and Amazon Web Services agreement is a big deal for your company. So I'm wondering if, a, if that's the case? And b, what about this upward curve in EV demand overall, silicon carbide or not? How do you anticipate that this will magnify your margins and/or your growth?

Yes, I think those are 2 good questions, Gene, and they're in 2 different segments. Let me take them one at a time. I think when you're talking about Avnet and Amazon Web Services, you're referring to their working together on Internet of Things adopted. And Avnet is a partner of ours on our SentriX technology platform. And we share a common vision around what it's going to take to make the IoT business take off. It's been slower across everyone in the ecosystem over the past few years because it's been too complicated. And everyone says, how do we simplify this to make sure that we have an ability to simplify the whole process from getting a customer interested in security, selecting security chips, provisioning the security, going into cloud onboarding and then ultimately, managing the devices downstream. So I think Avnet and AWS relationship is helpful in that simplification process. The second area around EV, I think, goes to our current business, which is about 60% automotive. We believe that the automotive semiconductor market is growing in double digits for the next decade. We see that from all of the automotive semi companies and their guidance. We see it from our customers, and we see it from people like McKinsey that have modeled out semiconductor demand by end market for the next decade. To put it in perspective, a double-digit growth rate of 12% a year ends up tripling the market by 2030, and that's meaningful for us. So when you look at what's driving, no pun intended, the growth in automotive silicon, you end up with 3 areas: in-vehicle infotainment, which we've done extremely well in up-to-date; active safety or advanced driver assist systems; and then electrification is a critical third component. They're substantially more silicon in an EV than there is in an internal combustion engine, and that creates additional opportunities for programming with Data I/O. So overall, EV is a really good trend for Data I/O. And I think we just had action in Washington yesterday where they're going to put even more money into electrification subsidies. Pretty much every major automotive company has indicated they're going to predominantly electric platforms, if not exclusively electric platforms in the next decade. And so again, we think that's a tremendous opportunity for us.

So the future of growth is very much tied to Internet of Things, which I know personally, I was at IFA, a tech show in Berlin. A few years ago, Google, Sony, they had trouble even getting the equipment to work when it was set up by their product developers. So you're absolutely right that this is barely a maturing phase. I don't -- actually, I don't think it's even mature yet. But so you think your footprint in the area is going to grow over the next few years. And of course, this matters to shareholders.

Exactly, it is we've said publicly, our SentriX revenue doubled last year. We've got an aggressive plan this year. The big challenge on anything in security is to simplify and scale, and that's our focus on the IoT. On automotive, it's a different story for us. The -- we're already in all the automotive factories. We have tremendous market share, and we have to continue to support their needs, be a great supplier, have a resilient supply chain, have spare parts and dozens of locations around the world, be able to support and service their systems in over 80 countries. It's much more of a -- being a good supplier, great technology play in automotive. In IoT, it's figuring out how to get the magic recipe to simplify and scale with the right combination of partners, the right combination of our own offer. And to be real frank, I don't think we've unlocked the formula just yet. We've got a couple of probes out there to figure out what can we do differently in sales and marketing? What do we have to do to simplify the product line? And I think we'll figure it out. But that's clearly an exciting long-term opportunity for us as well.

Well, let's look at the compounded growth. If you were to double your revenues over the next few years, do you think you have to raise capital, i.e., dilution? Or do you think you have enough of a margin that whether gross or net, that you can internally or organically fuel or fund your growth?

That's a great question, Gene. In the past, we've typically had enough capital to fund all of our development needs internally, not had a need to raise capital. Even today, after dealing with the lockdown and the temporary disruption of the balance sheet, we have over $10 million in cash and no debt except office leases. Okay. So our balance sheet for a company our size is actually really, really strong. Now if we were to go in and look to acquire a company, it's likely we probably have to go, increase stock one way or another to go do that. It's not in the plan right now, but if we were able to do that in the future, I think clearly, that would be something that will be on the table. Doing spending or spending money on SentriX today, we're funding that out of our current cash flow. If we decided, for example, that there was a tremendous opportunity that presented itself right now. And we need to spend even more, we'd probably be able to do that internally for a while. But again, any kind of inorganic M&A, I think we probably have to go to the market and raise capital.

If it was inorganic, right?

Yes.

So circling back because the topic -- I'm basically interested in the stock as opposed to the topic today of supply chain. But to circle back to that, you're basically suggesting based on what you're doing now that you have sufficient resumption and flow of parts and service capabilities to fund these things and service the customers. We have a decent backlog, but without losing the backlog to with times of the essence for some customers. And certainly, the whole EV sector has been slowed down because of the semiconductor shortage. But I think this topic when we decided we're going to do this, but the topic is actually resolving itself around this time.

Yes. I think you're right, Gene. The key part there is, as compared to 3 months ago, what's happening is I think there's a broad recognition that consumer and enterprise segments are slowing down. And what that's doing is it's taking pressure off the entire semiconductor supply chain. And so wafer starts can be retargeted to the automotive industry. Again, that takes about 3 to 6 months from the time someone in a semiconductor company says, "Hey, let's move starts from a consumer product to maybe an automotive product." They have inventory of the parts are common, that's 1 thing. But if they have to retarget wafer starts, it's 1 or 2 quarters before you'll see that in the market. I think that's clearly happening. We're seeing that. And we're sort of a countercyclical play there. If customers didn't expect to get a lot of parts, let's say, January when they share their forecast with us. But now they are, they're coming back to us and saying, "hey, we might need another machine. Can you do that for us?" And of course, the answer is always yes. It's just a question of lead time. But I think you've seen that our backlog is a record level. Our bookings have been very strong for several quarters, even as we've had the supply chain challenges. And so the second half of the year we indicated on our conference call that we expect to take that backlog and turn it into revenue in the second half. And that should put us in a pretty good spot.

To wrap up, perhaps my questions, I've enjoyed the chat. And I see your passion for the business, Anthony. And I'm also curious how this translates and on what time frame into revenue? And obviously, bottom line earnings, which really could take the stock, that would be the goal if one is buying the stock back to levels that was at before the more recent crisis in semiconductors?

PWell, Gene, on the stock, one of the things that we don't give explicit forward guidance. It's not because we don't want to. It's just -- historically, it's turned out to be challenging given the lumpiness of system sales. But in the last earnings call, we were very clear that, as I said, we expect to take that record backlog and turn it into revenue and our sales funnel looked very good. And that's pretty -- that's about as descriptive as I get on an earnings call. But the -- that's a cyclical kicker, if you will, to the company. The secular strategy is, as I've described. We're in the right market segments. We're in automotive that's growing in the year for the next decade, okay? And we're the #1 supplier there. So we just have to do our job on automotive and continue to be a great supplier to customers there. On IoT, it might actually even be a bigger opportunity, I think the jury is still out to be fair on have we figured out the formula there yet. I don't think we've figured it out completely yet, but we're getting closer, and we know it's around simplification and scale. And we continue to try and dial that in. And as the market finally figures out security as more and more relationships get established, such as Avnet and AWS, I think that market will become simpler, and we're well positioned there with our SentriX technology to grow much, much faster in that market than our traditional growth segments.

Well, I wish you luck. And I think you are on the right track, it sounds like. Enjoying the chat, and we'll keep an eye on your stock, but also the EV market, which I suspect is probably where you want to focus the most on over the next 2 years.

Well, Gene, thanks very much. I really appreciate your time today and your support here on our third in a series of fireside chats, celebrating Data I/O's 50th anniversary. With that, I'd like to close our chat and encourage anyone that's listening here to go get additional information at www.dataio.com. Thanks, again, everybody.