Release Date: July 25, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Strong performance in Asia and EMEA sales regions, exceeding expectations.
- Significant new customer acquisition with eight new wins in Q2, totaling 13 year-to-date.
- Record units processed by programming center partners, indicating strong demand for SentriX and software solutions.
- Successful cost control measures, reducing operating expenses by 21% year-over-year.
- Maintained a strong balance sheet with no debt and steady cash position at $11.4 million.
Negative Points
- Bookings and revenue were below expectations, particularly in the Americas region.
- Weakness in the automotive sector, with significant pushouts from existing customers.
- Second quarter revenue down 32% year-over-year, reflecting sluggishness in the Americas.
- Gross margins decreased by 3 percentage points year-over-year due to lower sales volume.
- Net loss of $797,000 for Q2 compared to a net income of $300,000 in the same period last year.
Q & A Highlights
Q: Can gross margins reach high 50s or even 60% with significant volume increases?
A: Gerald Ng, CFO: Yes, we believe so. For example, with $5 million in revenue, our operating income was a $400,000 loss. We typically see a 60% fall-through on revenue increases, so as revenue grows from $5 million to $6 million or $7 million, we should see a corresponding fall-through to the bottom line. Anthony Ambrose, CEO: It depends on the mix and location of the revenue, as margins differ between direct sales and distribution.
Q: What is the variable expense on the next million dollars of revenue?
A: Anthony Ambrose, CEO: The primary variable expenses are sales-related, which vary depending on whether sales are direct or through distribution. Other variable costs include material, freight, logistical costs, and commissions. Historically, we've told people that the operating leverage is around 40%.
Q: Are there incremental expense reductions or efficiencies expected in the back half of the year?
A: Anthony Ambrose, CEO: There will be smaller improvements as we continue to work through opportunities. Some initiatives, particularly on material cost reduction, may have longer-term but more sustainable impacts.
Q: What is the impact of AI on your business and the opportunity it presents?
A: Anthony Ambrose, CEO: AI impacts us through Edge AI applications, such as automotive ADAS, smart cities, industrial automation, and smart metering. These applications increase code size and require newer platforms, benefiting Data I/O. The AI market, particularly Edge AI, presents significant growth opportunities for us.
Q: Can you provide a broader global landscape for the automotive sector, particularly in China and India?
A: Anthony Ambrose, CEO: Asia, including China, is performing well and is ahead of plan for the year. In contrast, the Americas have seen significant pushouts in automotive demand. Factors such as interest rate expectations and product rotations contribute to this. Historically, automotive demand returns sharply once capacity additions are decided.
Q: Can you provide more details on the software-centric business and its growth?
A: Anthony Ambrose, CEO: We had record units processed by our programming center partners on SentriX, contributing to 49% of our revenue in the first half. This is close to our long-term goal of a 50-50 split between recurring revenue and systems. The strength in consumables, combined with expense reductions, helps preserve cash and positions us well for future demand.
Q: Does repatriating cash from China indicate a slowdown in your China business?
A: Anthony Ambrose, CEO: No, it was an opportunity to optimize our cash position and earn more interest. We maintain sufficient working capital to support operations in the U.S., China, and Germany.
Q: Are automotive companies noting a significant decline in demand?
A: Anthony Ambrose, CEO: In North America, automotive demand disappeared in Q2. However, we remain confident in fulfilling backlog orders in the second half of the year, as customers typically do not cancel orders once placed.
Q: Are there other applications for Edge AI besides automotive and ADAS?
A: Gerald Ng, CFO: Yes, applications such as smart metering, IoT factory automation, and other industrial automation represent growth opportunities for us. While automotive remains significant, these areas also contribute to our business.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
