Seeking Alpha • Aug 17
Another Upturn At Data I/O
Underlying demand is strong for the company but buffeted by macro problems like the Chinese lockdowns, supply chain problems, and the Ukraine war.
Supply chain problems have started to ease in their most important segment, automotive.
Demand from programming centers is also coming back and there were new orders for the SentriX.
Demand from Europe remains weak as a result of the war.
Data I/O (DAIO) is the market leader in programming, selling machines that put data on chips before they go into stuff. They sell to programming centers but most of it (58% of revenue in Q2/22) goes to the automotive sector, selling to almost all of the top OEMs.
The amount of electronics in need of programming is expected to grow at a CAGR of 12%-15% a year in automotive, giving the company a nice secular tailwind.
A couple of years ago they came up with a new device for secure provisioning, the SentriX, especially relevant for the security-sensitive IoT market. This got off to a slow start but it's now gaining traction after they changed the business model and made it a lot easier to operate.
They have 50 patents (20 for the SentriX), a strong balance sheet, and an installed base of 420 PSV systems that produce an increasing demand for consumables (31% of revenue in Q2/22) and services (15% of revenue in Q2/22).
The company has faced a very tough couple of years with a host of macro problems, like the pandemic, supply chain problems (especially in automotive), Chinese lockdowns and the war in Ukraine, and a strong dollar.
The cyclical upturn that seemed to happen a year ago but was cut short because of these macro problems, but in Q2 another episode of sunshine seems to break through the clouds, except in Europe where demand remains weak.
So their business is a lot stronger than the macro picture seems to indicate (apart from Europe), the automotive supply chains are improving and almost back to normal with chips production capacity shifting as other markets see diminishing demand.
FinViz
Financial results
Q1/20 Q2 Q3 Q4 Q1/21 Q2 Q3 Q4 Q1/22 Q2
Sales 4.8 4.7 5.9 4.9 6.0 6.7 6.7 6.4 5.0 4.8
Bookings 4.3 5.0 5.6 6.0 5.4 8.9 5.0 6.2 6.2 6.4
Backlog 2.3 2.8 2.8 3.9 3.0 5.0 3.3 2.9 4.1 5.8
Gros Marg 58.2 52.4 55 52.9 55.5 57 60.7 54.4 46.4 57.8
Adj. EBITDA -11K 23K 169K -194K 173K 597K 564K 117K -932K -64K
Bookings were above $6M for a third consecutive quarter, and the company won 6 new customers in Q2, testifying to strong underlying demand. Most bookings came late in the quarter, leading to a high backlog which management expects to clear by the end of Q3.
Therefore, management expects a significant improvement in financial performance in H2/22 and some $1M in order delays because of Chinese lockdowns will be cleared before yearend as well.
There was some success with the SentriX as they gained two orders and had another customer go into volume production (apart from an outright CapEx sale, the SentriX also has a per-use business model).
Data by YCharts
While Q2 isn't yet in the graph, it's notable the company hasn't been making any cash since 2018, but they were plagued first by a cyclical downturn and then by an assortment of macro problems. Fundamentally the company is better positioned than during the last cyclical upturn.
They also have a strong balance sheet with no cash and $10.3M in cash, management argues that they are the best-capitalized company in the business and that it is an important competitive advantage.
Valuation
There has hardly been any dilution, the share count went up from 8.2M to 8.6M in the past 5 years:
Data by YCharts