Data I/O Corporation (DAIO) Q2 2016 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the Data I/O Q2 2016 Financial Results Call. At this time, all lines are in a listen-only mode. Later, there we will be an opportunity for your questions and instructions will be given at that time. [Operator Instructions] And as a reminder, this conference is being recorded. I'll now turn the conference over to Jordan Darrow, Investor Relations. Please go ahead sir.

Thank you, and welcome to the Data I/O Corporation's second quarter 2016 financial results conference call. With me today are Anthony Ambrose, President and Chief Executive Officer 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, 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 these 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 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. Now, I would like to turn over the call to Anthony Ambrose, President and CEO of Data I/O?

Thank you, very much, Jordan. I'd like to comment on our 2016 Q2 performance and then turn it over to Joel for some more detail on specific numbers. 2016 second quarter highlights include our sales were up year-over-year and sequentially. The leverage in our model, both the operating income and the net income as well as earnings per share were also up sharply. Q2 bookings of $5.7 million were very robust and filed the strongest Q1 we've had in five years. We saw strength across the automotive sector, both in the OEM and programming center business. Over 50% of our bookings in Q2 were due to the automotive electronics market. We also saw continued strength in Internet of Things and chip scale packaging demand with repeat orders for the PSB7000 in chip scale package applications. Backlog remains at $2 million, same as at the end of Q1, which is a very solid start for Q3 On product developments, we recently released the LumenX programmer integrated into our PSV5000 automated programming system. This combination delivers a cost-effective automated programming solution with the ultrafast managed and secure programming from the LumenX. Now the award-winning LumenX programming platform is now available in the award-winning PSV7000 and PSV5000 automated systems and manual configurations. We're continuing strong investment in R&D with the emphasis on expanding our LumenX platform support and lower enhancements, managed and secure programming initiatives, and operational infrastructure in support of the automotive electronics and Internet of Things markets through our OEM and programming center customers. On sales and marketing in Q2, subsequent to the end of the quarter, we announced a five-year supply agreement with Bosch Car Multimedia with an estimated value of up to $9 million. Bosch managed a very thorough competitive bidding and analysis process where Data I/O won out versus our top two competitors, demonstrating very clear technical superiority. We won with our PSV7000 and LumenX technology, global support, and total cost superiority. We expect most of the systems from this agreement to be delivered in 2017 and 2018, but expect to ship some product starting in Q3. We also extended our global presence in the Asia-Pacific region, entering into a distribution agreement with First Technology China Corporation FTCL. FTCL is one of the leading integrated service and technology solution providers in the high-end electronics assembly and semiconductor industry in China with a very broad customer base. Upcoming, we'll also be exhibiting in the Netcom Shenzhen Tradeshow this August 30th through September 1st in China. Once again automotive, electronics, and the Internet of Things are rapidly growing industries and they are focus of our R&D and marketing activity. Automotive remains driver of growth for the next several years with Internet of things being our next wave of growth with chip scale packages and managed and secure programming. Our wins with the PSV7000, LumenX programmers, and at Boston in automotive electronics, reinforce our belief that we're on the front-end of a wave of new and exciting automotive infotainment and instrument cluster applications that favors Data I/O's approach to programming. Our wins in Internet of things chip scale packaging conform our market opportunity there. While we've talked about IoT for a while, we believe we're in the early stages still of the Internet of Things opportunity. We plan to service these markets directly through sales to OEMs as well as through their programming center and EMS partners. Quickly on the balance sheet, we completed a rights agreement amendment from our April 4th, 1998, our rights agreement and we issued a press release and 8-K on that filing as well. Please refer to the press release and Form 8-K filing for more details on that. And finally before I turn it over to Joel, I just want to remind everyone that our fundamental strategy for Data I/O remains the same. We're focused on our core business of programming, continuing to enhance, and extend our core platforms and programming technologies. We market and sell our products globally. We continue to lower our total cost structure overall and enhance shareholder value through intelligent M&A in return of capital. Let me now turn the call over to Joel Hatlen, our Chief Financial Officer for more detailed review of our numbers.

Thank you, Anthony. Good day to everyone. Revenues for the second quarter of 2016 were $5.8 million compared with $5 million for the second quarter of 2015. With the growth primarily resulting from the sales of our PSV Systems to the automotive electronics and Internet of Things markets as Anthony previously stated. International sales represented 90% of total sales for the second quarter 2016 compared to 80% in the second quarter of 2015. On regional basis, revenue increased in Asia 48% and Europe 27% and declined in the Americas 30% compared to the second quarter 2015. Adapters and consumable declined 6% to $1.2 million. Order bookings were $5.7 million in the second quarter of 2016 compared to $5.1 million in the second quarter of 2015. The variation in revenue percentages versus order percentages relate to change in deferred revenues, backlog, and currency translation. Backlog at the end of the quarter was $2 million compared to $1.9 million June 30th, 2015 and $2 million on March 31st, 2016. Deferred revenue at the end of the quarter was $1.1 million compared to $1 million on June 30th, 2015 and $1.2 million on March 31st of 2016. For the second quarter of 2016 gross margin increased in dollars due to the sales volume increase. Gross margin as a percentage of sales was 53.2 compared to 54.9 in the second quarter of 2015 with the decrease primarily due to a mix shift and less favorable factory variance. Operating expenses in the second quarter of 2016 were approximately $2.7 million in each of the second quarter of 2015 and 2016. In accordance with U.S. Generally Accepted Accounting Principles, GAAP, net income in the second quarter of 2016 was $444,000 or $0.06 per diluted share compared with net income of $100,000 or $0.01 per diluted share in the second quarter of 2015. EBITDA, earnings before interest, taxes, depreciation and amortization was $584,000 in the second quarter of 2016 compared to $197,000 in the second quarter of 2015. Equity compensation expense, a non-cash item in the second quarter of 2016 -- 2015 were $205,000 and $148,000 respectively. Adjusted EBITDA excluding equity compensation charge was $789,000 in the second quarter of 2016 compared to $345,000 in the second quarter of 2015. Please see our press release for discussion and reconciliation of these non-GAAP financial measures. We have net operating loss, NOL carryforwards 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 of these tax attributes. The company's cash position at June 30th, 2016 was $8.8 million with $3.7 million in United States and the balance in our foreign subsidiaries. The change in cash during the quarter primarily resulted from a working capital shift mostly to receivables. The company remains debt-free and has 7.978 million shares outstanding as of June 30th, 2016. The company repurchased approximately 31,000 shares during the second quarter for a total of approximately 74,000 shares year-to-date, totaling $172,000 with an average price of $2.33 per share under the 1 million share repurchase plan initiated during the first quarter of 2016. At this point, I will return the discussion back to Anthony.

Thank you very much Joel. At this point, I'd like to turn it over to the -- any questions from our listeners.

Thank you. [Operator Instructions] And we'll go first to Robert Anderson with [Indiscernible]. Go ahead please.

Good afternoon gentlemen and congratulations on a very good quarter.

Thank you. Bob.

I think what would be helpful is Anthony if you spend a little time trying to flush-out [ph] the growth opportunity in automotive. And I guess what I have in mind, a possible example is, if you looked at the car five years ago and you looked at the cars today and if you looked at a car five years hence how much -- how many chips, how much code, how much electronics would be involved, so we get a sense of the density of chips and code in automobiles.

Bob, let me try and do my best here on the call. I just I guess my response would be refer people to some of the materials we published in our most recent and previous investor update…

Presentation.

…presentations on our website. But your question is what's the trend in automobiles and how do we quantify that.

Yes.

So, let me take your answer first as more of a general case. There has been a very broad and well understood discussion in the business press, the technical press that automobiles are getting a lot more electronics. We've seen cases where they may go from 50 microcontrollers to hundreds of microcontrollers. I've heard couple hundred microcontrollers now per car and we expect that to continue over the next five years. The exact number will vary of course by the type of car, whether it’s a premium car, or a standard car, and also the geographical location. Western markets will tend to be a little bit more advanced than the emerging markets. But the general trend is for a significant increase in the total number of subsystems that require intelligence code and therefore programming. And that's a general trend. There's also a very specific trend that we've talked about before and I think was very important in the recently announced Bosch Car Multimedia win. When you talk about with car multimedia, we're talking about infotainment, navigation, dashboard controls, things like that and these systems have been fundamentally re-architected to systems that have a substantial amount of flash memory. That large flash memory array leverages the technology we build into our LumenX Processor -- Programmer rather. So, the code change in those new systems is highly disruptive and we talked about numbers like a 10,000 times increase in the amount of code that goes into one of these newer model infotainment systems versus a traditional car dashboard as an example. So, that will be a very important trend for us Bob. And I think the third one finally is the overall trend towards autonomous vehicles. You've heard a lot about this in the news recently, about how people should be operating them, or whether they are operating them properly. But the point is a number of these new electronic systems fall into what we call Advanced Driver Assist Systems, or the abbreviation ADAS. And these systems require substantial amounts of programming. They have been forecasted to more than double over the next five years, and again, I'd refer you to our Investor Relations update for some more detailed information and third-party forecasts there.

Okay. Thank you very much.

Thank you.

Thank you. Our next question will come from Jay Harris with Axiom Capital Management. Go ahead please.

Sort of continuing the thesis on the last question. There will be more automobiles, there will be more electronics for automobile, how does that affect the revenue expectations of the company?

So, I think we've talked about our market size doubling over the next five years based on the forecast that we look at for automotive, Internet of Things, as well as, a general conversion towards more factory automation globally. I think that's the market opportunity. It's up to us to get that. That means we have to win versus--

You're not really responding to my question. My question basically is do you sell more machines? Do you get a service revenue? How do the machines you're selling change as the amount of electronics per platform increases? I'd like a little color on all of that.

Okay. So, if you look at what we've done Jay, is we've completely updated the product line in the last three and a half years. So, now we have world-class handlers, we have world-class programming engines, we have a global support infrastructure. So, that means -- and if you look at the mix historically, we sell about 65% of our revenue as capital equipment, about 25% goes out as consumables, which include adapters to translate programming and very specific component to be programmed and then about 10% is software and services. So, in the short-term and medium-term, I don't think that will change fundamentally. Over time, it might shift a little bit, but that's the mix that we have today. So, to support more demand, we sell more systems. And then we sell more consumables and adapters as customers with new systems as well as customers with an installed base decide that they need to update those systems to support new products. Did I answer your question?

Yes, you did. Thank you very much.

Welcome.

Thank you. We'll go next to Walter Ramsley with Walrus Partners. Go ahead please.

Thanks a lot. Congratulations Anthony, Joel. That was a terrific quarter.

Thank you.

Thank you, Walter.

You bet. So, I've got a -- I guess my two questions to start with in any case, the -- I know this is more boring I suppose, but the non-automotive, non-Internet of Things business, the legacy business, can you just comment on that a little bit and describe for us if that's kind of holding steady or if that's declining or what kind of shape is that in?

So, when you say -- I'll reframe your question a little bit. When you just call legacy, we have a specific definition of legacy. We have a number of products that have been -- where we really don't sell the hardware anymore, but customers come back for software updates, new device supports, and things like that. It's under $1 million of our business and it's on a pretty predictable decline. Now, these are products that were designed in the 1990s to give you an idea of how old they are. And we expect that business continue to decline, it's still profitable for us to support that and we have customers that want us to support that. There are other businesses -- other segments that are not growing. We see the wireless market as being a smaller portion of our revenue. We talked about that on our call about a year ago and that's unfolding pretty much as we expected. That will not go to zero, but it just -- it's not growing. The market is maturing a little bit and we see opportunities for growth to be much better in automotive and Internet of things.

I'm sure -- I'm just wondering how much you have to kind of make up for from the -- if there is even a decline in those other areas. Is that something you have to compensate for or they kind of holding their own and you're just adding on top of that?

It’s a little -- it's going down in terms of a dollar volume year-over-year. The specific numbers would be -- is probably down a few points in terms of our overall total revenue from this time last year. So, we definitely to make up for it. It's not helping, but it's not hurting too much.

Yeah. Okay. Now, that's good. And the other question I have at least right now is the backlog. In the past few conference calls, you've talked about the model kind of shifting over to a book and ship arrangement and that backlog is pretty high. So, are the customers beginning to order ahead or are things changing there or do you -- is this just kind of temporary bulge in little less than littlest time goes on.

In general, I think $2 million isn’t bad at all. If you look what we just did in the $5.8 million, that's about little more than a third of the quarter, so that's about a month's worth of revenue. So, that's still consistent with what I'm calling a book and ship -- because we're going to have to book and ship two-thirds of a quarter, write a $2 million of backlog, $5.8 million of revenue. Now, it's obviously much easier to do that when you have $2 million of backlog than we started out the year below $1 million. But I don't think fundamentally that people are ordering any further in advance. In fact you can make the argument that they are expecting us to be able to be more flexible and turn business when they need it. I'll give you an example. We have one customer that is pretty good about forecasting. And they tell they need something that an order will be coming and then we get a call one day, says you know that order I told about, well, I'm going to give it to you today and I want it in a couple weeks, which is well inside our stated delivery time. But we try and maintain the flexibility to support those good customers wherever we can.

Okay. That's a good answer.

One comment that I would have is that the automotive businesses tends to be more predictable in terms of their schedule and alignment. They generally try and help us by sharing their forecast with us and occasionally, we can get more early purchasers where they have a stated delivery time that they want us to make sure we're going to meet. So, that has helped us. But when you look at our traditional business that we do with programming centers and electronics manufacturing services, the contract manufacturer, those guys generally have less visibility and can share less with us. So, know it's ones where we just have to be a little more reactive to.

Okay. Now I get it. So, I got a couple more questions. But I'll go back in the queue for the time being. Thanks.

Well, sir, there's no one else in queue at the moment. So, please continue.

All right. Thanks. So, the Bosch contract, obviously, that's a -- I mean a pretty gigantic victory on your part. I mean number one, congratulations, and based on the 8-K that you issued, I mean it's not in the bank obviously, but you're talking about $7 million and $9 million in total orders and based on your earlier comments, it sounds like most of that's going to happen in 2017 and 2018. Is that the way it's looking?

Yeah, based on the discussions with the customer, we believe that's where the bulk of the purchases will be. Based on also some of the conversations, we think we'll see some of the business in Q3. But in order to guide investors, I think it's more of a 2017 and 2018 number rather than -- it's not all going to hit at once -- for example this year. I just want to be clear about that with investors.

Well, that would be great I guess, but this looks pretty good the way it's shaping up. And in addition the foreign currency, did that have any impact on the numbers in the quarter and do you have any visibility in the future? Or do you hedge it all? Or what's the -- is that a factor?

Walter, it wasn’t a big factor this time because the euro for the most part has been fairly stable for us with regard to the second quarter results. We did see a little bit of stuff with the R&D in China, but it really wasn't a significant factor in our P&L for the quarter.

Okay. And the recent development where you installed the LumenX on the 5000, is that something that could generate a significant amount of orders right away or is that just kind of business as usual?

I think it's more -- it's not business as usual so much, but it's not something where you're going to see an immediate step function change in orders. What this does is it makes our latest programming technology more available to customers that have lower volume need. We've also announced that at the same time that we did we announce increased device support for the LumenX. So, it just it's -- continues the long-term pattern we have of moving the LumenX technology to be a bigger and bigger part of our overall business.

And then just one last one the Internet of Things, you kind of indicated that you're actually beginning to get some traction. I mean is that really starting to happen or is this sort of trials and like small amounts of testing? Is it still in the kind of preliminary stage or is it kind of going into mainstream business?

I think the -- it's definitely a mainstream business, but I've indicated I think we're still in the early part of the game on Internet of Things. What we talked about is we had some repeat business for our chip scale package customer using very, very small packages for a very specific application. The volumes on that obviously, if it's repeat business, just on that one application are good. So, I don't think we see all of the opportunities on Internet of Things by any means, but the ones we see we like and we just see more and more demand for small parts security solutions. We talked about managed and secure programming, I think that's going to become very, very important for Internet of Things and I think we're out of the height [ph] phase a little bit into the people demonstrating real business opportunity with IoT.

Okay. Well, Anthony and Joel, looks like -- well, the whole company really has created a very strong foundation and it's beginning to catch the wave as they say. So, congratulations.

Thank you.

Thank you much.

Thank you. And our next question is from George Melas with MKH Management. Please go ahead.

Hi guys. Good afternoon.

Hi George.

Hello.

I lost [ph] the beginning of the call, so I'm sorry, but I imagine you didn't discuss that. The question is sort of a more conceptual. How much -- can you assess what -- how much of your sales goes to replacement or replacement units to do work that actually is done right now by other machines, maybe your old machines or competitors' machine? And how much of it is for growth or additional capacity?

That's a really good question, George. I don't have a quantitative answer that I feel comfortable giving you on the call right now. I think I would say the majority goes towards a new application. There are some customers, for example, that would be replacing equipment. We saw some of that a couple years ago when, for example, the mandate to remove Windows 98 and Windows XP from environments necessitated an upgrade. But, in general, it's usually for new application. What we'll do is I'll have some more quantitative information for you on the next call if that all right.

That would be great. Okay, that's it from me. Thank you.

Thank you. And we have a follow-up from Robert Anderson with [Indiscernible]. Please go ahead.

Thank you. My question was on the Internet of things and has already been answered. So, I'm all set. Thank you.

Thank you. [Operator Instructions] We have no one else queuing up. Gentlemen, please go ahead with any closing remarks. Well, thank you very much. With no further questions, at this point, I'd like to thank everyone for joining and close the Q2 earnings call. Thank you very much.

Thank you. Ladies and gentlemen at does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.