Data I/O Corporation (DAIO) Q1 2015 Earnings Report, Transcript and Summary

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

Thank you, and welcome to the Data I/O Corporation first quarter 2015 financial results conference call. With me today are Anthony Ambrose, President and CEO of Data I/O Corporation; and Joel Hatlen, Vice President and Chief Financial Officer of Data I/O. Before we begin, I would 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 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 applied by 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, President and CEO of Data I/O. Anthony?

Thank you, Andrew. I will first comment on Q1 2015 and the overall market and then I will turn the call over to Joel Hatlen to discuss the numbers in more detail. Q1 was an exciting quarter for all of us at Data I/O. We are encouraged by returning the first quarter profitability for the first time in four years. Our new products continually growth with strength in automotive and European markets. There is strong secular trend in automotive electronics that demands significantly more programming capacity than is currently installed. The PSV7000 continues to perform above expectations and gain market share from customers in the automotive market. As I mentioned on the last call, we won eight of the top nine auto electronics customers, with the PSV7000 since its introduction. We are also making progress winning new business with the PSV3000 and sold multiple units in the 2015 first quarter. The PSV3000, which was designed to meet the need of Chinese and Asian local manufactures moving from manual to automotive programming, recently won the 2015 SMT China Vision Award for Device Programming as well as the 2015 EM Asia Innovation Award for Programming Systems. We are excited about these recent awards and our increased marketing presence in the region. Most recently, we announced the PSV5000, which will replace our PS388 system globally and offers customers up to 50% less costs for programmed part and the lowest total costs of ownership compared to competing products. Our balance sheet at March 31, 2015, remained strong with $8.9 million of cash, no debt and excellent liquidity. We had good inventory and cash management in the quarter. Overall, inventory was down $600,000 even as we prepared to launch new products. At the same time, we saw a continued to erosion of the euro versus the U.S. dollar and this had a significant direct impact on revenue and margins. We estimated about $400,000 impact to revenue and a several point impact margins as a result of the declining euro. We started our annual plan at about $1.24 to the euro and now anticipate a much lower exchange rate through the rest of the year. This will impact our model P&L and we will be updating that we are formerly [ph] shortly. I would also like to remind listeners who are in the Los Angeles area that we will be attending the B. Riley investor conference in May, we will be presenting on May 12th and a link to a live webcast of the presentation is available on our website. For investors attending the conference I am available for one-on-one meetings and we look forward to meeting you and telling you more about Data I/O's business and opportunities. Data I/O is committed to enhancing long-term shareholder value through multiple growth-oriented and objectives, including organic growth by increasing market share, which we accomplish through developing great new products and competing globally. We also look at inorganic growth opportunities at the right price, which can include accretive acquisitions, expanding in the market adjacencies and other activities. As we have done in the past, we will also consider returning cash to shareholders when it is appropriate and when we have a surplus of cash to support our organic and inorganic growth objectives. With that, I would like to turn the rest of the call over to Joel to talk more about the numbers. Joel?

Thank you, Anthony, and good day everyone. Revenues for the first quarter of 2015 were $5.9 million, up 23% compared to $4.8 million in the first quarter of 2014. International sales represented 93% of total sales for the first quarter of 2015 compared to 88% in the first quarter of 2014. On a regional basis, revenue increased in Asia 36%, and Europe 69% and declined in the Americas, 42% compared to the first quarter of 2014. On a product basis, the revenue increase in the first quarter of 2015 compared to the first quarter of 2014 was primarily due to Data I/O's automated PSV family including both, the PSV7000 and our new PSV3000. Sales were strong in the automotive markets. Order bookings were $5.2 million in the first quarter of 2015 compared to $5.8 million in the same period in 2014. The variation in revenue percentages versus order percentages relate to the change in deferred revenues, backlog and currency translation. Backlog at the end of the quarter was $1.7 million compared to $2.6 million on March 31, 2014 and $1.9 million on December 31, 2014. For the first quarter of 2015, the gross margin as a percentage of sales was 48.4% compared to 51.8% in the first quarter of 2014, with the decrease primarily due to foreign-currency rate fluctuations with a less favorable product mix as well as unfavorable overhead variances, particularly due to the inventory reductions. Operating expenses in the first quarter of 2015 were $2.6 million compared to $2.9 million in the first quarter of 2014, reflecting both, the impact of foreign currency rate changes, and spending controls. In accordance with the U.S. GAAP, net income in the first quarter of 2015 was $49,000 or $0.1 per share compared with a net loss of $343,000 or $0.4 per share in the first quarter of 2014. EBITDA that is earnings before interest, taxes, depreciation and amortization, was $175,000 in the first quarter of 2015 compared to a loss of $178,000 in the first quarter of 2014. Equity compensation expense, a non-cash item in the first quarter of 2015 and 2014, was $90,000 and $85,000, respectively. Adjusted EBITDA, excluding equity compensation and the 2014 restructure charge, was $265,000 in the first quarter of 2015 compared to a loss of $80,000 in the first quarter of 2014. Please see our press release for a discussion and reconciliation of these non-GAAP financial measures. We have net operating NOLs in carry forward of approximately $19 million as well as other credit carry forwards in the U.S. that are available to continue to offset our future U.S. net income and we will continue to analyze and manage taxes to take advantage of these tax attributes. The company's cash position as Anthony said at March 31st was $8.9 million with $3.2 million in the United States and the balance in foreign subsidiaries. The company remains debt-free and has 7,864,000 shares outstanding at March 31, 2015. At this point, I will turn the discussion back to Anthony.

Thank you very much, Joel. At this point, operator, I would like to open up the call to questions from our callers.

[Operator Instructions] Our first question comes from line of Arthur Winston from Pilot Advisors. Please go ahead.

Okay. Good quarter. Anthony, I wonder if you now think that the ultimate market for the PSVs is an access of the $10 million that you quoted a couple of times. It seems like you are doing at a more rapid pace and the market is probably - it could be bigger than you originally anticipated?

Hi, Art, and thanks very much for the congratulation on the quarter. When we looked at the market for the PSV3000 as we have talked about several times, we are trying to find customers primarily in China and the rest of Asia that had been buying from competitors, because they did not see a cost-effective product from Data I/O in the price band that they were willing to pay. We estimated that $10 million based on what we knew about what competitors were doing, what customers have been talking to us about and things like that. Relative to China and Southeast Asia, I think that $10 million number, Art, is still roughly right. It could go up over time and again we rely on our feedback from our customers deal flow and things like that, so there is not really a robust regular way of updating that number. We continue to work hard; we continue to see good deal flow there. That is a very competitive part of the global market and we have to take that into account as we look at the deals, but I think at this point, I am still comfortable with the $10 million, and if we think it changes materially, we will let you know.

I just have one more question. On the big gears it is 7000, a more expensive unit, will be shipments in 2015 be bigger than '14? Would it be the same and it is a corollary that question, what is the possibility now of penetrating to great extent the industrial market outside of automotive - question?

Okay. On the first one, we generally do not give guidance on the future. We have a plan for the 7000 that has been put in place and we are executing to that as we showed in the first quarter. As we mentioned, the automotive market is our strongest market and the PSV7000 is ideally suited for the automotive market. It provides a lower total cost of ownership than any competing product and we had very, very good success with our automotive customers since the product was introduced and including Q1. As we go forward, I think that the biggest growth opportunities for us continue to be in automotive and the so called Internet of things portion of the industrial market. The 7000 brings some great capabilities for Internet of things as well, primarily around small parts handling, the throughput and again being the most effective from a total cost of programming standpoint, so those are the two areas that I would expect to be most exciting for us as we go through the year, that is what we are seeing from not only our Q1 results, but also what I see in terms of our sales funnels going forward.

We do have a question from the line of David Kanen with Aegis Capital. Please go ahead.

Good afternoon guys, congratulations. Nice job.

Thanks, David.

Okay. Several questions, first, you said you sold multiple units of the PSV3000. Can you quantify what percent of revenue it was and what is the average selling price for a 3000?

Dave, we have not broken out into the percentage of revenue. That is going to be sold at a lower average selling price than we would have on the PSV7000. I do not know that I want to go into too much detail on exactly what the ASP is on that particular product and on these deals from primarily a competitive standpoint. We do give ranges of our selling prices on those systems in proxy materials in the 10-K, so I would refer you to those.

[Operator Instructions] We do have a follow-up question from the line of David Kanen with Aegis Capital. Please go ahead.

Okay. Sorry about that. On the PSV5000, can you give us a little bit more color on that? I know it is a replacement to the PS388. Is this going to be an incremental opportunity and tell me what price point roughly this product is at and if this is an opportunity again for incremental growth? Then a follow-up for Joel, I know Q1 historically has been a quarter where we have got some one-time expenses are listing fees audit then some trade shows up. Was that the case this year and should we expect OpEx to come down, sequentially?

All right, so I will take the first one and then I will let Joel answer the second one. David, I think you highlighted correctly the PSV5000 fits the segment of market that is currently occupied by the PS388, there are some benefits with the 5000. It's a little bit faster than 388. It is obviously a much newer platform, so it is a little bit simpler to build for us, but you should view it as a product that is in a segment that was already served by the 388. What it does is, allow us to simplify our manufacturing a little bit and be in a situation where I think we can be even more competitive globally, but it is largely already in that segment I think you should view it from a standpoint of replacement of the 388. The 388 won't go away overnight, we saw customers that we will be ordering that and taking delivery going forward, but the 5000 will fit into that marketplace. On the spending question, I will turn it over to Joel.

Hey, Dave. I think that what we look at for this year, I think, we are going to see that we did an especially good job of controlling spending in the first quarter, so you are not going to see the kind of dip that we traditionally have had. We did have some one-time things, but we actually saved quite a bit of engineering dollars this quarter and marketing dollars that I anticipate that will kind of go back into the spending piece in the second quarter, so it should probably stay pretty close to the same.

[Operator Instructions] We do have a follow-up question from the line of David Kanen with Aegis Capital. Please go ahead.

Okay. In the prepared remarks you alluded to the effect of the dollar versus the euro. Can you give us some color for the balance of the year on some of the things that you are doing specifically to reduce COGS and should we be able to, with some of the initiatives that you are putting in effect to drive gross margins higher, and therefore hopefully get a fatter operating margin?

Yes. Let me start with that and then, Joel, if you have any other items, we can talk through that. Yes. We try to quantify that, Dave, in the first quarter obviously we are pleased with Q1, but there was a pretty heavy currency headwinds baked into Q1. I really can't remember the time where I saw our largest market currency change that fast. We did a good job managing through that transitionary period, and I think we are looking at a number of ways. Obviously, anywhere we have suppliers that are doing business in the euro; we are looking to get some adjustments in our pricing. That will be number one. Number two, we are also looking at ways to talk to control rather some of our real estate costs. We alluded to that in the Q4 call in February. We are in advanced stages of trying to update some of our lease agreements. Nothing to announce yet, but when we do, you will probably see that as an 8-K, and continue to look at overall cost savings wherever we can. As I indicated in the call in February, this is an ongoing continuous improvement activity and it is something we have to do, the euro probably brings that into sharper focus, but continuous cost improvements is just something that is part to running this business.

I think I would add to that, but at least in the COGS area, we had a fairly large $600,000 roughly inventory reduction during the quarter and that loaded on a bunch of capitalized overhead into the P&L this quarter, which we typically would do not expect to reoccur going forward. I would actually think that we might actually build a little inventory as we get to the end of the second quarter. Based on that, I would anticipate that a couple of points of margin would come back just as a result of that activity.

Then of course, the final gross margin depends on mix and factors and where we sell the product, whether it is distributor sales or direct. Okay. Thanks, Joel.

[Operator Instructions] We do have a follow-up question from the line of David Kanen with Aegis Capital. Please go ahead.

No one else is going to ask questions. I guess so I will take the opportunity to monopolize. I appreciate it. On the PSV7000, clearly has been a product that has helped you to gain market share from your competitors. It is quite impressive. How do you feel, Anthony, about the PSV5000? Is that a product that potentially can help you gain share. While I know it is an upgrade or replacement for the 388, if it helps you to gain share, obviously, we are getting incremental revenue so tell me what you are feeling is on that?

Yes. As I indicated it is primarily a replacement for the 388. I do not want to split hairs, Dave, obviously if we were competitive then we can gain share. The whole focus of our product development and our sales thrust is to build great products that are extremely competitive that allow us to be in more deals in a competitive manner globally and close them in a higher rate and therefore grow the company. The 5000 will allow us to do that as well. Now, again where the 7000 is really targeted to automotive. I think the 5000 will help us with the Internet of things in industrial market. It is really ideally suited from a capacity and price point perspective for a lot of those opportunities. Again, I am excited about the product and we will see that unfold over the balance of the rest of the year. As it improves our competitiveness, it should give us the opportunity to grow.

Okay. I forgot to ask before adapters. How much did you do on adapter sales in the quarter?

Joel, I will let you take that one.

Adapter sales were approximately $1.3 million and that is down just a little bit from last year. They were 86% of last year sales.

Okay. Thank you.

[Operator Instructions] With that, it does appear there are no further questions from the phone lines. Please continue.

Okay. Thank you very much operator. With that I would like to thank everyone for joining the call and we will conclude the Data I/O Q1 2015 earnings call at this time.