Ladies and gentlemen, thank you for standing by. Welcome to the Data I/O Second Quarter Financial Results Conference. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions]. And as a reminder, this conference is being recorded. I’d now like to turn the conference over to Jordan Darrow. Please go ahead.

Thank you. Welcome to the Data I/O Corporation second quarter 2018 financial results conference call. With me today are Anthony Ambrose, President and CEO of Data I/O Corporation; and Joel Hatlen, Chief Financial and Operating 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, markets, economic conditions, estimated impact of tax reform, product releases, new industry partnerships, 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 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 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 now like to turn the call over to Anthony Ambrose, President and CEO of Data I/O.

Thank you very much, Jordan, and welcome everyone. I’d like to comment on 2018 second quarter results and our outlook on the overall market. Then I’ll turn it over to Joel Hatlen for some more detail on our specific numbers. We continue to produce solid financial and operational performance in fiscal 2018 following an unprecedented 2017. I’m very happy to report that we delivered our 200th PSV system in the second quarter of 2018. This is a very exciting achievement and we believe this far exceeds the programming system sales of anyone else in the industry during the past four years. These PSV systems have been sold on five continents and 27 countries and to over 70 customers. The PSV family has become the industry standard system for device programming in the past four years. Among these 200 systems sold were multiple wins at a top global automotive electronics company versus competition in the second quarter. One of the locations had been served previously only by a competing system. This customer selected Data I/O over the most recent model of a competing system after a multi-quarter evaluation. The customer likes our superior product capabilities, Data I/O global support, ISO9001 process control, UFS product support, as well as the financial stability and transparency of Data I/O Corporation versus competition. Looking at some of our markets, we’ve discussed our thesis about automotive growth on many of these calls. Industry forecast from leading automotive OEMs show about a 10% to 15% CAGR for semiconductor content in cars and a larger increase of 30% to 40% compounded annual growth rate in the total market for flash-memory in cars, growing between 1 and 2 terabytes per car in the next seven years. Today’s dominant memory architecture for automotive systems is what’s called eMMC which is…

Thank you, Anthony, and good day to everyone. Revenues for the second quarter of 2018 were 7.2 million compared to 9.1 million in the second quarter of last year and 7.6 million in the first quarter of this year. Year-over-year results reflect a very strong 2017 with the majority of our demand continuing to be generated from automotive electronics OEMs. These customers have been placing orders in large part for our PSV family of automated systems as Anthony discussed in his remarks. As previously disclosed, our programming center business continued to be down as compared to the prior year but improving compared to the first quarter. Revenues from adapters increased to approximately 1.7 million, up 59,000 or 3.5% from the prior year period. Total revenue for the second quarter of 2018 was comprised of capital equipment 65%, adapters 24% and software and contracts 11%. On a geographic basis, international revenue represented approximately 86.5% of total revenue for the second quarter of 2018 as compared with 95% in the first quarter of 2018 and 90.2% in the second quarter of 2017. Sales in the second quarter as compared to the first quarter of 2018 benefitted from favorable foreign currency exchange fluctuations. By region, second quarter revenues declined in Asia14%, the Americas 24% and Europe 24% as compared to the prior year’s strong results. Order bookings were 7.2 million in the second quarter of 2018, down from the prior year period of 10.1 million but remaining in a high range than that of a few years ago due to our presence in the automotive sector. As compared to the first quarter of 2018 when we had 6.2 million in bookings, second quarter bookings increased by 15% or 944,000. The variation in revenue percentages versus order percentages relates to changes in backlog, deferred…

Thanks very much, Joel. At this point, I’d like to open up the call to questions. Operator?

[Operator Instructions]. The first question will come from James Anderson. Please go ahead.

Hi, guys. Congrats on reaching the 200th PSV model milestone. I just had a quick question about the UFS capacity on the programming side. How much of the existing flash programming capacity out there in the OEM side is flash UFS capable and how much of that do you think will need to be upgraded over the coming years as UFS becomes more standard in automobiles?

James, thanks for the kind words there on the 200 PSVs. But you’ve already answered your question because every PSV out there is ultimately capable of programming UFS memory. That’s the beauty of our architecture and the way we’ve engineered it so that any customer, even if they purchased the PSV four years ago before we did UFS, can purchase an upgrade that will allow them to do UFS programming on a PSV system. So in effect they’re all upgradable. What we see with automotive typically is the early adopters are moving to UFS now. They do the designs. That takes about a year to go from design to production in the auto space and we expect to see more of that pick up in the second half of the year. But again if you’re looking at an auto company going out towards 2025 when they’re going to have more than 1 terabyte or even 2 terabytes or flash, we think by then certainly the vast majority will be UFS or even a subsequent standard.

Quarter-to-quarter visibility area for you guys but I’m just wondering what your outlook is for the SentriX development and deployment now that you have sort of beefed up the sales team and there’s been a lot of buzz. I know Google was talking a lot about IoT it seems like. There’s an increase in interest generally. I’m wondering if you guys are seeing that on your side.

James, we remain very, very excited about SentriX. And as you know and we’ve talked about on the calls, the SentriX gestation period, if you will, is pretty long time. We’ve got to work with the semiconductor supplier, develop the support for them. They’ve got to go out and get some designs for their typically new products. And then those customers have to ramp. So we’ve been pretty consistent because that takes a period of time. And 2018 is still a market development year. We’ll begin to see growth next year but with SentriX it’s definitely something where we see security as the way things are going to be done. And our goal is to get the pole position with the market leaders. And I think from our announcements you can see that we are working with pretty much all the people, the market leaders except one in the authentication IC space and we’re working with many of the market leaders in secure microcontrollers. And stay tuned for additional announcements in both areas. But our goal is to work with the market leaders, get designed in, in their provisioning process and then let the natural design in, design win cycle from their semiconductors take its course. That’s a very good strategy for us. It just takes some time.

Thank you. [Operator Instructions]. Our next question will come from David Kanen. Please go ahead.

Hi, guys. Good afternoon. Thanks for taking my questions. First question is for Joel on the backlog. I know it was 1.9 million at the end of the quarter. What was it a year ago at the same time? You provided March and December. Just curious June a year ago what it was?

I actually don’t have that here at my fingertips. I believe it was in about the $4 million to $5 million range.

Okay. So how should we look at Q3? I know traditionally Q3 is seasonally your strongest quarter. But with backlog where it is, is there something going on right now in the marketplace in terms of maybe capacity, excess capacity digestion that would point towards a weaker Q3 which seasonally we don’t have that, but I’m just wondering if that’s the indication on implication?

Dave, hi, it’s good to talk to you again. You kind of look at the things on backlog, I’d also look at deferred revenue when you kind of add up the backlog in deferred in terms of what kind of tailwind we’ll get from previously booked orders that will be turned into revenue in Q3. I think in general the market is significantly less frothy than last year. I think you hit the nail on the head and we’ve talked about it before that some customers got ahead of themselves on capacity buys and they have been digesting that capacity. I think overall we would normally expect Q3 to be the seasonally strongest. I think that seasonality is probably a bit weaker this year than it was in previous years. We’ll just have to see.

Thank you. Next we will go to James Rush [ph]. Please go ahead.

Hi, guys. Congrats on the quarter there. I just had one question with the SentriX system. I know on previous calls you had mentioned that you’re looking into doing some type of pay-per-use system with the semiconductor manufacturers. Is there any development on that or do you think that that – the way that you’ll go forward with the SentriX system?

That’s the way we plan to go forward with the SentriX system that would have a significantly more recurring revenue component to the revenue. And we think that’s the right thing to do long term from the business. Short term, it might be nice to have a couple more systems of capital equipment. But we think overall it’s best for our customers and the market to introduce it and keep it as a pay-per-use model. What this does is it smoothes out the risk for some of our partners from hiring a system early on because they’re able to essentially pay us as they go. It also makes it easy to understand how to charge the end customer for the service which would be comparable for other ways or perhaps getting keys from a wafer level provisioning. And for us long term we hope to increase the level of recurring revenue that we have which as Joel mentioned today is about 35%. The other thing is we know a number of customers – given where the market is now, a lot of our customers may have one or two customers that will be very interested in starting with security. And a number of these companies, just some of the smaller ones, may not have the balance sheet to go ahead and buy a full system that may not be fully utilized for some period of time. So we think the pay-per-use model also helps us get SentriX into more places sooner.

Okay, thanks. So that would be the semiconductor manufacturing paying for the use not the end customer?

It would be, for example, the end customer or maybe a programming center. We’ve announced our relationships with the two biggest franchise distributors that have in-house programming centers. But there are others that are out there that have customers that would be good SentriX customers.

Okay, sounds good. Thanks, guys.

Our next question will come from Robert Anderson. Please go ahead.

Good afternoon, gentlemen. Just wondering what is going on with the programming centers you have and said too much about them in this call? I know in previous calls you said that they were fully up to capacity and really didn’t need any additional equipment. But maybe you could give us an update on that? And then, Joel, maybe you could say something about foreign currency going forward? Thank you.

Thanks, Bob. Good to hear from you. On programming centers, we talked in the past Q1 was really slow for programming centers. Q2 was stronger, Bob. Not as good as last year in the first half overall, but we actually had good business at some programming centers that we had not sold to in a while. We do think there is still some excess capacity out there. It’s starting to get consumed. I’m more optimistic now than I was let’s say six months ago. But that has to get absorbed and the programming centers are kind of the first indicator down or up about capacity adds, because they really only buy when they need capacity. We’re talking to all of our programming center customers, but overall it’s definitely a down year versus '17 for programming centers. But it doesn’t feel as bad as it did six months ago. And Joel, you had a question on currency.

Yes. So when we’re looking at currency, we kind of tend to project that things are going to stay mostly the way they are. But if you look right now just this week, China has been allowing their currency to devalue a little bit. That has some favorable benefits to us in that the sales that we have to take place in China translate into higher U.S. dollar sales for our balance sheet. It does mean that our customers tend to have to pay more so that’s also a risk. Our U.S. dollar-based accounts in China result in currency gains when this happens. And the other costs on the balance sheet tend to get translated and go to equity. So it’s a mixed bag. It can affect you one way or the other depending on how you’re postured with regard to sales, costs and where your currencies are located. But when we saw the dollar this last quarter, its effects basically gave us a very favorable currency effect compared to the first quarter where we had mostly negative currency effects.

So, Joel, would it be fair to say that quarter-to-quarter it’s really hard for us to predict and it can move one way or the other and that’s just the way it’s going to be. But over long term it tends to sort of balance out.

It does. A big reason is we have inventory that’s moving back and forth. And as it moves and sells through, it balances out some things that go through the balance sheet and some things that go through the P&L and those are from a CFO standpoint kind of the hardest to --

But from our standpoint in terms of giving sort of any guidance to investors, it’s just really hard on a quarterly basis just to nail that.

We do our best to naturally hedge and eliminate gyrations causing from currency fluctuations.

Thank you. Next we will go to Avi Fisher. Please go ahead.

Hi. Good afternoon. Thanks for taking my call. I had two quick questions. First, how many SentriX units have been deployed and installed already?

We have three SentriX units out in the programming centers right now, Avi.

And how many were installed and out last quarter?

The net addition probably in the last 90 days would be one unit.

Just one unit, okay. And do you have a target on how many you expect to have by the end of the year or --?

We have some goals but the key thing for us is we want to balance the placements with real demand. We’re in a position with the strength of the balance sheet that we can put a SentriX unit where it needs to go. But we want to kind of follow the early demand to the partners that are working with us closely right now. And as additional customers and partners come in, certainly companies may have an Affinity with a certain programming center or certain factory. We want to be able to support them as well. So it’s a balancing act. We’re not capital limited. We just want to make sure that we can efficiently support the units that are out there and sort of naturally grow to fulfill the demand.

All right. I have just one another quick question on backlog and someone touched on this before. I’m confused by – you had a jump in bookings and a decline in backlog and you said, we have to add deferred revenue in there. But has there been – can you just talk through this? Any mix shift that might show up in there, different products you’re selling that may contribute to this unusual variance where the bookings grew but the backlog shrank? Thank you.

So probably the biggest single item was the growth in our deferreds where $0.5 million roughly worth of system revenue while it came out of backlog it went into deferred revenue because the customer hasn’t accepted it yet. So there’s 0.5 million of it. A piece of that was related to the currency impacts that happened between bookings and backlog and it finally turning into revenue. So I guess those are probably the two biggest factors there.

Thank you. Next we will go to Art Winston. Please go ahead.

What is the approximate dollar investment revenue of one of the SentriX systems that’s been installed?

Art, we don’t disclose that for competitive reasons. You should in your mind think of it as a premium product in our product line. And if we were to sell it, it would be perhaps even beyond the high end of what we typically listed as our prices for automated systems.

Why is it so expensive?

It’s the amount of software and – you’re asking the wrong question.

Okay.

The question should be, what’s the value that the SentriX provides and how do we capture that in our pricing?

Okay. That’s the question.

And my answer is the pay-per-use model.

Okay. I understand. Other than SentriX and excluding stock buybacks, does the company have any other use for its cash?

We like to always have enough cash to weather the three things; have enough working capital that really helped us quite well in the last, I guess, six to eight quarters when the business really ramped up, being able to go out and turn the cash into receivables and then ultimately back into cash again, having a rainy day fund. And we’ve always said that if the right opportunity comes up by M&A, we want to have an ability to investigate that. Those are all the theoretical uses. That’s what I’ve said for years. But that’s how we would view potential uses of cash.

We now have a follow-up question from David Kanen. Please go ahead.

Okay. Guys, on SentriX, my question is you have three units out in the field right now and you’re engaging in a pay-per-use model. So how should we look at amortization of COGS? Is that like over five years, three years in terms of – you understand what I’m saying is what is the deduction from cost of goods sold for the amortization? And then if you could help me out, what is the maximum throughput – if this machine is running 24/7 365, how much can a SentriX – how many parts could it touch in a year? And then if you could just give us an idea of what’s reasonable; half of that, fourth of that, et cetera?

So, Dave, I think the maximum throughput, again I’ll be a little bit vague here for competitive reasons but the beauty of SentriX is its raw performance, the way it’s architected. So that throughput is in the millions of units per year. And the actual use case at the customer will depend on a number of factors. Primarily do they have a lot of big jobs or – a few big jobs or a lot of little jobs? The programming centers like to run the systems as much as they can but we anticipate a mix of everything from prototypes all the way to significant volumes being run on those machines. So it will vary quite a bit from customer to customer.

Next we will go to George Melon [ph]. Please go ahead.

Great. Thank you. Hi, guys. I have a follow up on SentriX. The core business in Q2 is strong especially in auto and you guys have been investing in SentriX. What I’m trying to understand is I look at the average OpEx in 2016, it was roughly 2.9 per quarter, in '17 it was 3.75. Now it’s hedging up a little bit. What is the investment in SentriX? I’m trying to understand sort of the profitability of the business, ex-SentriX and trying to look at SentriX as an investment into the future? So how much of the OpEx would be related to SentriX?

George, most of the increase and we’ve talked about this in previous calls, most of the increase that you’ve described is – in the R&D side at least is related to SentriX and then things we do on the machine that benefit both SentriX and our core business. One of the things that we have is there are some unique investments in SentriX, like for example when we do support for a particular product. And then there’s some other investments we make in the core technology around the platform that benefit our core business as well as SentriX. And those would be more general performance enhancements in the programming technology, our system software, the handler technology and systems integration capabilities. But I think it’s fair to say most of the increase from the engineering side has gone into SentriX.

We have a follow-up question from James Rush. Please go ahead.

Hi, guys. A quick follow up. I know you mentioned the growth rates for the semiconductors and the automotive and the eMMCs. Just wondering if you think you’d be able to capture more of the market share from that or you just piggyback just kind of off those general growth rates for [indiscernible] semiconductors.

That’s a good question, James. I think in general we look at – we should be able to grow – first of all we believe our share in automotive is substantially higher than our share overall in the market, especially on the flash side. We think as the customers’ use cases grow that we should be able to hold our share or even grow it a little bit. We think the best way to gain share and this is not just experience from Data I/O but 35 years in technology is when you have a much better answer for a problem that happens during a major technology transition. And that’s why we’ve been so focused in talking about automotive and the secure Internet of Things. We think both of those markets are undergoing major technology transitions now. And what that means is customers are actively looking around for potentially new solutions to new problems. And they tend to do that much more often when there’s a new problem in front of them that they haven’t faced before. And so our ability to be there when people maybe for the first time even are looking for a solution to secure provisioning or very high performance flash programming and automotive. We think if they look at Data I/O they will be favorably disposed. The automotive is not just the technology transition but also a very, very large increase in things that go into infotainment systems and auto self driving cars, things like that. And so they’re going to need new programming solutions from what they’ve been doing traditionally. So that’s the way we look at the market. You want to sort of grow with the market in the traditional areas, maybe gain a little share. And then as new problems and new technologies come in, you need to be there early, you need to be there with the best solution and then turn that into something where you become the incumbent over time.

And we go again to David Kanen. Please go ahead.

Okay, sort of a follow up on George Melon’s question. Since two years ago, OpEx is up approximately $5 million to $5.5 million a year from about 11 million to 16 million or so and most of that is – or a good portion of that is related to SentriX management secure programming. So my question is how many SentriX units approximately based on average usage anticipated do we need to get in the field before we can start to recoup our investment?

So, Dave, the number of SentriX units that we want to put in the field is obviously more than three. And that will go up over time as we get more and more units designed in. The exact number depends on what we talked about earlier in terms of capacity, pricing, things like that. But obviously we think it’s a very good opportunity because we think the market, and we’re not alone. People like ABI Research published this. We think the total available market’s in the 4 billion unit range in about five years. Now not all of that is going to be available to us but we think enough of it will be available to us and we’ll win enough where that’s going to be good business for us.

There are no further questions.

Okay. Well, if there are no further questions, operator, I’d like to thank everyone for a great call and we can go ahead and close the call. Before we do I just want to remind everyone that we will at the ROTH Capital Internet of Things Corporate Access Day in San Francisco on September 5 and the Dorian Company Annual Investor Conference in Minneapolis on September 6 and we hope to see you there. Thanks very much.