Jordan Darrow - Investor Relations Anthony Ambrose - President and Chief Executive Officer Joel Hatlen - Vice President and Chief Financial Officer

Ladies and gentlemen, thank you for standing by. Welcome to the Data I/O Fourth Quarter 2016 Conference Call. [Operator Instructions] As a reminder, today’s call is being recorded. I would now like to turn the conference over to Jordan Darrow. Please go ahead, sir.

Thanks, Valeria and welcome again, everyone. This is the Data I/O Corporation’s fourth quarter and year end 2016 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 statement that maybe constitute 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 levels of orders, ability to record revenues based upon the timing of product deliveries and installation, 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. I would like to turn the call over to Anthony Ambrose, President and CEO of Data I/O.

Thank you very much, Jordan. Good afternoon, everyone. I would like to comment on our 2016 fourth quarter and full year results as well as our overall outlook on the market. And then I will turn it over to Joel Hatlen for some more detail on our specific numbers. 2016 fourth quarter highlights include very strong overall orders with $7.4 million in bookings, which represents a 9-year high for us in the fourth quarter. Revenues were $6.4 million, a 6-year high for us in the fourth quarter. We saw continued strength in automotive and programming centers with additional orders from industrial and IoT customers. We received orders from the Bosch agreement in Q4. Our operations delivered a very strong performance supporting backlog and new orders as well as collecting on our receivables. We ended the year with $11.6 million in cash. And finally, net income increased over 120% for the year, looking at – for the quarter rather. Looking at 2016 as a whole, I am very pleased with our progress in several important areas, particularly the strong financial performance. These are the results of our multiyear plan and the very hard work of all of Data I/O’s employees worldwide. For the full year, we had revenues of $23.4 million, our highest level in 5 years. This also represents our fourth consecutive year of revenue growth. We had $26.9 million in annual bookings, that’s the highest bookings total we have had in 8 years. Automotive bookings were up 55% year-over-year and now represent 47% of our orders. During the year, we had a signature win at Bosch Car Multimedia. We talked about this previously. This was a very important win for us, top to bottom on their car multimedia products and validated our entire development strategy around automotive and multimedia…

Thank you, Anthony. Good day to everyone. Revenues for the fourth quarter of 2016 were up to $6.4 million, 28% increase compared to $5 million in the fourth quarter of 2015. As Anthony noted, automotive electronics and the Internet of Things demand from both OEMs and programming centers drove increased revenues, primarily related to our PSV family of automated programming systems. Revenues from adapters and consumables were up 8% for the year. International sales represented approximately 86.7% of total sales for the fourth quarter of 2016 and compared to 92.3% in 2015. On a regional basis, revenues increased in Europe 95% and in the Americas 15% while declining in Asia 9% compared to the fourth quarter of 2015. Order bookings were $7.4 million in the fourth quarter, again a 9-year high compared to $4.1 million in the same period in 2015. 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 $3.2 million on December 31, 2016 compared to $700,000 on December 31, 2015. Deferred revenue at the end of the quarter was $1.9 million on December 31, 2016 compared to $1 million December 31, 2015. For the fourth quarter of 2016, gross margin as a percentage of sales was 56.3% compared to 55.9% in the fourth quarter of 2015 with the increase primarily due to sales volumes resulting in better fixed factory cost utilization and a favorable product mix partially offset by increased factory variances. Operating expenses were $3 million in the fourth quarter of 2016 compared to $2.6 million in the fourth quarter of 2015. The increase was primarily due to additional engineering, incentive, consultant and commission compensation as well as costs associated with new hires. Looking forward, the higher level of…

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

[Operator Instructions] We will go to the line of Fernando Kandel [ph]. Please go ahead.

Yes. Thank you very much. Congratulations on a very nice quarter. Is there an explanation as to why there was no revenue growth from the third quarter to the fourth quarter of this year?

So the question on revenue growth from Q3 to Q4, they are both at very high levels for the quarter. Probably the biggest reason was that we had a couple of big systems that had acceptance process and were deferred until we get final test by the customer that is taking place here in January and February. So that’s the biggest single difference. Otherwise, with the bookings, there was significant bookings growth again.

Right. So then we can expect much better first quarter for this year then?

Well, we don’t give guidance on the specific quarter. And we have just never given guidance. But what I would encourage you to do is build your own models looking at what we have discussed on previous revenues, bookings, the backlog that comes into the quarter and also deferred revenue. And then I think you will be able to build up your model accordingly.

Okay. Well, thank you very much and again congratulations on a very good quarter.

Thank you very much.

[Operator Instructions] We will go to the line of John Fanning. Please go ahead. John Fanning with Coast [ph] Capital, please go ahead.

Yes, good afternoon. Can you hear me now?

Yes.

Very good. Gentlemen, congratulations on a great end to what turned to be a very strong year for you.

Thank you.

I just wanted to dig in if I could a little bit on your New ConneX Smart Programming Software, so I can get a better understanding on the potential market size that you believe this has for Data I/O?

Certainly. We think this complements the products that serve the markets we have already talked about. What we are seeing John is, as more and more customers especially automotive space and those moving to automation, they want to make their factory smarter and that means they need to get more information, more high-quality information and more information in real-time out of all of their systems, including the programmers. So, the ConneX software that we have announced supports those automotive and IoT initiatives we have talked about. Looking forward, ConneX is also a foundational element in our managed and secured programming strategy and we will have more to say about that throughout the rest of the year.

Great, thank you. And if I could just touch on a couple of numbers, I want to make sure I heard this correctly. You had a nice gross margin expansion last year. Did I hear that you at the moment projecting gross margin to be flattish year-over-year?

That’s correct. And that’s based around the assumptions we have shared on the currency, with factors going to margin are currency, factor utilization and product mix.

Got it. Got it. And just quickly once again what was that NOL number that you provided?

We have about $19 million in NOLs. And if you look in our financial statements we value those, but have them fully reserved. So, in essence, they are unvalued on the balance sheet of about $9 million in total tax attributes.

Excellent. Gentlemen, again, congratulations.

And we will go to the line of Mark Stiegel with [indiscernible] Capital. Please go ahead.

Quick questions. Joel, the NOLs and the overseas income, if we get the tax package that, let’s say, repatriate the overseas income 10% or overseas cash at 10%. Would you be able to essentially pay that tax sort of out of pocket and then just use the NOLs for the higher tax domestic income or do you have to apply it like first come first served?

That’s something that’s a little bit complicated to calculate actually. So you have got the withholding taxes from overseas and then they can offset your U.S. taxes, but you will be in the alternative minimum taxes usually, because you can only offset regular taxable income with 90% of your NOLs.

So, the answer is really it depends since we are speculating on federal tax. So, Mark, it depends.

Okay, fair enough. And then the second one just to clarify the sale of those IP addresses, that was a Q4 item?

We sold somewhere close to half of them in Q4 and throughout 2017 we expect to try and do a similar amount of sales.

Right. So, what was the dollar amount in Q4? Did you say $140,000?

Our gain after commissions and brokerage things was $140,000.

Okay, very good. Thank you very much.

There are no additional questions. Please continue.

Okay. Well, operator, if there are no additional questions, I would like to thank everyone for joining the call and we look forward to talking to you on our Q1 earnings call near the end of April, early May. Thank you very much.

And ladies and gentleman, that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.