Good afternoon and welcome to the Data I/O Corporation Third Quarter 2020 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Mr. Jordan Darrow. Please go ahead.

Thank you, and welcome to the Data I/O Corporation’s third quarter 2020 financial results conference call. With me today are Anthony Ambrose, President and Chief Executive Officer of Data I/O and Joel Hatlen, Chief Operating Officer 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 COVID-19, 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 impact from the COVID-19 pandemic along with the continued reopening and recovery efforts within the supply chain and among our customer base, 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. And now, I would like to turn the call over to Anthony Ambrose, President and CEO of Data I/O.

Well, thank you very much, Jordan. I’ll begin my formal remarks in a moment including our 2020 Q3 performance recent developments, and then I’ll turn it over to Joel. But once again, I’d like to express our appreciation for the health of our staff, our customers, our partners and their families and are grateful for the sacrifices made by health care professionals and first responders around the world. Global team here at Data I/O has been truly remarkable, and I personally must commend each and every one of them for a job well done. Before we go into quarterly details, I’d first like to welcome our newest Board Member, Sally Washlow. Sally joined the Board of Directors, effective October 28 of this year. As a consultant and former CEO for Cedar Electronics, she brings experience to the Board as an operating leader in the security and automotive electronics markets. From 2015 to 2017, she was the chief executive officer of Cedar Electronics Corporation, the supplier of radar detectors, GPS systems, dash cameras and other electronic products and led the integration of the Cobra and Escort electronics businesses. She currently serves on the board of directors of Costar Technologies, which is an OTC market company. And she’ll serve on the Nominating and Governance Committee as well as the Compensation Committee here at Data I/O. Sally replaces J.D. Delafield who resigned. We’d like to thank J.D. for his service on the Board and wish him well in his future endeavors. Now on to third quarter results. We supported -- reported very strong growth, sequentially, from the second quarter in revenues and bookings, and year-over-year sales increased 56% from last year and 26%, sequentially, from Q2. Our turnaround in financial performance in the third quarter is bolstered by what appears to be a…

Thank you, Anthony, and good day to everyone. Net sales in the third quarter of 2020 were $5.9 million as compared with $3.8 million in the prior year period and $4.7 million in the second quarter of 2020. Third quarter bookings were $5.6 million as compared with $4.3 million in the third quarter of 2019 and $5 million in the second quarter of 2020. With first quarter 2020 bookings of $4.3 million, we have seen sequential growth during the first three quarters of the year. On a geographic basis, international sales represented approximately 92.5% of total net sales for the third quarter of 2020 compared with 89.8% in the 2019 period. Total capital equipment sales were 65% of revenues, adapters, 21%; and software services, 14% of revenues for the third quarter of 2020 compared with 41%, 35% and 24%, respectively, for the third quarter of 2019. 2020 third quarter bookings composition included 60% from the automotive sector, 24% from the IoT and industrial controls and other sectors and 16% from programming centers. Gross margin, as a percentage of sales in the third quarter of 2020, was 55% as compared with 52.6% in the third quarter of 2019 and 52.4% in the second quarter of 2020. For the third quarter of 2020, gross margin was primarily impacted by fixed costs being spread over a higher revenue amount compared with prior periods and a favorable channel and revenue mix as compared to the second quarter of 2020. Operating expenses were $335,000 higher than in the prior year period. R&D was $60,000 higher than the third quarter of 2019 and relates to continued advancements in our technology solutions, as Anthony discussed in his remarks. SG&A of $1.8 million was $275,000 higher than in Q3 of 2019 with the primary increases relating to higher…

[Operator Instructions] Our first question comes from Jaeson with Lake Street.

Hi, guys, thanks for taking my questions. I know there is a lot of moving parts with the macro. But just curious if you could comment on how you’re feeling about your overall visibility? And I guess more specifically, how does visibility compared today, compared to how it was three months ago?

Yes, it’s like saying, if you’re stuck at the bottom of a pool in the dark and you come up and you have a flashlight, you’re better off. So yes, we’re better off clearly than we were three months ago. What appears to be happening, Jaeson, is in Asia, I think we have a little bit better visibility. Business has been pretty good there, pretty predictable. I won’t say things are back to normal, but they’re reasonably close. I think I was feeling better about Europe until a couple of weeks ago. Now they’re having a huge spike in cases. Hopefully, that abates pretty quickly. We’ll just have to see. I think the common thread throughout everything is the automotive electronics industry, which had shut down for a decent portion of Q2, came back in Q3 and is getting closer to full production in Q4. That’s pretty clear. And I think you’ve heard that from maybe some of the other companies that reported today in the automotive electronics segment. So that’s our primary factor on visibility. And then on the SentriX side, obviously, with the new tools announcement, we’re also starting to see some more interesting deal flow in terms of the quantity of potential deals -- I’m sorry, the quantity of units associated with each potential deal.

Okay. That’s helpful. And then in regards to the multisystem order win, can you just provide some color on -- is this an existing customer? And how should we think about the delivery time line?

Yes. It’s an existing customer, and they had to scale out. We’ve had a good relationship with them for a while. It was a good win for us. We had to compete effectively in order to win it, and we did. Think about it hitting in Q4, predominantly, some of them might be in Q1, but that’s pretty typical on these types of orders.

Okay. And the last one from me, and I’ll jump back into queue. I think you mentioned about 16% [ph] of bookings were related to programming centers. Can you just provide an update on sort of how you’re thinking about that market coming back online?

I think, there’s no – I think the capacity -- that they have generally adequate capacity. We do a decent business with programming centers. Whether or not they need capacity or not just from the consumables and service and support. There’s some that probably will be buying some equipment, others that are probably okay for a while. I don’t see that mix moving substantially one direction or another over a sustained period of time. You can always get something to happen in a quarter that could move the needle one way or the other. But it sort of feels like that’s going to be steady for a while.

Okay. Thanks a lot guys.

Our next question comes from Jeff Peterson [ph] with Olsen Capital.

Thanks Anthony and Joel for taking my questions. I like to ask about the – how should we think about SentriX. First, you talk about the simplifying scale. Can you define what that means relative to the system available for the past year?

Yes. Sure. We’ve been talking about that as our strategy for pretty much the balance of 2020. And I would encourage you to read the announcement that we made yesterday. I think that has a lot of the details in it. But what we realized from our early work in SentriX in our Gen One platform is that the product was great. It was highly secured. Customers could make it work. But we found that the customers that were drawn to the product really wanted to have a simpler user experience, a better user experience, one that was a lot easier for them to implement a model, where they had to work with perhaps a certificate authority or do things, simple things like get on board to a cloud. And what we decided to do was make the whole tools experience much simpler, not only for the customer, the end customer, but our programming center partners and potentially partners in certificate authorities and other places so that things that you would need to have, to have a successful job created could be easily managed in one place that had a common look and feel and was much easier to use. And that was the biggest thing we’ve done with our SentriX tools, on simplify. On scale, what we’ve done is, as you know, we have about 320 PSV systems around the world, and it’s always been our intent long-term to make those become opportunities to upgrade the SentriX at the right time. And with our second-generation architecture, that becomes a lot easier for us to do, both financially and logistically.

Okay. Thanks. Very helpful. Regarding your announcement, earlier this week, did you develop this internally?

Yes. The – what we’ve done is all the tools are -- common tools flow that’s built around our existing data programming tool flow and our internally developed security tool flow. So that portion of the product has been internally developed. We’ve been working hard on that for a while. And while the world was paying attention to COVID, we had a lot of developers busy getting this thing done.

Great, helpful. Thank you. last question is, can you talk about your security and how it has evolved with the partnerships you’ve entered into? And are there any key wins you can discuss that demonstrate the key players who are adopting your technology?

Yes. So I think the key thing is; I’d refer you to the announcement we made last quarter, where Cypress, now an Infineon company, announced their support for a direct to Amazon Cloud version of their PSoC 64 microcontroller, and that’s obviously supported on SentriX. And what we’re seeing, again, if you look at the big changes in some of our partners, what they’re trying to do is also pick up on the simplified mantra. If you look at the NXP website, for example, you can see how they’ve broken up their secure elements into a model, where the customer can get predefined use cases done, they can go full custom, they can also go direct to a cloud onboarding. And I think you’re going to see announcements, further announcements, in this regard from the leading secure element and secure microcontroller companies. Again, we’re trying to make it all much easier for the customer to just do what they want quickly, easily and with minimum of designing time.

Thanks and that’s helpful. That’s all the questions.

Thank you.

Operator, would you please take the next caller?

Our next question comes from Mr. George from MKH Management.

Thank you, operator. Hi, Anthony and Joel, how are you?

Hey, george.

Hey, George. How are you doing?

Good, thank you. Quick follow-up on the Tier 1 auto, the multisystem deal. This was an existing customer but did they previously only use your tools ? Or did they use competitors’ tools? And is this kind of a win from a unit perspective for you guys?

Well, George, it’s – they’re have been a previous customer, we think, on pre-programming, been largely working with Data I/O. I can’t say it’s 100% type of thing. But it was clear situation, where they had a decision to make, and they decided that as they added capacity here, it was best to work with Data I/O, going forward. And we’re very grateful to have been selected. This is one of those cases, where we talk about it. I hope we’re not getting boring on the subject. But even when times are tough, people need to buy equipment to support new technology, and they’re willing to do that. And if you don’t have the new technology, then you’re not considered. If you do have the new technology, then you’re in the running and then you get to talk about all the other great things you can do for them. So that was the case here. And as I said, we’re very happy to have that in Q3.

Great. And the competitor, the people you were competing with, were they domestic providers? Or was it an international provider?

I think they were more of an upset provider than any of the other two, George.

Okay, okay. Great. And then just a quick question on SentriX. The market on the whole seems to have been sort of rather slow to adopt that kind of technology. Is it that the market -- is it the IoT market is really not quite well secure at this time? Or have they sort of adopted a different way to secure their devices and the data that flows.

I think George, if you look at it, obviously, we were hoping that SentriX would have ramped faster than it has. And we’ve done our own looking at this problem, and we realize part of it was us. We needed to make our tools easier to use, which we’ve done and just announced. A part of it was our semi partners. They had, in some cases, delayed their own products. And part of it was the market that didn’t know how to get security in, maybe didn’t know the best way to do it, wasn’t sure they needed it. And I think all three -- there’s been improvement on all three fronts. And so again, steady progress. Wish it were faster. We’re doing our part. We’re starting to see the semi companies doing their part, not only with getting their products into the market, but getting them positioned in a way that makes them easier to use and also taking care of some of the things that we’ve talked about, getting direct to cloud onboarding, doing things that, again, make it very easy for customers to do certain things that they want to do as part of IoT security. So it’s a combination of all three, and we hope that gives us better results going forward.

Okay. Great. Thank you very much. Appreciate.

Thank you, George.

[Operator Instructions] Our next question comes from Mr. Todd from Engage Management.

Hi. Thanks for taking the questions. You talked about the bottoming out in the second quarter of the automotive electronics sector. And I just wonder if you had a few more specifics on what you’ve seen in the industry and Data I/O specifically that may support kind of the ongoing rebound?

Yes, Todd. Thanks very much for the question. As we mentioned earlier, I think Joel had indicated, we’re about 50% of less business in Q2 was automotive, and 60% of more business in Q3 was automotive. So we clearly, saw it in the bookings. We also saw it in terms of our -- the customers’ factories actually being opened in Q3. A number of them had closed anywhere between two and six weeks in Q2 for either COVID-related reasons or demand-related reasons. And they largely came back, some of them were operating at less than full capacity, but they were largely back answering the phone, answering e-mails, things like that and buying consumables. So, those are the big indicators on our side. And then I think you’ve got some confirming indicators from some of the big boys. I mentioned NXP, Aptiv, Wistron, were out today with their earnings, and all were positive on automotive electronics.

What might a recovery look like based on prior business cycles? Again, acknowledging we have the COVID with flashlight in the swimming pool, I like that. But do you have some thoughts? I mean, going forward on what that recovery might look like in the automotive?

Yes. As I just cautioned you, we don’t give forward guidance, because it’s just real hard for us to do a good job there. But the -- what we look at going forward is the -- if you step back, whether you look at Gartner Group or some of the other industry forecasters, when you look at the semiconductor companies and their own prognostications. They seem to believe that automotive electronics is a big growth area in a secular manner over the next five to 10 years. And we can talk about the reasons why the advances in electrification, autonomous driving, infotainment, connectivity, mobility, et cetera, et cetera. So, we believe that thesis that automotive electronics is the place to be. Now from our standpoint, as that business grows and we can grow our support in automotive, I’d encourage you to look and see what happened the last time we had a big up cycle led by automotive. We’re able to show very strong operating leverage as a company, close to $0.40 of every new revenue dollar ended up coming down to the operating income line. And as we go forward, doing that with some intelligence around tariff management, tax planning, to use our NOLs and things like that, I think we’ll be able to do pretty well on the bottom line.

Great. Thanks. And one last thing, relative to last business cycle, I think one of the things we have right now is the autonomous driving seems to be coming on. I just wondered, is that -- did you view that as a catalyst going forward? And any other catalyst in particular that might make it a little bit different than the last business cycle? In addition to opportunities?

I think you are correct. Autonomous driving, in fact, the whole advanced driver assist system marketplace or the ADAS marketplace, the infotainment marketplace. And also, as I mentioned, electrification, not just full EVs and hybrids, but 48-volt systems in internal combustion engines. It’s a -- that’s why I think the analysts are pretty excited about the long-term future of semiconductor content in cars.

Great. Thank you very much.

Thank you.

Our next question comes from Mr. Robert Anderson with Penbrook.

Good afternoon, Anthony. Nice quarter.

Thank you, Bob. How are you doing?

Good, thank you. Rainy day here in Connecticut, but we’re moving ahead. I had a two-part question. The first part is summarized Data I/O relative to the competition, both in automotive and in the SentriX area. And then I have a specific SentriX question. But let’s just talk about the competition, where they are.

Sure. So Bob, I’ll just mention that we don’t have the luxury of having a lot of public information out on our competitors. What we understand is from our own internal analysis. It’s pretty clear though that we’re by far and away the largest supplier in our industry, about double the size, we believe, of the next largest competitor. And we’re also the only really truly global company. That gives us a really good selling point with the automotive electronics companies, all of whom are global, all of whom need to have a consistency of product, support and understanding. And frankly, they like doing business with companies that have money in the bank. So, it’s hard to give you a precise market share for automotive preprogramming. But again, we’re the largest in the industry. And if we’re at 60% in automotive electronics, and we’re at least double the size of our nearest competitor. If you do the math that means our automotive business is bigger than anyone else’s total business. So that’s how we feel about the automotive sector. On SentriX, we have a truly unique value proposition in architecture tools, system configuration with SentriX. We also have relationships that are very strong with the semiconductor companies. And our technology is patent protected. So we just don’t see anyone out there with something that’s exactly like SentriX. As with everything in programming, there are substitute ways to do things. You can provision at the wafer level, you can provision at the end of the line, you can provision over the air. But we believe our approach offers the best combination of security, flexibility and value. And that’s why we like it.

Okay. That’s good. And my question relates to your SentriX announcement yesterday. Explain the economics of it. You said you have 320 PSVs. So, somebody comes along and says, “Anthony, I’d like to upgrade it and install some of your new SentriX offerings.” What approximately would somebody pay to upgrade their PSV?

Well Bob, I wish I could tell you that. But that’s a pretty good trade secret. And I’m pretty sure my competitors like to listen to call. But let me tell you, though, that we could have offered that two years ago to anyone. It would have been significant in terms of a cash outlay on our output -- on our part, rather, to provide a full SentriX system to a customer. What we can do now is substantially reduce whatever capital outlay we might need to make, to upgrade a system to allow a customer to use SentriX as a service on an existing PSV system. So we’ve eliminated a barrier to deployment. Now, we still got to go out and win the business, because people aren’t going to want to upgrade unless they have a reason to. But I think when we are able to do that, we’ll have a much easier time supporting that demand ramp.

So, if I understand you correctly, it’s not an outright purchase. It’s a kind of a use charge or rental or something like that.

Yes. It’s a pay-per-use fee. That’s exactly correct. So, think of your mobile phone, right? If you want to buy a brand-new iPhone, you got to pay for it; maybe you got to pay monthly installments. If you want to buy a feature phone, the network operator will just give you the phone and you get paid back -- they get paid back in minutes.

Great. Okay. Thank you.

Thank you, Bob. Take care of yourself.

Yes.

This concludes our question-and-answer session. I would like to turn the conference over to the company for any remarks.

Thank you very much, operator. I’d like to thank everyone for joining the call, and appreciate the good questions. At this point, our Q3 earnings call is now closed.

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.