Data I/O Corporation (DAIO) Q4 2014 Earnings Report, Transcript and Summary

Ladies and gentlemen thank you for standing by. And welcome to the Data I/O Fourth Quarter and 2014 Financial Results Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be provided at that time. [Operator Instructions] As a reminder, this call is being recorded. I would now like to turn the conference over to our host, Mr. Andrew Berger. Please go ahead sir.

Thank you and welcome to the Data I/O Corporation fourth quarter 2014 financial results conference call. With me today are Anthony Ambrose, President and CEO of Data I/O Corporation; and Joel Hatlen, Vice President and CFO of Data I/O. Before we begin, I’d like to remind you that statements made in this conference call concerning future revenues, results from operations, financial position, economic conditions, product releases and any other statements that maybe construed as a prediction of future performance or events are forward-looking statements which involve unknown and known risks, uncertainties and other factors, which may cause actual results to differ materially from those expressed or applied in such statements. These factors include uncertainties as to the level of orders, ability to record revenues based upon the timing of product deliveries and installations, market acceptance of new products, changes in economic conditions and market demand, pricing and other activities by competitors and other risks, including those described from time-to-time in the Company’s fillings 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. At this time, I would like to turn the call over to Anthony Ambrose, Data I/O’s President and CEO. Anthony?

Well, thank you very much, Andrew. Before I begin my formal remarks, I’d like to take a moment just to acknowledge presence of Joel Hatlen, as many of you know Joel suffered a stroke early in the year and I pleased to have Joel joining us on today’s conference call. I’d like to talk a little bit about 2014, the fourth quarter and then the full year. In the fourth quarter we – people continued the strong momentum on our new products that we experienced throughout the year. We won our first PSV3000 customer in China in the industrial market, combination of Data I/O’s programming, quality and reliability at an attractive price point, enabled us to win that deal. We also had five PSV7000 wins in automotive, capping off a fantastic year for us in that market. Asia and Europe were particular strong for us in Q4 for the PSV7000. Looking towards the full year in 2014, the highlight of the year was our return to profitability and a 17% increase in revenues overall driven by the market acceptance of our newest products. This excellent result was accomplished because of our turn around efforts we started over two years ago, which focused us on new product developments, controlling costs, expanding our deal flow and executing a concise operating strategy. We delivered comparable net income and better earnings per share versus 2011 on about 80% of the revenue from that year. PSV7000 significantly exceeded our plan winning eight of the top nine automotive electronics companies, since the product was introduced in September 2013. The PSV7000 has exceeded our expectations and is the fastest ramping product and most successfully automated android [ph] Data I/O has developed today. Automotive electronics are growing rapidly, as a result of the new instrument clusters and infotainment systems that are ideally served by the PSV7000. The merits for the PSV7000 in automotive are clear in each and every win, better small parts handling, better overall performance and superior total costs of ownership. PSV3000 was introduced in July 2014, I’m pleased to announce the one of our first customer on the fourth quarter 2014. The PSV3000 serves new markets and customers for us which have very different programming requirements in our other product categories. The market size for the PSV3000 is about as we expected around $10 million of new opportunities that we were not previously serving with our existing product line. As we look at this market, there’s more indifferent competition in that market, than our traditional markets. We’ve already demonstrated we can win. Our China cost structure helps us compete in this market against primarily local competition. The PSV family overall increased our automotive revenue sharply in 2014. As planned manual units were down significantly in 2014 versus 2013 and legacy revenues continued to decline as forecasted about 18% to 20% annually. Overall we’re very effective in translating the market share gains, new product momentum and cost reductions into operating profits. Top line revenue growth contributed significantly to bottom line operating profits, as we realized a full year savings in restructuring actions we took in 2013, as well as the strong ongoing focus on driving cost efficiencies. When you compare year-over-year, we had a little bit more in the $3.2 million in revenue growth from 2013 to 2014. And yet we realized a little bit more than $3.6 million in improved net income. After adjusting for restructuring charges in 2013 we’ve had about 80% of the revenue gains year-on-year flow through to operating profits. The results in 2014 were very strong we could not have achieved the success without our team’s strong efforts over the past two plus years. Looking forward to 2015, the fundamental strategies for Data I/O remain the same. Number one, we are going to focus on our core business of programming. Number two, we continue to innovate with exciting new products. And three, we proactively manage our total cost structure. As we indicated in the Q3 call, the long-term growth trends in the industries we serve are positive. Market research from IC Insights is forecasting 40% growth in 32-bit microcontroller units and 20% to 50% growth in Flash Memory units over the next three years. Automotive Electronics and the Internet of Things market categories are rapidly growing industries, which complement in overall increase in electronic content in our other industry verticals. Our recent wins in the automotive industry with the PSV7000 reinforced our belief, that we’re the beginning of a wave of new and exciting automotive infotainment and instrument cluster applications that favors Data I/O’s approach programming systems. In other terms, we are continuing to see automation replace manual programming in most global markets. We also see customers very focused on reducing the total cost of programming and this creates opportunities for us versus outsourcing and other forms of programming solutions. Our sales funnel is at the highest level spending three years and we continue to pursue more opportunities than we’ve had in the past. Fluctuation in currency exchange rates will have an impact on revenues and margins this year and we will have to respond accordingly. We will see discipline in our approach and we will not sacrifice market share for margins. Going forward, we expect automated programming systems to continue to represent a larger portion of the overall revenue mix with declines in manual and legacy systems. Based on our current sales expectations, gross margins will be roughly flat with continued cost reductions offset by currency impacts. Now we modeled this in about a $1.24 to the Euro and we are currently trading about a $1.13 to the Euro. So we have to keep that in mind, as well. By far the largest factors in gross margins are product mix and overall factor utilization. We expect selling to be slightly higher due to increases in marketing activities and investor outreach programs, as well as forecast in sales commissions and continued investment in R&D. Similar to 2013 and 2014, our R&D spending will yield results, as we plan to introduce multiple new products and enhancements throughout 2015. We’ve also initiated a process to reduce our ongoing operating cost significantly by 2017 primarily through real estate manufacturing materials cost reductions and other operational efficiencies. This will not be a headcount exercise but focused on the areas I have mentioned earlier. We have more to say about the details of this as year progresses. And finally we’ve grown faster than our industry has in the past two years. We continue to believe that our industry will benefit from impulsion [ph] consolidation and we remain focused on looking for the right opportunities to continue that consolidation. With that let me turn it over to Jo Hatlen, Chief Financial Officer for more detailed review of our numbers. Jo?

Thank you, Antony. Good day to everyone. Revenues for the fourth quarter of 2014 were $5.3 million, up 59% compared with 30 – with $3.3 million in the fourth quarter of 2013. International sales represented 90.2% of total sales for the fourth quarter, compared to 79.8% in the fourth quarter of 2013. On a regional basis, revenue increased in Asia, a 126%, Americas 53% and Europe 34% compared to the fourth quarter of 2013. On a product basis, the revenue increase in the fourth quarter of 2014 compared to the fourth quarter of 2013 was primarily due to Data’s automated PSV family, as well as flash pack. Revenues from adaptors, a consumable were up 48%. Order bookings increased 44% to $5.4 million in the fourth quarter of 2014, compared to $3.7 million in the same period in 2013. The variation in revenue percentages versus order percentages relate to the change in differed revenues and currency translation. Backlog at the end of the quarter was $1.9 million on both December 31, 2014 and 2013. For the fourth quarter of 2014, gross margin as a percentage of sales was 55.1%, compared to 44.3% in the fourth quarter of 2013. With the increase primarily due to higher factory utilization from increased sales volume and a more favorable product mix. Operating expenses in the fourth quarter of 2014 were $2.6 million, compared to $3.1 million in the fourth quarter of 2013, where the fourth quarter of 2013 amount includes $571,000 of restructure and impairment charges. In accordance with U.S. GAAP, net income in the fourth quarter of 2014 was $349,000 or $0.04 per diluted share, compared with a net loss of $1.6 million or $0.21 per share in the fourth quarter of 2013. EBITDA was $429,000 in the fourth quarter of 2014, compared to a loss of $1.5 million in the fourth quarter of 2013. Equity compensation, a non-cash item in the fourth quarter of 2014 and 2013 was $99,000 and $116,000 respectively. Adjusted EBITDA, which excludes equity compensation and restructuring charge, was $529,000 in the fourth quarter of 2014, compared to negative $880,000 in the fourth quarter of 2013. For the year ended December 31, 2014, net sales were $21.9 million, up 17% compared with $18.7 million in 2013. International sales were 90.4% of total revenue, compared to 87.5% in 2013. For the year 2014, bookings were $22.8 million, up 17% compared to $19.5 million in 2013. This increase was primarily due to sales of the new PSV family. For the year 2014, net income was $1.1 million or $0.14 per diluted share, compared to a net loss of $2.6 million or $0.33 per share for 2013. It’s great to report achievement of the turnaround on profitability for 2014. For the year 2014, gross margin as a percentage of sales was 53.9%, compared to 50.8% in 2013, primarily again due to sales volume related higher factory utilization and a favorable product mix. For the year 2014, operating expenses excluding the restructure and impairment charges were $10.7 million, compared to 2013 were down $259, 000 with the decrease primarily due to restructure actions, marketing trade to our costs offset impart by higher incentive compensation. For the year 2014, EBITDA was 1.5 million, compared to an EBITDA loss of 2.1 million in the year 2013. Equity compensation expense in 2014 and 2013 was $400,000 and $423,000 respectively. Adjusted EBITDA excluding equity compensation and restructuring charge was $2 million in 2014 compared to a loss of $471,000 in 2013. Please see our press release for a discussion and reconciliation of these non-GAAP financial measures. We have a net operating loss NOL carry forward of approximately $19 million, as well as other credit forwards in the U.S. that are available to continue offset our future U.S. net income. And we will continue to analyze and manage taxes to take advantages of these tax attributes. The Company’s cash position at December 31, 2014 was $9.4 million with $2.6 million of that in the United States and the balance in foreign subsidiaries. The company remains debt free and it has 7,861,000 shares outstanding at December 31, 2014. At this point I will turn this discussion back to Anthony.

Well thank you Joe. At this point, I’d like to turn it over to the operator and see if we have any questions. Operator? At this point, operator I’d like to make sure if you have any questions. We will open it up for Q&A.

[Operator Instructions] Our first question is from the line of David Kanen with Aegis Capital. Please go ahead.

Good afternoon, guys. Congratulations.

Thanks, Dave.

I wouldn’t just like the highlight Anthony, you and your team so far have done a wonderful job and it seems as though we’re pointed in the right direction for the future. Also Joe, welcome back best wishes for a speedy recovery.

Thank you, Dave.

You, welcome. So first question is, what where adapter sales for the quarter.

Joe, you want to take that one?

Sure. Let’s see. Adapter sales were almost $1.8 million.

Okay. And then in the press release you look to investing an additional new products or growth opportunities. Do you expect incremental to the PSV3000. Do you expect any other new product releases this year?

Yes.

You do, okay. Are these new markets does this expand or TAM or this is in an area where we have already presence?

Dave, I don’t like go into too much details you know about unannounced products on the earnings call. I think, I just has [ph] affect our new products and technologies will address both existing markets and they have the potential to broaden our reach to customers we’re not currently serving.

Okay, excellent. And then Joel how much of the $0.1 million in EBITDA for the quarter was U.S.?

I don’t have that breakdown. We had a very good Asia and European sales but most of those are actually sold in U.S. dollars via Data Corporation to our distributors. So breaking that down just U.S. revenues our U.S. only revenue from U.S. customers was basically 10% of revenue and you can pretty much just treat that as a straight allocation to the bottom line.

Okay and our next question is from the line of Michael Potter with Monarch Capital. Please go ahead.

Hi, guys. Congratulations on a great turnaround this year. And Joel, also I want to mention it’s good to have you back.

Thank you.

Just one quick question, you’ve been able to, I guess, how many new customers did we sign up in the auto industry and particular for 2014.

Michael, I have to get you a more definitive number on that. On the auto industry, I will say this we won eight of the top nine on the PSV7000. It doesn’t mean we can’t keep winning those customers, that represents our first system and these companies have a lot of plans and they may need more than one system at a plant. Several of those wins were customers that had most recently purchased competing products. We have a couple of locations, especially in Asia, where we wanted the PSV7000 add customers that had most recently purchased a system that was not a Data I/O system. And when we look at the win backs for the year, at least five in the auto industry, the pattern is pretty clear. They look at our products, they understand Data I/O and when they run the numbers on the PSV7000 they find they can do with one PSV we would take two or three systems to do with the – over the competitors products. And it’s 40% or 50% better on a total cost model than the competition. So it becomes relatively straight forward decision for the customer once they see those numbers.

[Operator Instructions] Our next question is from the line of Robert Anderson with Penbrook. Please go ahead.

Yes, good afternoon gentlemen and Joel it’s great to have you back.

Thanks Bob.

Nice quarter and nice turnaround. Couple of questions for you guys, Anthony what do you think is your best use of cash and then spend a little time just describing in further detail the currency effects of the Euro versus U.S. dollar.

Okay, I probably take the second question first Bob. If we look at our numbers last year we will probably about 39% Europe much of that in the euro. And so obviously the weakening of Euro versus the dollar is negative for us. We’re somewhat hedged with the fact that we have people in Europe and we buy some components from European suppliers, but on balance that’s a negative for us. So we just have to be very careful about that, be intelligent about our pricing, because I mentioned earlier we will prioritize maintaining market share over gross margins if it comes to a choice of those two items based on currency. The second one on cash we like to get more cash just as the fundamental strategy, if you sit thinking do we have more enough cash now to begin thinking about the [indiscernible], I’m not quite there yet, the model I like in the industry is you see somebody like the Teradyne talk about the need to keep about a year of operating expenses and cash that model seems to make sense to me. We’re not quite there yet, and for us also we have mix issue, as Joel indicated we have about 25% or maybe 30% of the cash in the U.S. and rest oversees and that - I would like to have a little bit more of the cash domestically. So there’s no change in our thinking right now on cash or returning cash at this point. If the numbers change materially higher, then we’ll take a look at that.

One other question comes to mind, are there I think you may have hinted it this in your earlier remarks, is there any opportunity for consolidation with the industry in the form of making an acquisition or something like that?

Bob, I think as I have indicated I think our industry does need to consolidate. I indicated that for, I don’t know several quarters at least maybe longer, you know our strategy is to help make it easy for other people to decide to consolidate by gaining market share. And if they want to talk, we’ll be happy to talk. But I do think that efficient nature of our industry is such that we’ll benefit from consolidation.

And we have a follow-up question from the line of David Kanen with Aegis Capital. Please go ahead.

Okay in two parts. Anthony over the next year or two, what markets do you think can drive incremental growth on top of the momentum that you’ve seen from automotive? And then can you just comment on momentum in orders for January and February since we’re two-thirds of the way through the quarter, if there was a continuation if you still feel good about things tracking in Q1?

Okay, I think in general, I think automotive has further to run Dave. And that’s been solid for us, I think, that can continue to be solid. This so, called Internet of Things market is really at the front end of a very, very fundamental change in how systems are produced and architected and that will drive disruptive growth in programming demand. On a more to say about these automotive infotainment systems through the quarter, I’ll more to say on Internet of Things, but those are probably two disruptive areas in terms of business that might become available that was not previously available to us. I think there’s also opportunities for market share gain again in wireless and consumer, both through our recently announced products and continued sales push. And I think there is opportunities in all those areas. It’s a little bit earlier to talk about Q1. I’m actually down here the ApEx Trade Show in San Diego as we speak and Chinese New Year folks will be coming back next week. So I’ll have a little bit better feel for it. As always in Q1, at March really will determine the success of the quarter and I would expect that to be the case this year, as well.

Okay, thanks, good luck.

And there are no further questions in queue at this time. Please, continue.

Okay, if there are no further questions, I’d like to thank everyone for joining us here on the conference call. And at this time, operator, I’d like to conclude the call.