Data I/O Corporation (DAIO) Q4 2015 Earnings Report, Transcript and Summary

Welcome to the Fourth Quarter Financial Results for Data I/O Corporation Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Mr. Andrew Berger. You may begin.

Thanks, Lucia, and welcome to the Data I/O Corporation fourth quarter and year-end 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'd like to remind you that statements made in this conference call concerning future revenues, results from operations, financial position, economic conditions, product releases, expectations for market expansion, 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 levels 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 filings on Form's 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 will turn the call over to Anthony Ambrose. Anthony?

Thank you, Andrew. I would like to comment on 2015's fourth quarter and full-year results and our outlook on the overall market. And then I will turn it over to Joel Hatlen for some more detail on our specific numbers. Our 2015 fourth quarter highlights include a major LumenX Programmer win in automotive versus our top competitor. At the Productronica Show in November, we also won the global SMT award for our LumenX Programmer technology against a full slate of industry competitors. We received additional capacity purchases in the fourth quarter from our previously announced Internet of Things win. Our operations delivered very strong performance to ship backlog and deliver on deferred systems revenue and collections. However, we also experienced a lengthening sales cycle and push-outs since potential systems orders from Q4 into 2016 which is reflected in the bookings total of $4.1 million for Q4. Looking at 2015 as a whole, I'm pleased with our progress in several important areas. Our growth in automotive continues since eight of the top nine automotive electronics companies and five of the top five automotive programming centers are using Data I/O equipment. Automotive electronics are growing fast with new instrument clusters and infotainment systems that are ideally served by our products. Automotive was up 19% year-over-year and now represents 39% of our orders. We also believe substantial portion of our programming center customers serve the automotive electronics industry. Number two, is growth in Internet of Things. Our Internet of Things applications demand security implemented through very small prices. During 2015, we had multiple IoT wins and demonstrated breakthrough wafer level chip scale packaging programming performance. Chip scale packages are very, very small devices with special handling challenges. In 2015, we had a marquee win for programming of a very small CSP device supporting a global brand. This customer added capacity in the fourth quarter and is forecasting additional capacity growth in 2016. Third, would be our growth in new products. We introduced the LumenX Programmer with breakthrough performance for very large MMC flash devices. We also introduced the PSV5000 automated system. Over the past two-and-a-half years we completely overhaul the automated handler product line to provide better, faster systems at lower cost. Our customers have noticed, in 2015, 69% of our system orders were based on the PSV system or LumenX; this is up substantially from 2014, and essentially zero in 2013. The bulk of our systems revenue is coming from products introduced in the past two-and-a-half years and we expect this percentage should grow in 2016. Number four, the strength in Asia, including China. We had our best China performance nearly 10 years in 2015. This is due to our product mix and selling efforts. The PSV3000 opened up new markets for us at the low-end and we took full advantage. And finally, our operating model performed despite a very extreme currency environment. The U.S. dollar was up about 20% on a trade weighted basis in 2015. Since we export nearly 90% of our products, we had to execute extremely well just to maintain our margins and revenue. Looking forward to 2016, the fundamental strategy for Data I/O remains the same. We focus on our core business of programming continuing to enhance and extend our core platforms and programming technologies. We market and sell our products globally and we continue to lower our total cost structure. And finally, we enhance shareholder value through intelligent M&A and return of capital. Automotive electronics and the Internet of Things are rapidly growing industries now the focus of our R&D and marketing activity. Our wins with the PSV7000 in automotive reinforced our belief that we are on the front-end of a wave of new and exciting automotive infotainment and instrument cluster applications that favors Data I/Os approach to programming. Our wins in the Internet of Things chip scale package and variable devices markets confirm the market opportunity for us in IoT. But we have talked about IoT for a while we believe we are in the very early stages of the opportunity in that market. We plan to service these markets directly through sales to OEMs as well as through their programming center and EMS partners. We are continuing to see automation replacing manual programming in most global markets. Cost and quality considerations are driving this change. Our PSV3000 and PSV5000 systems directly address this opportunity. Going forward, we expect automated to represent a larger portion of the overall revenue mix for Data I/O with declines in manual and legacy systems. Based upon available industry forecasts, we forecast that our served available markets can double in next five years, led by automotive and the Internet of Things. And our current sales funnel is strong and we have set targets for double-digit bookings growth in 2016. We expect bookings to exceed revenue in the first quarter as backlog and deferred revenues are at unusually low levels entering 2016. Turning to our cost expectations, we expect gross margins would be slightly up at our model mix for the year. By far the largest factors in gross margins are product mix and factory utilization. We assumed that one euro equals $1.08 for this plan. We're forecasting a slight increase in our overall spending; our R&D spending will focus on enhancing current product lines, expanding LumenX support, and supporting the automotive and Internet of Things markets. We expect there will be about $200,000 higher depreciation and amortization expense in 2016 due to capitalizing some office build-out costs and support for demonstration systems. We are always looking at ways to reduce our ongoing operating costs. We targeted $1 million of non-headcount savings by the end of 2017 and we're about halfway to that goal. These reductions are primarily through real estate savings, manufacturing materials cost reductions, and other operational activities. This is not a headcount exercise. We continue to believe that our industry would also benefit from consolidation and continue to look for smart opportunities to do so. And finally, we have announced today that our Board of Directors is authorized to share repurchase program to buyback up to $1 million of stock over an extended period of time for four quarters. The program will be established under a 10b5-1 plan under the Exchange Act to maximize our flexibility to make purchases. With that, let me turn the call over now to Joel Hatlen, our CFO, for more detailed look at the numbers.

Thank you, Anthony. Good day to everyone. Revenues for the fourth quarter of 2015 were $5.0 million down 5.6% compared with $5.3 million in the fourth quarter of 2014. The decline was primarily due to the impact from and the translation of the stronger U.S. dollar compared to the prior period. As Anthony noted, on a product basis, increased sales for automated programming systems especially the newer PSV and LumenX offset most of the currency headwind. Revenue for adapters and consumable were down 20%. International sales represented approximately 90% of total sales for both the fourth quarters of 2015 and '14. On a regional basis, revenues increased in Asia by 52% while declining in Europe 28% and in the Americas 33% compared to the fourth quarter of 2014. Order bookings were $4.1 million in the fourth quarter of 2015 compared to $5.4 million in the same period in 2014, a decline of 24% as previously discussed by Anthony. The variation in revenue percentages versus order percentages relate to the change in deferred revenues and currency translation. Backlog at the end of the quarter was $700,000 on December 31, 2015, compared to $1,900,000 on December 31, 2014. For the fourth quarter of 2015, gross margin as a percentage of sales was 55.9% compared to 55.1% in the fourth quarter of 2014, with the increase primarily due to a better product mix as well as better factor utilization largely as a result of our move back in the third quarter. Operating expenses in the fourth quarter of 2015 and 2014 were approximately the same at $2.6 million. In accordance with U.S. Generally Accepted Accounting Principles, GAAP, net income for the fourth quarter of 2015 was $338,000 or $0.04 per diluted share compared with net income of $349,000 or $0.04 again per diluted share in the fourth quarter of 2014. EBITDA earnings before interest, taxes, depreciation, and amortization, was $434,000 in the fourth quarter of 2015 compared to $429,000 in the fourth quarter of 2014. Equity compensation expense, a non-cash item, in the fourth quarter of 2015 and in 2014 was $105,000 and $99,000 respectively. Adjusted EBITDA excluding equity compensation, and the restructuring charge, back in 2014, was $539,000 in the fourth quarter of 2015 compared to $528,000 in the fourth quarter of 2014. For the year ended December 31, 2015, this is a full-year, net sales were $22 million increasing slightly compared with $21.9 million in 2014. The unfavorable currency translation of the stronger U.S. dollar versus the Euro negatively impacted 2015 sales by approximately $1.2 million. International sales were approximately 90% of total revenue for both years. For the year 2015, bookings were $20.3 million compared to $22.6 million in 2014. This decrease was primarily attributed again to the unfavorable currency related impacts as well as channel mix and decreased business from the wireless sector. We were successful in our revenue recognition efforts by delivering all of the systems that were booked during the year such that backlog was reduced to $700,000 at the end of the year as well as completing the delivery and acceptance provisions such that deferred revenue was reduced at 2015 year-end to $1 million from $1.8 million at the end of 2014. Other figures for the year 2015 and 2014 financial results are included in the press release. We have net operating loss NOL carryfowards of approximately $20 million as well as other credit carryforwards in the United States 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 if these are tax attributes. The company's cash position at December 31, 2015, was up to $11 million with $5 million located in the United States, and the balance in foreign subsidiaries. This reflected especially strong collection and we anticipate the working capital mix of cash to return to historical levels. The company remains debt free and has 7,944,000 shares outstanding at December 31, 2015. At this point, I will turn the discussion back to Anthony.

Thank you very much, Joel. At this point, I would like to open up the call for any questions we might have from our investors.

[Operator Instructions]. Our first question coming from the line of Marc Siegel with Northfield Capital. Your line is open.

Yes, hi, thank you very much Anthony and Joe, a few questions. Did you say that you're targeting double-digit revenue growth for this year for 2016?

Marc, what I said was that are we said our bookings target to be double-digit increase and then targets will pass along to our sales teams.

Okay. Couple other questions --

And Marc just to clarify I'm sorry to cut you off here, but bookings will ultimately translate into revenue it's a question of when, when we ship the system, when it gets accepted and so there is a timing on it, but it's an indication of where we see our sales funnel for the year.

Okay. So that's despite the fact that it sounds as if Q1 is going to be down pretty substantially versus the quarter you just reported?

I think in Q1 what we're going to see is we expect bookings to be ahead of revenue in Q1. As we talked about the deferred and the backlog are pretty low. So basically whatever we're going to get in Q1 has to be booked in Q1, shipped in Q1, and recognized in Q1. So we would expect bookings to exceed revenue in Q1.

Our next question coming from the line of Robert Anderson, Penbrook. Your line is open.

Yes, good afternoon, Anthony and may be you could review for us in the context of all the new products you brought out in the past two years, what's the size of your available market now and what do you think Data I/Os market share is of that total available market worldwide?

Yes, Bob, good to hear from you. So we've also put up an updated investor briefing package on the website and there is some material there that addresses this directly, but I'll walk you through it verbally here. If you look at our market, we had estimated it back in 2013 at about $100 million market which would give us about a 20% share, little bit less than that at the time. We believe that overall market can double over the next five years driven largely by Internet of Things and automotive electronics as well as some manual to automated conversion. We also reset the market a little bit based on the dollar strengthening. But in effect we believe our share right now is in the 20%, 21% range.

Our next question coming from the line of David Kanen with Aegis Capital. Your line is open.

Hi. Can you tell me the improvement in gross margins is this sustainable going into 2016 assuming the dollar versus euro remains at roughly the same level, I think we're about 1, 1 is about 1.1 now?

The answer is yes, I believe it's sustainable although the fourth quarter is typically a little bit better than other quarters from the standpoint that there is a lot of expenses that we just don't seem to have in the fourth quarter and we get a lot of favorable variances as we close out the year. When I think about the gross margin for this next year, I think that we're going to continue to see the favorable factory utilization with regard to having moved from the old building to the new ones this year where we substantially cutback the amount of space that we had devoted to manufacturing. And in fact, we moved in our Chinese office this past month and now have a substantially larger manufacturing presence there. But this really does reflect again the improved I'll call it further materials cost structures of just continually reducing the cost of our goods on our newer products as well as one of the biggest variables is the product mix each quarter as well as the channel mix each quarter.

[Operator Instructions]. Showing we have a follow-up question from Marc Siegel with Northfield Capital. Your line is open.

Yes, hi wondering why the buyback is being set only at a $1 million. And the reason I say that is I guess it's kind of obvious the stock is so cheap I mean if you were just to replicate last year's numbers in terms of EBITDA and EPS and netting out that cash, the company is like at six times EBITDA and like nine times earnings or something like that. When I buyback, when I just sort of park a bid there and buyback more stock?

Well Marc I think it's a good question. We've been hearing from investors for a while that Data I/O represents good value and we considered a share buyback. There are really two factors driving it. Number one, as Joel indicated, while cash is up probably equally important is that the mix of that as a percentage that was in the U.S. was up as well. So that gave us a little bit of flexibility. Not all of our cash is located in the U.S. so not all of our cash is available for buyback.

So let me ask you --

I’m glad to hear you think it's undervalued but I think we're starting with a $1 million and that will be spread out over roughly a four quarter period. We felt that was the right balance given cash, the need to fund the business and go forward.

All right. So with $20 million of NOLs and make it as a simpleminded question but I'm not a tax expert. Can't you just repatriate that $6 million that's overseas and now you have got $14 million of NOLs left, I mean how does that work?

That is a correct statement. However where our cash is in the China and Germany and Canada those all constitute dividends where there is withholding taxes from the local countries on that as well as limitations on how much it's brought back and is eligible for I'll call use of NOLs, if this is an alternative tax limitation. Anyway as a result of that it's not quite so simple.

So if you would have pay whatever you had to pay use whatever you could use on those and bring it back, how much cash do you really have net of that $6 million overseas, if you were to bring it all that?

We haven't done that recently. We've looked at many of the countries have essentially a 15%, 20% tax but it's something that we really have to do a personal from that.

Marc, you also have to carry in fact that we have operations in China that are fairly large and our operations as well in Germany. So those sites also have working capital needs, it's not just a financial cash discussion.

Our next question coming from line of Michael Potter with Monarch Capital. Your line is open.

Hi guys. Just a quick question, Anthony. You just mentioned that current market is about $100 million and you expect that to double over the next five years. So when if we have a 20% market share of that. I would expect for our revenue to begin to really ramp -- revenue growth to really ramp pretty soon. What do you -- when do you anticipate that we're going to start seeing I guess the tailwind of that market growth?

So Michael so as I indicated we grew last year a little bit. We probably had another $1 million that could happen with currency. And so if you look at the last three years we've had three consecutive years of revenue growth. So I think we are growing. As I indicated earlier we set out the targets that were double-digit increase in our bookings for the year and that's our plan for 2016. The drivers I think I have been pretty clear about this are automotive and Internet of Things. And our served market forecast is driven by the growth we see in those areas. We have the design wins now in automotive and in the Internet of Things to begin seeing very specifically what that opportunity looks like. So yes, we expect to grow.

We have follow-up question from Robert Anderson from Penbrook. Your line is open.

All right, yes Anthony, I didn't quite get my first question answered. You pointed out that the available market is roughly $100 million and your share is 20%. It wasn't clear to me how much is the $100 million growing and how much do you hope to increase market share; those are two variables may be you could clarify that?

Right. I think as we've indicated Bob we believe the available market for us can double over the next five years driven by Internet of Things and Automotive Electronics. And we've baked our growth in there to grow with those markets. We haven't issued a multiyear revenue target or forecast. What we've tried to do is for -- I think for the first time really share with you our thinking on how our markets are growing specifically the Internet of Things and Automotive. Okay and within that we also -- we think our wireless will go down a little bit, it was about 14% of our business last year and that probably continues to decline over time. We have some annual legacy business that drop. So again we'll grow in those areas that are growing. We'll probably get back a little bit in some of those legacy and manual and wireless areas.

And somewhat related to that to my first question, I think you noted that you had a fabulous year in Asia; I think you said up 52%. But I think if I got my notes right, Europe was down 28% and Americas were down 33% last year was it something like that?

I think that was the fourth quarter, Bob. I'll ask Joel then on the specific numbers of GO year-over-year, Joel, I think that was Q4 related?

Yes, that was.

All right. Well so my question is what's going on in Europe and the Americas that caused such a substantial decline or is it just a lot of quarter-to-quarter volatility?

I think Bob there is always a quarter-to-quarter volatility. I think for the year, we are pretty pleased with Asia. I think with the Americas, we were just generally not pleased with Latin American performance. I think that was a country specific certainly with Brazil and Argentina.

Yes well one can understand that. Sure. Okay.

Our next question coming from the line of David Kanen with Aegis Capital. Your line is open.

Just a question on I’m sorry comment on the remark from Marc Siegel. The EBITDA to enterprise value is actually 3.7 times so it's cheaper than some times. So the -- with the cash that we have now the enterprise value is like $6.8 million and I believe we did $1.8 million for the year. So I just wanted clarify this comment. So that being said if we continue to generate cash for the year my message to management and to the board is I would love to see you guys continue to buyback and creating value through reducing the shares. My question is in terms of the targets that you set double-digit bookings increase, is that somewhat based on what you're seeing here in the beginning of the year or it's just really a goal?

We set those targets Dave at the end of the year when we set up the annual plan and then I finalize the sales teams in January. But as I indicated we like our sales funnel.

Okay, good luck, good job and look forward to have the results turnout later in the year. Thanks.

Our next question coming from the line of George Melas with MKH Management. Your line is open.

I'm sorry -- I missed some of the prepared remarks, so I just have a question on LumenX. Is there -- does it increase your does it make you more competitive in the existing markets and existing application or does it actually sort of increase your TAM and make certain applications that you couldn't really serve that you can serve them now?

I think right now George certainly reflected in the 2015 results, LumenX allows us to compete much more effectively certainly in the automotive infotainment market and wireless. I'll give you an example. So the design win I mentioned versus our top competitor in the fourth quarter, it was a system for automotive infotainment. One of our systems versus one of theirs and it was just absolutely clear that LumenX was by far better valued from the customer both for what the capacity they needed right now and for when they would need to invariably add capacity as their product ramps. So it's very clearly right now driving competitive benefit for us in the markets that we serve.

Okay, great. And just a follow-up on that may be two quick follow-up on that, I think that there was one of the big three in the U.S. that you guys were not really selling to and think your major competitor down in Texas had that's what of a lock on that company. I don't know if you've been able to just selling to them or do you have some visibility into that. And the other one is the wireless market clearly your big customer from a couple of years ago is probably basically gone, do you see some potential growth in wireless with LumenX or is that sort of going to be a declining market?

George, we see wireless as a declining percentage of our revenue going forward. Partly because the -- who we have in our wins we're subject to the market share wins, if you will, in the consumer market. But as we go forward we will really have one very large Asian based customer in the wireless space and several smaller ones. But we did have a couple of good winds last year in I will call the second tier and most of the action there is in Asia but in terms of overall percentage of business we are betting on automotive and Internet of Things.

Okay great. And that that -- one of those -- one of the big three's in the -- are you working with all big three's or?

We're working with, we have eight of the top nine automotive electronics companies and they service essentially all of the top automotive nameplates and badges that you would recognize. The ninth company that we don't have is a Japanese based supplier to give you a kind of a better idea who is not in the list. But we think based on the conversations we've had with the various customers, where they're located, to whom they sell; it's hard to drive a part that doesn't have Data I/O in it.

[Operator Instructions]. Our next question coming from the line of Michael Potter with Monarch Capital. Your line is open.

Oh, God. My question was answered. Thank you.

Our next question coming from the line of Marc Siegel, Northfield Capital. Your line is open.

Yes, hi thank you. Just one last question about the cash, because you had mentioned that it's sort of artificially high due to some unusually accelerated receivables I guess. If we were to try to normalize that figure, would it make sense may be to take the Q3 number at the end of that quarter and may be just add Q4 EBITDA to that. So it's somewhere normalized may be $400,000 or $500,000 higher than it was at the end of the last quarter, I'm just trying to get some grasp but how overstated it is?

Yes it's hard for me to pinpoint exact cash number but somewhere in that $9 million range is where we've historically been for most of the last few quarters.

Our next question is coming from the line of David Kanen with Aegis Capital. Your line is open.

Anthony, can you give us some idea of some of the products in Internet of things that you guys are currently touching and on the opportunities that you see over the next two to three years?

Yes, Dave, I also refer everyone to the investor briefing. The problem with Internet of Things is it has quickly become Internet of Everything and then it loses relevance. But I actually found some good materials to one of our semiconductor partners in one of their briefings and I've included some of that in our briefing. I would like you to think of it in terms of two broad categories. On products that are already here today that's been rearchitected to communicate wirelessly and communicate with the cloud. So these would be things like watches, jewelry, glasses, electric sockets, slide switches, light bulbs things like that are applications that you seen for 20 or 30 days but just different now, they are connected. And then the second part would be new to world applications around usually there is a word smart in front of it, so a smart city, a smart home, smart healthcare et cetera. I think some of the best applications where we won; we talk about the fitness bands earlier in the year. And we've had some very interesting wins for our global consumer brand around some of the portfolio of these. And unfortunately I can't go into too much more detail other than that. But the capabilities there are really that the reason that's exciting for us is you have an installed base that represents billions or tens of billions of dollars of sales that are rearchitected that now require programming. And that's one of the reasons why we see the programming market size increasing in our forecasts. And the second part is then adoption is I will call them the way cool items, the more futuristic activities but there is a pretty good uptick there as well and you will see that with things again like the smart city and the smart home. So those are two of the big wins we've had so far, Dave. They're very nice wins, they're chip scale packages that require all the capability we have in programming and handling and global customer support. And we think it's the iceberg on Internet of Things.

I'm showing no further questions at this time.

Okay, with no further questions, I would like to thank everyone for joining us, and we will close the call this time.

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