Good afternoon, and welcome to the Data I/O Third Quarter 2022 Financial Results Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. And please note that this event is being recorded. I would now like to turn the conference over to Jordan Darrow, Investor Relations. Please go ahead, sir.

Thank you, operator, and welcome to the Data I/O Corporation third quarter 2022 financial results conference call. With me today are Anthony Ambrose, President and CEO of Data I/O Corporation, and Joel Hatlen, Chief Operating Officer 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 COVID-19, future revenues, results from operations, financial position, markets, economic conditions, silicon chip shortages, supply chain expectations, estimated impact of tax reform, product releases, new industry partnership 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 COVID-19, including the 2022 outbreaks in China, the Russian war with Ukraine, including any related international trade restrictions, along with continued reopening and recovery efforts within the relevant global supply chain and among our customer base, level of orders for the company and the activity level of the automotive and semiconductor industry overall, ability to record revenues based on the timing of product deliveries and installations, market acceptance of new products, changes in economic conditions and market demand, part shortages, 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'd like to begin my formal remarks by addressing our 2022 third quarter financial and operational performance. And then I will turn over the call to Joel Hatlen for a more detailed look at the numbers. Our performance in the third quarter was outstanding as we delivered across the board with strong bookings, strong revenue, strong operating income, and strong cash generation. The second quarter call, we predicted an end to the operational disruptions from the China COVID lockdowns and resumption of strong growth in Q3. And this is exactly what happened. Our team excelled in managing our global manufacturing capacity, silicon shortages, freight challenges as we delivered 16 PSV systems to customers in the quarter and shipped a record unit and dollar volume of adapters to customers as well. We also have a large industrial SentriX customer going into production in Asia during the quarter. In addition to a strong operating quarter, we had an excellent sales quarter with third quarter bookings of $7.1 million, reaching the highest level in the past year. Within the verticals, we had a strong automotive quarter, continuing our strength for the year. Automotive electronics represents 63% of orders so far this year, and we had four new customer wins in automotive and industrial during Q3. For those keeping score, that's 16 new customer wins this year alone. We're the market leader, and we're adding to our share. Our sales funnel in the third quarter continued the momentum from the first half of the year. New opportunities from automotive and industrial customers are driving our high level of demand. Activity within Asia and Americas has been strongest year-to-date and Europe had a very strong Q3 as well. This is in spite of currency weakness for the euro and…

Thank you, Anthony, and good day to everyone. I'd like to start by providing a review of our third quarter of 2022, starting with the balance sheet and then moving on to the income statement. Data I/O's financial condition remains strong. In fact, from the second quarter, it got much stronger with cash increasing to $11 million on September 30 from $10.3 million on June 30. As expected in the third quarter, and as Anthony referenced in his talk, during the period we were able to catch up with the effects of the Shanghai COVID lockdown. This had resulted in the balance sheet returning to more normal levels from the impact of the craziness of the two prior quarters. Days sales outstanding, or DSO, a receivables collection measure, is back to a normal level at 51 days as of September 30, which is down from 74 days at the end of June. With the increase in business activity level, deferred revenue grew to $2 million, up by $500,000, including a delivered system waiting for final acceptance from the end of the second quarter. Net working capital on September 30 was $16.5 million, up $600,000 from June 30. Inventory of $7.1 million on September 30 was $200,000 higher than the $6.9 million on June 30 and compares to $6.4 million at the end of last year. During the past year, the increase in inventory related to our decisions to hold additional inventory to address shortage risks, as well as to improve our resilience as a supplier and to support the record backlog level going into the fourth quarter. Our backlog at September 30, 2022, was $4.9 million compared to $3.3 million on September 30, 2021. Now on to the income statement. For the third quarter, revenue of $7.2 million was up…

Certainly. And we will now begin the question-and-answer session. [Operator Instructions] And our first question today will come from Brendan McCarthy with Singular Research. Please go ahead.

Yes. First off, congratulations on the strong quarter, impressive results. My question is just around geographic demand and topline growth. And I guess where are you seeing – or where did you see the bulk of the demand come from, from a geographic standpoint, just in terms of Asia, Europe, and the Americas?

Yes. Well, Brendan, thanks for the comments. We've had consistently good results coming from Americas and Asia all year. And Europe joined the party in the third quarter. I'd say all regions were strong in the third quarter. As Joel indicated, we had very strong automotive in the quarter. 70% of the bookings were automotive and 63% year-to-date. That was actually a little bit richer than we normally have on automotive, but not surprising. So good strength globally, all three regions contributing, and then automotive showing excellent strength.

Got it. Yes. And if I could just kind of ask a follow-up there, was that surprising to see Europe bounce back later in the quarter?

No. I mean, we've had it in our sales funnel. I guess – you never know, right, with all the things you read in the newspaper. And I tried to comment on this in our last call, there's sort of the whole macro negative narrative of rising interest rates, inflation, the war, are people going to have heat in their homes in the winter? And then the other narrative was, okay, my sales team is saying these deals are advanced in the sales funnel and should close. We trusted our eyes as opposed to media reports and our sales guys delivered what they said they were going to deliver. From our standpoint, I think there's still – all those macro issues are out there. I guess the U.S. reported good growth in the third quarter overall despite all those items. And I'll be in Europe for a couple of weeks to see for myself what's going on, on the ground, and form an opinion for the first half of next year as well.

Thank you.

[Operator Instructions] Our next question will come from Avi Fisher with Long Cast Advisers. Please go ahead.

Hi, Anthony. Thanks for taking my questions. I have two of them. First off, you have – I'm curious if you could talk about kind of what drives a customer win. You talked about 60 new customer wins year-to-date. Is SentriX part of those wins? Are customers – it doesn't sound like you sold 16 SentriX units. Do customers appreciate the option to upsell eventually to SentriX? Just wondered if you could talk around what makes a customer win, why they're not buying SentriX units now, how SentriX plays into their decision to become a customer?

Sure. We have a focus in our team on new customer acquisition as well as supporting existing customers who often bring capacity additions to us. The new customer focus is important because there are a number of new entrants coming into the automotive and industrial space. And a new customer will come to us when, typically, they have a new project or their circumstances change. And I'll give you an example. We had a customer that, an automotive customer, that we won about a year-ago that was doing end-of-line programming and found it very inconvenient and inflexible for their particular need. And so we were able to work with them over about a three-quarter period to bring Data I/O preprogramming technology into their facility. It was a very protracted process because they're a Japanese domiciled company. But we were able to get ourselves in that first location. We booked a second location in the third quarter. We think that represents a course of converting a substitute programming technology to Data I/O. We also have customers that have been using a direct competitor that for one reason or another aren't happy or maybe they need to up-level their game a little bit if they're automotive, and so we certainly get those customers as well. And then you have customers that, with SentriX, they're brand new. They come in either through direct means or through one of our programming center partners. And if it's a programming center partner, then we do things like the device support for them and make sure the partners got everything they need to be successful. We've also sold a couple of systems, and I think I highlighted this in our call last time, that we call SentriX-ready. Where the customer might be a data customer now and says, yes, I'm probably going to be doing something with you on SentriX. Why don't you just get the system ready that I'm buying for SentriX and we'll get it going on data today and then I can turn on SentriX and have it be real convenient. I don't have to have someone come out and do a physical upgrade. And so we think that's a viable pathway going forward. Increasingly, we're seeing customers value the benefits that we can bring as a premium supplier in data programming as well as SentriX. And again, despite our extraordinary share in automotive, and penetration, we think we have over 250 of our 430 PSV systems focused on the automotive market. There's still places out there that don't have a Data I/O system, and that's a shame, and we want to help out those customers as fast as we can.

Thanks for these details. For my second question, Anthony, just it's a little bit on the kind of guidance you talked about, backlog plus deferred revenue. It seems to imply something about bookings. What's happening with bookings in 4Q? Have they slowed so much that now we're just dealing with backlog and deferred revenue? I'm curious about that.

No, don't over read it. We don't give a bookings forecast usually at all. I think what Joel was trying to comment on was, as we indicated in the third quarter, we had an extraordinary backlog. We did burn down some of that through shipments, but we also have a system in deferred revenue at about $300,000, Joel?

Yes.

That we expect to ship in the fourth quarter.

It shipped. It's just recognized.

There you go, and so the concept there is just to make sure everybody has as much information about where we see the backlog coming out in the fourth quarter.

Just to be clear, because I was confused by this, when Joel talked about the backlog plus the deferred revenue, that comes to $5.2 million in revs. You're not guiding to that?

No, that's not a guidance for revenue in the fourth quarter at all. As you know, we have a lot of business that books and ships within the quarter. What I think the message, Avi, is, that backlog plus deferred revenue number is extraordinarily high on a basis going back several years. We just wanted to make sure you were aware of that.

Okay. Thank you. Appreciate it.

You are welcome.

And this will conclude our question-and-answer session. I'd like to turn the conference back over to management for any closing remarks.

Well, thank you, Operator. At this point, I would just like to remind everyone that we will be at several events in the fourth quarter and early in the first quarter. We'll be meeting with investors in the New York area in a few weeks. And we also have a fireside chat coming up on November 14. And please get with Jordan Darrow if you'd like to schedule some time when we're in New York. We'll also be in Europe in the fourth quarter, and we have trade shows coming up as well at Apex in January in the United States. So with that, I'd like to conclude today's call. Thank you very much.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.