Good afternoon, and welcome to the Data I/O first quarter 2022 financial results conference call. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a touch-tone phone. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Jordan Darrow, Investor Relations. Please go ahead.
Thank you, and welcome to the Data I/O Corporation first quarter 2022 financial results conference call. With me today are Anthony Ambrose, President and CEO of Data I/O Corporation, and Joel Hatlen, Chief Operating Officer and Chief Financial Officer of Data I/O. Before we begin, I'd like to remind you that statements made in this conference call concerning COVID-19 future revenues, results from operations, financial position, markets, economic conditions, silicon chip shortages, supply chain expectations, estimated impact of tax reform, product releases, new industry partnerships, and any other statements that may be construed as a prediction of future performance or events are forward-looking statements which involve known and unknown risks, uncertainties and other factors which may cause actual results to differ materially from those expressed or implied by such statements.
These factors include uncertainties as to the impact from the COVID-19 pandemic, including the 2022 outbreaks in China, Russian invasion of Ukraine, including any related international trade restrictions, along with continued reopening and recovery efforts within the relevant global supply chains and among our customer base, levels of orders for the company and the activity level of the automotive and semiconductor industry overall. Ability to record revenue based on the timing of product deliveries and installations, market acceptance of new products, changes in economic conditions and market demand, part shortages, pricing, and other activities by competitors, and other risks, including those described from time to time in the company's filings on Forms 10-K and 10-Q with the Securities and Exchange Commission, press releases and other communications. The accuracy and completeness of forward-looking statements should not be unduly relied upon.
Data I/O is under no duty to update any of these forward-looking statements. Now I would like to turn over the call to Anthony Ambrose, President and CEO of Data I/O.
Well, thank you very much, Jordan. I'll begin my formal remarks by addressing our 2022 first quarter financial and operational performance, and then I'll turn the call over to Joel Hatlen for a more detailed look at the numbers. As we announced on March 29, our manufacturing and shipping facility operations in Shanghai were forced to shut down due to COVID-19. This government imposed lockdown is still in effect. With the COVID-19 restrictions and shutdowns impacting our facility and many of our customers and business partners, first quarter revenue shipments of approximately $1 million were not realized, although no orders have been canceled. During the first quarter, we did achieve bookings of $6.2 million and backlog of about $4.1 million. Auto electronics represented about 63% of orders in the quarter.
We had six new customer wins, including a new automotive electronics customer in Africa. The war and lockdown hit during a solid ramp in our sales funnel. We added $several million of opportunities to our funnel in January and February. Earlier this month, we celebrated a major milestone with our 400th PSV platform win and shipment. With over 220 PSV programming systems supporting the global automotive electronics industry. We now have over 50 unique automotive electronics customers worldwide. As we mentioned in the release, all of our Shanghai-based employees are safe and at home and working remotely to provide technical support to our customers or assisting the transition to alternate supply chains. We've been able to keep up with system demand through our Redmond, Washington, USA manufacturing facility and have accelerated ramp up of alternative manufacturing for our adapters.
We anticipate logistics challenges as we plan to reopen our Shanghai operations in May. These logistics challenges will include freight forwarding capacity, partner availability and overall supply chain performance. Time will tell how long a return to normal will be in China. During this lockdown, we've had great performance from our team, and I'd like to acknowledge each and every member of our Data I/O team in China and also their counterparts around the world for their tireless effort and hard work during the lockdown. We meet daily with the leadership team in China to ensure we're making progress on customer support and deliveries. They're showing true grit and determination during a very challenging period for them personally. On our SentriX platform, we had an announcement earlier this week, which we're very excited about, an announcement with NXP and Avnet on SentriX provisioning of the NXP LPC55S6x family of microcontrollers.
NXP is a leading global supplier of microcontrollers for Internet of Things, and Avnet, a global distributor leader, is making a much bigger push of late in IoT support, including the SentriX platform. The customer came to us through Avnet and we're able to provide a great production solution for them. During the quarter, we also earned repeat customer business for SentriX, and that should be revenue in Q2. The pattern we see with SentriX is very interesting. Once we have customers that actually use the solution, they really like the solution. They appreciate the ease of use of the tools and manufacturing friendly features that we've designed into the platform. As I mentioned many times before, our job and our challenge is to expand our sales opportunities here.
We need to get more customers into the pipeline to experience the ease of use and scale of the SentriX platform. We continue to see opportunities forming in the industry within a 25 billion-30 billion unit microcontroller industry that has a need for compelling solution for security provisioning. During the quarter and during recent years, we've been very active on the patent front and have now been awarded over 20 U.S. and international SentriX and security-related patents with more to come. As I mentioned, our SentriX opportunity is even more interesting given the growth in connected devices and mobility trends. Just one example, the worldwide market for smart home devices grew almost 12% in 2021 compared to 2020, with almost 900 million devices shipped, according to IDC in a recent report.
One of our neighbors here in Redmond, one of the largest cloud companies in the world, announced very strong growth for their security business last year. We continue to be one of those companies championing not only enterprise security, but securing the entire ecosystem, including hardware of IoT and connected devices. As we mentioned in our last earnings call, this is also a special year for Data I/O as we celebrate our 50th year in business. In recognition of our special anniversary and due to the following we've generated with the investment community, a great opportunity to talk about our programming technologies, and we're developing a series of fireside chats with several Wall Street analysts and investors. This will be a public series of events held over the course of the next few months.
We'll plan our first installment with June, and we'll be announcing the topics and exact schedule soon. We think you'll find it interesting and informative as we dig into some of the key areas of our business, differentiation, technology, and growth initiatives. Finally, as we look forward to the balance of 2022, we've adjusted our short-term growth expectations to account for the present economic challenges with a resumption of growth contingent upon a reopening in China, stabilization of supply chains, and restoration of business confidence in EMEA. Longer term, we're confident that our industry-leading automotive presence, our secure programming technology platform, resilient supply chain, and strong balance sheet will position us very well to capitalize on a resumption of demand. With that, I'll turn it over to Joel Hatlen.
Thank you, Anthony, and good day to everyone. I'd like to start by providing a review of our first quarter of 2022, starting with cash and our balance sheet, and then moving to the income statement. Data I/O's financial condition remains strong with cash at $12.3 million on March 31st, 2022, down from $14.2 million at the end of the prior year and $13.6 million at the end of the first quarter of 2021. The change in cash relates primarily to approximately $1.6 million of one-time or annual seasonal payments, including a one-time China dividend withholding tax of $442,000 and a planned disbursement for annual incentive compensation, annual 401(k) match, and seasonal public company costs like the audit and Nasdaq fees.
Days sales outstanding or DSO, a receivable collection measure at March 31st, 2022, remained at or below our target measure at 49 days. Net working capital on March 31st, 2022 was $16.9 million, down from $18.5 million at the end of the prior year. Inventory of $6.6 million on March 31 was approximately $274,000 higher than at the end of the prior year. The increase in inventory related to the inability to ship approximately $1 million of product potential revenue resulting from the Shanghai COVID lockdown. Now on to the income statement. For the first quarter, revenue of $5 million was down 17% from the $6 million in the first quarter of 2021.
The decrease, again, was primarily due to the approximately $1 million of finished product potential revenue, including five PSV systems that had been awaiting pickup in the Shanghai factory for delivery to customers that were caught up in the lockdown. As Anthony mentioned, the quarter started strongly with improved orders and added sales funnel prospects as it appeared the supply chain and silicon part shortage problems appeared to be improving. This improvement of business conditions was before the geopolitical issues stemming from the late February Russian invasion of Ukraine and the mid-March COVID-19 resurgence in China, resulting in the restrictions and lockdown of Shanghai. Automotive orders during the quarter represented 63% of sales and continue to be our primary addressable market. Consumables were up to 33% of revenue sequentially, up from 30% of annual revenue in 2021 and up from 27% in 2020.
Software and services revenues at 15% of revenue in the first quarter were up from the prior year level of 12%. On a geographic basis, international sales represented approximately 94.2% of revenue for the first quarter, compared with 95.3% in the same period last year. First quarter bookings for 2022 were $6.2 million, equal to the fourth quarter of 2021, even though business activity in Asia was considerably held up with COVID containment process in China. First quarter of 2022 bookings were up 16% from $5.4 million in the same period of the prior year. The lockdown delayed shipments contributed to backlog increasing to $4.1 million at the end of the quarter.
The timing of the resumption of operations and shipping in Shanghai may have a continued impact on cash as late in the quarter shipments may not be collected before the end of the quarter. Gross margin of 46.4% in the first quarter was down 9 points from 55.5% in the first quarter of 2021. Clearly, this was lower than our target range of mid- to upper 50s and was due to the sales volume and mix. Our gross margin in the first quarter missed, including the margin on the lockdown-impacted $1 million in potential product revenue that still awaits shipment, which would have added approximately 5 points. Meanwhile, we continue to effectively manage our operating expenses and maintain a strong balance sheet. Funding our R&D and growth initiatives have continued.
R&D expense remained at $1.6 million in the first quarter as compared to the prior year period and the fourth quarter of 2021. Selling general administrative expenses was relatively flat in the first quarter of this year compared with both the prior year period and the fourth quarter of 2021, coming in at just under $2.1 million as well. Backlog on March 31st, 2022 was $4.1 million, as compared with $2.9 million at the end of the fourth quarter of 2021 and $3 million at the end of the first quarter of 2021. The higher backlog reflects stronger bookings in the first two months of the quarter and the lockdown impacted finished products awaiting shipment, as we've discussed.
Deferred revenues were unchanged at the end of the first quarter of 2022 from $1.7 million at the end of the prior year. Taxes during the quarter consisted of foreign taxes with no U.S. income tax. A dividend withholding tax of $442,000 was incurred in China as a result of a $4.4 million dividend paid from our China operations to the parent company in the United States. Sufficient cash remains in China and in Germany to effectively manage business in each region. We also recorded in non-operating income a gain of $57,000 on the sale of internet domain addresses, a legacy asset.
Net loss in the first quarter of 2022 was $1.8 million or $0.21 per share, compared with a net loss of $333,000 or $0.04 per share in the first quarter of 2021. We had 8,622,369 shares outstanding on March 31st, 2022. Adjusted EBITDA loss of $932,000 in the first quarter of 2022 compares with adjusted EBITDA of $173,000 in the prior year period. Overall, we remain very strong financially and continue to have no debt. Combined with our resilient supply chain strategy, these represent key competitive advantages as the best capitalized supplier and reliable producer in the global programming industry.
We are prepared to benefit from this favorable positioning over the long term and even in the short term as global conditions outside our control are being resolved. That concludes my remarks, and I'll turn the call back to the operator to begin the Q&A segment. Operator, will you please start the Q&A process?
We will now begin the question-and-answer session. To ask a question, you may press star then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the key. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Jeff Peterson with Austin Capital. Please go ahead.
Thanks, Anthony and Joel, for taking my questions.
You're welcome.
You seem to be performing quite well amid the issues you've addressed and what has been what, you know, what we've read about. The bookings have indeed been showing signs of industry recovery, so this is very promising. I did have a few questions. The first one I had is, has the fallout thus far from the Russian invasion of Ukraine helped your security business at all?
That's a good question, Jeff. I think there's a lot of noise around, you know, what the Russians are gonna do around cybersecurity attacks. I think a lot of people are getting awareness about that. You hear a lot about, you know, major infrastructure and enterprises, but I think people are also realizing that their Internet of Things devices are also a prime target for denial of service attacks, other things like this, and that a real security strategy to protect those assets is required. I think it continues to generate awareness. It's yet, you know, one more reminder of why you need to secure your IoT devices.
Okay, great. That's very helpful. Thank you. I think I have a good handle on the company, so I'd like to focus my questions on your balance sheet to determine how just how attractive the shares may be. My first question on that is, can you review some of the cash that was used in the quarter to pay those annual expenses?
Yeah. As I was commenting on it was primarily one-time or annual seasonal payments that was responsible for the change in cash. The dividend we had from our subsidiary in China resulted in $442,000 of withholding. Then in addition, the other items that used cash related to the incentive compensation that had been accrued previously for the year. It included the annual matching fee for our 401(k) plan. It included different annual public company costs such as the audit and Nasdaq fees and the like. That's probably the main points.
Okay, thanks for the additional color on that. What are the capital expenditures for the year? You know, how do we think about that for financial modeling purposes?
They are expected to be pretty similar to last year's stuff, which would have it be in the $600,000 -$700,000 range at this point.
Joel, how much of that is, you know, sales demo systems which ultimately get sold?
I would guess that that's off the top of my head, at least half.
You know, $300,000 or so to run the business. Another $300,000-$400,000 on sales demos.
That's correct.
Give or take.
Yeah.
Okay, great. On the projected, you know, cash flow in the business? It looks like you're gonna have some spring back, you know, after you ship and collect on that $1 million in products waiting to be delivered. You know, if you could kind of help me walk me through how do I think about, you know, cash, you know, for the, you know, going forward.
Yeah. We typically have not been big spenders in terms of CapEx for, you know, for infrastructure and the like. We've seen that our cash flow tends to match, you know, our EBITDA adjusted. That's probably one of the better ways of monitoring it from a rule-of-thumb standpoint. We have a very strong balance sheet. We have no debt, so there's no drains that way. We aren't doing any financings or anything along that line. For the most part, it's where our working capital deployed. You will see that we fluctuate by how much our receivables or inventory or accrued expenses are on a quarter-by-quarter basis. There are fluctuations.
You know, we had the major cash outflows in the first quarter, which is typical for our seasonal expenses, and we tend to build cash for the rest of the quarters during the year.
Joel, given that there are sort of unusual times right now with you know the lockdowns and such, you know, our inventories, we've been spending cash on inventory to secure the supply chain. What do you think the inventories are gonna be doing from here on out?
I expect that as soon as we can start shipping again from Shanghai, we will see that $1 million of product instantly go out. I expect that we had been buying things for the expected growth, and I think that you'll see that we can now just sort of bleed that off, as we continue to, you know, rationalize our inventory levels to our demand.
Basically no cash contribution to inventory, maybe a little benefit from that.
That's correct.
You know, with our what's our DSO average historically? 55 days, something like that?
Yeah. It's been. It typically averages between 50 and 60 days. We have a target that's saying keep it under 60, and we've been able to keep it in the very high 40s, so.
Right. Just let's make the math easy, call it 50 days. Once we start shipping, then we'll get our cash for those shipments on average 50 days later, which is sort of, you know.
Later in the quarter.
Could be the end of the quarter, could be Q3. Cash flow, you know, by the end of Q3, you know, assuming we can get reopened in May, should be back to normal.
I would guess that, yes.
Okay. Jeff, did that answer your question?
Yeah. You know, just to follow up on that was really helpful. To follow up on that, how do I think about that, you know, Q3, you talked about that, but how do I think about, you know, Q4, you know, the remainder of where do you think it'll settle in at, you know, at the year-end?
We probably couldn't give you a forecast on that right now. As we get through the year, it might be a little easier to do that. Certainly once everything, you know, gets back to, I'll call it more like business as usual from a shipments perspective.
Okay. I've got a blended gross margin of over 50%. You know, how should we think about that? Is that, give or take, about the right level?
It's really hard to say with how many uncertainties there are in today's world with the COVID and the war and stuff like that. Our long-term target gross margin is in the mid- to upper-50s, and that's where we're at on a typical basis. Obviously, this quarter is not gonna be typical, and I think that second quarter, who can say? You know, I do believe that being in the mid-50s is kind of the more immediate target range.
Okay. Can I think about that for Q3 or Q2, I mean? Is that fair?
I don't wanna be, you know, problematic with your question, but Q2. Q1 was weird, okay? We left $1 million of product on the dock in a crate. Q2, we hopefully unwind that. You know, the normal comparisons we have probably don't make a lot of sense. I think for, you know, if you talk about a four-quarter average or for the year, yeah, then I think we're comfortable with those numbers. On an individual quarter basis, it's gonna be crazy in Q2.
Okay. That's really helpful. Thanks. Your average quarterly accounts payable in 2021 was about $4.8 million, yet your AP at the end of the first quarter of this year was $4.4 million, you know, a $400,000 reduction since December 31. Did you plan for that sort of reduction from the end of the year? Was there any significant one or two?
Yeah.
Items that were paid down, you know, beyond what you mentioned those one-timers or discrete items?
You know, it was primarily those one-timers. It's the incentive compensation, it's the company match. Those are the items that traditionally get paid out in the first quarter and were accrued in the prior year. Yes, we did plan on paying those down. That's typical in our overall cash flow planning.
Okay. Thanks, guys. That's all the questions that we have at this time.
Thanks, Jeff.
Our next question comes from David Wright with Henry Investment Trust. Please go ahead.
Anthony, hello. Are there any products that you manufacture in China that you couldn't manufacture in Redmond?
No.
Can you talk about, sort of like if the company decided it didn't wanna be in China anymore, what would that involve?
Yeah. Like, let me maybe answer your question this way. We've had a policy we call the resilient supply chain, and it's been accelerated since the advent of COVID-19 a couple years ago. It refers not just to our tangible products, you know, the systems, the adapters, spare parts, things like that, but also the intellectual property products, our device support, technical items, software development, things like that. We've had a strategy to be in China for manufacturing for well over a decade because it's really good, it's low cost, it's highly predictable, and it serves our China market, which is one of our biggest markets. It serves that market very well.
For us, what's happened is with the advent of tariffs and increased freight costs and shortages of semiconductors, which makes moving physical goods more complicated, we've been moving and splitting and trying to balance the manufacturing between Redmond and Shanghai a little bit more. That's accelerating obviously with the lockdown. The business decision on where to build things will be, you know, where is the end customer? What's the total cost? And what's the availability of talent in that region? You know, that's how we'll be looking at how to balance our resilient supply chain going forward. I'm pleased with the progress we've made in the last couple years. We'll be accelerating that. Then I think it'll just be an idea of where do we wanna go from there.
One more factor that I'd mention, Anthony, is we do have a goal of some tax efficiency. To the extent we can, we would like to use up NOLs in the United States and not pay foreign taxes in place.
Yeah. That's a really good point, Joel. Glad you brought that up. David , one of the other factors is tax efficiency, not just supply chain efficiency.
Okay. Thanks for taking my question.
Our next question comes from Avi Fisher with Long Cast Advisers. Please go ahead.
Hi, good afternoon. Thanks for taking my questions.
Hi, Avi.
Three quick ones. Hi. I'm curious if you could talk about the opportunities to penetrate new markets via SentriX. What I mean is, you know, 65% of your business, 66.5% is automotive. What other markets can you penetrate, and can SentriX be the tip of the spear for that?
Yeah, I think that's a good question, Avi. We think SentriX has applicability in automotive, but we think it also has a big applicability in the industrial IoT market, which is our second largest market. It's been growing a little bit for us as a percentage over the past couple years. Yes, SentriX can help us in industrial and IoT. I would say most of our customers for SentriX are industrial and IoT. We do have a couple automotive, but the mix there is richer towards industrial and IoT.
Well, given that answer, sort of dig into that a little bit, you know, this press release you put out for NXP was fairly similar to one that Secure Thingz and IAR had put out a year or two ago. Can you talk a little bit about, is that a competitive market? Are you winning share? Are you both doing the same things?
Yeah, I didn't see a production partner in the release from the competitors that you mentioned a year ago. I think maybe they're not as similar as you might think. I mean, the product is a similar family of products. It's a very popular set of products. What we've been focused on is we got this customer because they came to us and they wanted a solution, so maybe they weren't seeing what they wanted elsewhere. The idea for them is they wanna have a solution that fits into their manufacturing and supply chain strategy. A lot of people don't want to change their supply chain strategy right now because they're concerned that if they do, they won't get parts.
If you have a supply chain you like, and you're getting parts, and you have committed parts, you wanna keep that. One of the benefits of SentriX is that, you know, there are 400 PSV systems out there that could theoretically be upgraded to SentriX. You don't have to change your supply chain strategy. You don't have to change your manufacturing strategy. If you're working with a great partner like Avnet, then you can continue to work with Avnet, and they have SentriX capability to support you. You don't have to, you know, go outside that supply chain. The other part is it's manufacturing friendly. You know, the tools are well understood by Avnet.
The whole process from gaining the customer, understanding their security and crypto strategy to actually implementing it, we made a ton of improvements on that over the years. You know, I think what we saw was a customer that had an unmet need. We were able to take care of it. If you look at some of the social media follow-up, I think both Avnet and NXP people were pretty excited to have this solution available.
Okay. Just to clarify, Avnet's the partner, the customer is unnamed, correct?
The customer is an OEM that is working through Avnet. Yes. We know who they are. Yeah.
You know who they are, of course. Okay. All right. The $1 million of deferred sales, is that included in backlog?
It is.
Is it backlog or is it inventory, Joel?
It's backlog and it's inventory.
Okay. One other quick one. You've press released two fairly high-profile new board members. As an outside shareholder, I wonder if you could talk about some of the things that they're bringing to the company that haven't been done before. I'm wondering as well as an outside shareholder, if one of those things that haven't been done before is if they'll be buying shares with the price currently so depressed.
On the second one, I'll let them speak for themselves on that. Message received. If you look at it, you know, I think we've had a very good board during my tenure here. One of the key tenets of maintaining a good board is maintaining some rotation. You know, you need to get fresh ideas in from time to time. There's not a magic number. It's just over time, it becomes a great opportunity. Now, we have a situation here where, you know, Mark Gallenberger, who's been a fantastic board member, is retiring from his, you know, not only his boards, but his day job.
We had an opportunity and the skills we wanted to bring in after, you know, consultation with investors, with other people, with you know, my team, the officers here. We wanted to bring in people that understood the manufacturing industry. We thought that experience was very helpful. Some more in the software and internet area with some semiconductor background to understand the technology, specifically around something like SentriX. You know, if you look at Ed Smith, he's a CEO of an EMS supplier. That's a big target market for us, not only for our data business, but the SentriX. If you look at Cheemin Bo- Linn, her background in semiconductors and software, I think is extremely helpful. I think those are the skill sets we brought to the table.
Experience in those areas, and the technology was helpful.
Again, if you'd like to ask a question, please press star then one at this time. Our next question comes from Robert Anderson with Penbrook. Please go ahead.
Good afternoon, Anthony and Joel.
Hi, Bob.
My question has been largely answered, but I wanted to, 'cause it was a question about board members, but maybe you could go a little further and explain further why Mark Gallenberger resigned from the board or plans to resign, I guess. It's not until May.
Yeah. To be clear, Mark's still a board member, and he's just not standing for election for the slate on our shareholders meeting, which is the nineteenth, Joel?
That's correct.
Yeah, Mark's just retired from his day job as a CFO and also from the board. That's what's to it.
Okay, thank you.
Ladies and gentlemen, this will conclude our question and answer session. I would like to turn the conference back over to Anthony Ambrose for any closing remarks.
Thank you very much, operator. Before we close the call, I'd like to thank everyone for joining us today and their continued support of Data I/O. We look forward to meeting with investors at the LD Micro event, June 7 in Southern California and the Embedded World event in Germany, June 21-24. Also, as we mentioned, we do have our annual shareholders meeting on May 19. With that, I'd like to conclude today's call. Thank you very much.
Please vote your shares.