Good afternoon, everyone, and welcome to the Data I/O Second Quarter 2025 Financial Results Conference Call. [Operator Instructions] Please note today's event is being recorded. At this time, I'd like to turn the conference call over to Mr. Jordan Darrow, Investor Relations. Please go ahead, sir.

Thank you, operator, and welcome to the Data I/O Corporation Second Quarter 2025 Financial Results Conference Call. With me today are the company's President and CEO, Bill Wentworth; and Interim Chief Financial Officer, Todd Henne. Before we begin, I'd like to remind you that statements made in this conference call concerning future events, results from operations, financial positions, markets, economic conditions, supply chain expectations, estimated impact of tax and other regulatory reform, product releases, new industry participants 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 also include uncertainties as the impact of global and geopolitical events, international tariff and trade regulations, order levels 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, in our press releases and other communications. The company may also reference GAAP and non-GAAP financial performance measures, including onetime items, which are intended to provide listeners with a means to better understand the company's performance. The accuracy and completeness of all discussions on this call, including forward-looking statements should not be unduly relied upon. Data I/O is under no duty to update any forward-looking statements. And now I'd like to turn the call over to Bill Wentworth, President and CEO of Data I/O.

Thank you, Jordan, for that introduction. I also want to thank the people that have made the call and took out the time to listen to what we're going to talk about today. As you can see, if anybody has seen the report, bookings were up sequentially from Q4 [ 401 ], Q2 [ 406 ] and Q2 [ 508 ] respectively. That's obviously been a focus for us is to get that booking number going in the right direction. It still hasn't settled in the backlog number. I see that in the second half, and I'll talk a little bit more about that and why. The large system order reflects our commitment to our core programming platform, the new universal platform we'll be rolling out between now and the end of the year. And the reason for this investment is the complexity of programming technology, especially in memory, has gotten a lot more difficult. And so the commitment to that is we need to have a platform that can actually handle these new technologies and the complexity that come with them and the changing standards that really almost change, almost annually at this point, at least every 2 years. So this complexity has driven the need to obviously invest in our core platform, which we are doing. And that order reflected that commitment because one of those technologies was UFS flash memory. And both UFS and NVMe, which are 2 technologies we are focused on, not the only ones, but certainly not 2 of the core because they have the most complexity, have annual CAGRs between now and 2030 of 14%. That is twice the semiconductor market. So obviously, there's a very good reason to be focusing in on these technologies, but also advance our platform in general for…

Thank you, Bill, and good day to everyone. It's a pleasure to speak with all of you today. In my remarks, I will address our recent financial performance in more detail. My comments today will focus on key points of interest for the second quarter of 2025, recent trends and our outlook for the second half of the year. Net sales in the second quarter of 2025 were $5.0 million, down from $6.2 million in the first quarter of 2025 and up from $5.1 million in the second quarter 2024. First quarter 2025 revenues were elevated due to the completion of a large order received in the first quarter of 2024. We were also awarded a large order toward the end of the second quarter 2025, which is expected to be shipped and recognized as revenue in the second half of the year. Automotive electronics as a primary business segment represented 66% of second quarter 2025 bookings compared to 59% for all of 2024. Asia, led by China, has been relatively strong, particularly within the EV sector of automotive electronics. Europe and the Americas continue to be pressured by pent-up capital equipment spending due to tariff and trade uncertainties. Despite this headwind, consumable adapters and services provide a stable base of reoccurring revenue, which represents 50% of total revenue in the second quarter. Moving on to new bookings. The first 2 months of the second quarter carried forward similar activity from the first quarter order activity, which were impacted by the aforementioned tariff uncertainties. Conditions improved in June as evidenced by the large order we announced and have continued to remain active in the third quarter to date, even though certain of the international trade negotiations remain an issue. Second quarter 2025 bookings were $5.8 million, up from $4.6 million…

[Operator Instructions] Our first question today comes from David Marsh from Singular Research.

I just want to start out, if I could, a quick housekeeping question. With regards to the $480,000, Todd, can you tell me how that hits the P&L in terms of SG&A, R&D, how it might hit the P&L? And how we could think about that going forward, in particular around the kind of double counting you were saying for CFO services in the back half of the year?

Yes. Really, David, it hits multiple areas. I mean primarily the area it's going to hit is going to be the G&A category because that's where the IT spending goes. That's where the finance spending goes, that's where HR goes. So a majority of that is going to be on the G&A line.

Some of the consulting is in there.

And some of it's -- and also the executive, there's some consulting in our executive group, and that's also in the same line item.

And that I would expect to kind of run out by the end of the year. So with the savings that we're seeing across, we did a lot of IT discovery in our infrastructure, and there was a lot of discovery to be done there. And so we identified all the spend. One of my -- the consultants I brought in is going through each vendor. We've already seen what we -- we've already identified about $512,000 worth of spend reduction in our IT annually. And so we're probably about halfway to that number I already implemented. Expect the rest of that to be done by definitely before year-end, for sure. I can't tell you exactly when because some of it's got a lot of complexity to it. And we're trying to move as much as we can to the cloud, get more stuff off-prem, which then enhances our security. So there's a lot of -- we'll end up with far better infrastructure, far secure infrastructure and half the price. So I think it's been a great exercise for sure. And then I would expect the consultants that do run up to about annualized, if I use the number, some might have increased because of the work that they're doing specifically in IT. So that's going to more than pay for itself. Probably about an annualized spend around $0.5 million, maybe a little bit more. There's a couple of people that we've extended that we're supposed to retire. I convinced to stay on board because of their 30 years of knowledge, and they've been super helpful in defining our new programming platform and looking at being more vertically integrated, which is one of our new growth strategies that we've now identified in Q2 and we'll be moving forward in the second half. And that's also expanding into services, which I've talked to some of the shareholders about. So sorry for that long-winded answer, but I just want to get all that out, Dave.

No, no, that's really helpful. I appreciate that color and detail. Hey, so Bill, I guess I kind of want to dial in here a little bit on UFS flash. You had a lot of commentary, obviously, in the press release about it. And obviously, great news on these new orders. But this is a part of the business that's been kind of challenged with kind of lower yield rates historically. Could you just talk about what Data I/O can do differently that might produce some better yield rates? And just talk about a little bit more about...

Thanks for the layup. I appreciate that. So yes, so UFS, when Luminex was first introduced, it was really introduced as a product, not a platform. And so through my discovery process, and this actually goes back to Q4, identified some of the technology gaps that were in the platform itself, and they were not small. And so I came back and started the year with a vengeance and just challenged the entire engineering team to say, look, we just need to reset here completely on Luminex. And so that's what we've done. And we brought in some outside consultants that there were some onetime charges in Q1, too that we didn't get a chance to talk about which I wish we did, and we give some reasons and more color for those numbers. But the investment here, Dave, is going to do exactly that, is get our yields. We need to be at 99.8% or 99.9%. That's the typical yield for memory devices that has been ever since flash came out. UFS, you got to picture it almost like a hard drive. It's got multiple layers, just like a hard drive flatters. And there's also a small part of what's inside the memory that directs to each one of those slivers of wafer or memory section to basically land the data. And so it's like a mini hard drive in a way, but it just does it through flash cells and a small instruction code. That's why they have these what they call protocols. These handshake protocols have only been present in UFS. They're not even in eMMC. eMCC is just a large piece of memory. That's it. UFS is a completely different animal. And so much more difficult. And if you don't preplan in your architecture for this…

Got it. And then if I could just sneak one last one in here before I yield. Just gross margin, this is kind of a low watermark for the last couple of years that we've seen for the company. Can you just kind of -- obviously, Todd, I caught your comments on mix, but maybe you could just give a little bit more color on that? And kind of just what the expectations are maybe for the back half of the year, if you have any of that available?

We do. Actually, another way up. Thank you. So that order came in June, and we're actually able to ship a few systems out before the end of the quarter, probably 6 of them. That came from one of our larger customers. And the I/Os or the options, I would say, they don't put a lot of them in. They do load up on the programs. That was one of the reasons why we had to conquer this 4.0 because it was part of that order because they were putting LumenX heads in the systems, not as much as we would like, but enough. But they were the smaller systems, less I/Os and you've got 6 of them in the mix with a 7,000, couple of 3500s, it's going to end up putting a lot of pressure on that because the mix was just so pointed in one direction. So that's definitely going to drive down. The second half, we have a broad -- we have a very broad mix of products on the system side. 3000s, 5000s, 7000s, all look very similar, equal weighted in Q3 and Q4. Certainly, with the manual launches, we should certainly get a lot more conversations around systems as we drive more value into the product line. But we also don't have any revenue in the second half for any of the manual system launches. And I will tell you from the early demos and conversations we've had with customers, they're literally waiting for that product to come out to buy. Like I think we've already got like 15 manual systems. Not a ton of money, but that will start to really build out. And we have a lot of low-hanging fruit with our system customers over the 500 systems that have been delivered over the last 10 years, every one of those customers could at least buy 2 of these manual systems. So we really expect that to drive a lot more conversation with customers, but also get us more exposure into what they're thinking and where their businesses are going also for 2026. So that's the reason for the depressed margin. We also had some additional costs and cost of materials with prototyping for V1, reskinning V0. So that had a little impact on the margin as well because those costs were not connected to any specific revenue, just added cost to the supply side. So I hope that answers your question.

Our next question comes from Casey Ryan from WestPark Capital.

Real quickly, I think we've talked in the past about wanting to expand beyond automotive, and I know that this takes time. Would you be happy to give us sort of a qualitative view of how it's going sort of expanding and getting into new customers, right, and talking to people who maybe knew you but hadn't chosen me in the past because that feels like a big expansion area, right, long term?

Right, right. No, it's a good question. And unfortunately, right now, I would say the new conversations are really going to be driven by the lead generation from the 6 shows we have coming up in the second half. Right now, I wouldn't say that we're not out there selling, but certainly, we have these new product launches coming up and that we know is going to drive more value to customers than new customers. So we're kind of in that in-between moment. But certainly, on the customer side, yes, automotive continues to be a big because it's been very large. And when you have these trail headwinds -- as an example, Korea, our Korea rep, South Korea rep, was one of our largest revenue- producing reps. And at this point last year, they had acquired. And when they forecasted for 2025, certainly, tariffs wasn't in the discussion at that time in December forecasting. But they were earmarked for $3.5 million of revenue. They've done 0. And it's a lot has been tariff-driven because in Korea, the customers we have there are tariff affected, their volumes slow down and they just put CapEx on hold. And so that's been a direct impact to our revenue for the first half. We would have a far better first half if that had not occurred. March, April and May were scary months. best I could say. June was outstanding. So we unlocked some of that kind of CapEx spend that was out there. But again, it ended up being mostly automotive. So it went from -- we went from 59% or 58% to 66%. It's not the direction I want to go in. We definitely want to be more diverse in our domains that we serve because that obviously makes the revenue more…

Right. Okay. Good. Well, that's actually very helpful. overview.

We just can't get out of automotives way. They like us.

You're just too popular.

I guess so.

So the bookings growth was really good, right, quarter-over-quarter, I think 26%, I mean, which is a big number off a small number, so I understand that. But do you feel like we could continue to see bookings at this level? Or is it reasonable to think that bookings could actually keep rising as we move through the year not at all -- that they would be recognized?

They should and they will. I mean we're rolling out new products. The good thing about the booking numbers -- and so systems are a little more challenging, like depending on the system type, the fact that we -- they were 5000s actually was a good thing because we could build them faster. They're easier machines to make. China is -- I mean, the order was in China, the Shanghai facility built them and delivered them. So that was a unique situation, super -- that's why we were focused so hard on getting over this UFS, not only just to complement or be able to show that we can actually do this and be able to get high yields on UFS technology because there are multiple protocols out there. The sweet spot right now for UFS is 3.1 and about 128 gigabytes. But there's already 256s out there, there's 512 coming and 1 terabyte coming in 2027. So the unique thing about this is we were able to book and ship within the quarter a decent amount of those systems to help the quarter. So yes, that was the big help there.

Okay. All right. Terrific. And then sort of getting to the gross margins, I guess I'm a little less concerned about it, but quarter-to- quarter. But tell me about the spread of the margins across your products. How widespread do we have to think about in terms of mix? I mean, are some at 70% and some at 30%? Or is everyone kind of in this 45%?

No, no. Like it's a good question. Actually, the Board asked that question yesterday. We need to do a little bit more homework on that so we can identify. One of the things that manufacturing implemented at the beginning of the year is that we didn't do a good job of true cost accounting at the labor level, right, to really understand what our margins are product to product. So I had Dwayne stood in. Dwayne Jones is our VP of Manufacturing. It's awesome for what he does. He's been here for 30 years. And he's been crying for this opportunity to be able to track the data as we build. And so they've been doing that, and then we'll start to be able to do -- we are doing true activity-based accounting on manufacturing. We understand the exact margins of those products. And look, manual systems are going to have a much like sockets, very similar margin to sockets, maybe even more because as we build leverage on the platform, we can also increase our pricing and that increase in pricing. And as I looked at how we price things, we tend to mark up the things we don't make pretty high, and I don't think we mark up our core platform and where we invest our capital high enough. So we're going to start breaking some of this stuff out, just especially internally so that where we're spending the money accurately shows the generation of revenue and the gross margin contribution to the company. And so then when I talk about investing at the core, people will get excited, right, because they'll see the real value that we drive by making those investments in what we do, which is building programmers, not analysts. We do -- the PSV…

[Operator Instructions] Our next question comes from George Marema from Pareto Ventures.

First, I just want to say I'm absolutely thrilled with the team's energy and the big positive cultural shift going on there. It's like an entrepreneurial startup, and I'm just thrilled about this.

It is. I will tell you, I changed the work-from-home policy a few weeks ago. Not everybody loved it. But I will tell you, in the last 4 weeks, it's amazing the amount of collaboration we have now. I've got the software team in here altogether. They're here on fixed days. You can see the collaboration growing, which is -- it will just extend into the value that we'll be driving in the second half. I mean some of the software team came out and fixed the old product. When we get this thing out there, it is the amount of value that it's going to give our customers is -- I was just blown away when they did the demo last week. I mean it's pretty special what's going on in the building right now.

That's great to hear. A couple of questions. One is on this $1.4 million EV order from China. What kind of penetration does this represent into this company? And does it meet all their needs? And what does this replace that they were using?

It didn't replace. It's -- obviously, the Chinese EV market is doing very well inside of China and also outside of China, where they don't have massive tariffs put on their cars and can actually sell them. So that is -- they were an existing customer already had 20 systems. So this was adding to their demand. So an existing customer. And that's why the configuration was what we expected from them and price point, we kind of knew and look, it was a great order to overcome. The UFS technology is something that they already use. It's also -- so that was 4.0 because they were going to make a new investment and those systems are on a product that's going to adopt the 4.0 protocols. Like I said earlier, the 3.1 is the sweet spot today. They use that in our systems for that as well and have been dealing with the yield issue. It's why we were -- they were like, "Look, we're not going to place an order unless you can show us you can conquer this." And we did, and we got the order. I mean we work -- the engineers work literally 24/7 for 8 weeks. I mean it was it was hardcore. And so -- and they accomplished a phenomenal goal, which also gave them all the hope that we know we can conquer the 3.1. And all our competitors are having the same problems. Once we solve this yield issue, I believe there's pent-up demand in the sweet spot right now. So I can't say that confirmatory with 100% confidence, it's just a feeling, but I think customers have also held back in general offline programming until this problem can be resolved. And they're just managing through. They can get enough yield to build the products. But if I was them, I wouldn't be happy either. But we're giving them a lot of hope that we -- not hope, we've shown them that we can fix this. And so we're pretty close on. I would say we're probably 4 to 6 weeks. Again, that's just a range, and it may be 8, but we will get 3.1 solved by the end of this quarter.

So let me go with that. So if you get that solved and then the 4.0, like can you sort of describe best you can sort of what kind of dollar market opportunity does that represent for you guys if you solve these problems? And also, does the profile of this solution have the same type of recurring adapter revenue? Or is it less or more or about the same?

No, no, it was same adapter revenue and all that. Yes, none of that changes. If anything, they probably would increase, obviously, as they move into more of using UFS across their entire platform. But I'll tell you, it's not just Asia, it's Korea, it's Europe. It's -- there's not much UFS, believe it or not, not a ton in Mexico, but it's coming. So as more and more adoption of the UFS and NVMe too, which is something we haven't talked about before, but it is a technology that also is growing at 14% CAGR. We actually, ironically, the bench equipment was already here to start working on it. It was just never implemented. So it's hard for me to put in dollars because, again, like if I look at the Korea customers, they bought 7000s. They didn't buy 5000s. So they would load up because they're using a ton, especially in consumer, some in automotive. But on the consumer side, you're driving large, large volumes of UFS. So in Korea, they would configure those systems with pretty much all LumenX, no flash. So it's hard for me to give you a very direct answer because it's literally region by region, and it's also market by market. Does that make sense?

Yes. Suffice to say, it's a large opportunity, though, yes.

Yes. Well, of course. And like I said, 14% is twice the overall semiconductor TAM. So it would be crazy not to conquer this. I mean it's where literally a significant amount of our engineering time is being spent right now. We've really -- I dumped a lot of the programs that were in the business in Q4, pretty much all of them because, one, it wasn't investing in the core and it wasn't solving the problem. What I found was and as a Board member, just became recently aware of the UFS but until you get under the covers, you don't really know what's going on. I mean they can flash up a bunch of reports that says we've solved this, we've solved that. In reality, a lot of it was not solved. And it's not because they were kind of guessing as to where they should focus the solve. And I will tell you from my experience of being intimately involved in this right now is that it's literally 4 or 5 areas of our technology and our automation, and socketing is a huge part of this, right? So contacting the device. And also, the LumenX platform is 8 sites. 8 sites was okay with eMMC, not okay with UFS. And so by the new platform goes down to 4 sites, which gives us much more power to every pin on the device, which you need to access multiple of these pins because you're dealing with such complexity in the device itself. So we can solve it with what we refer to as M8, but M4 will definitely be which gets launched in November. But we've been able to do some pretty special things even on the existing platform like 4.0, which has fairly complex communication handshake needs. But I will say from 3.1 to 4.0, the suppliers themselves have gotten better because even some of them implement these protocols in variable different ways. That's the other complexity. It's not the same across all the silicon providers. Some they're really good at it, like Micron. And I won't call out the ones that don't do a great job, but there are some that it's a bigger area of gray. So you have to have the right bench equipment to do that and to identify that and understand it. So the team is learning a lot. And I think through these challenges, we're going to up our ante in these consortiums. We're actually going to be a real member of these different committees, and we'll have representation at those large committee meetings when they start talking about the protocols and so. So we're ahead of this all the time in the future.

And ladies and gentlemen, at this time, we've reached the end of the question-and-answer session. I'd like to turn the floor back over to management for any closing remarks.

Well, I just want to thank everybody for taking the time to listen to our spiel. We're very, very excited about where we're going. The team is as energetic as ever. I think it seems to be increasing week after week. We've got some people that retired and I put them on contract because of their knowledge and now they're thinking, "I don't know if I want to retire." I'm like, "Sorry." No, kidding. I mean, love to keep them around. These are people with 20, 25, 30 years of experience. That's one of the other things that we're really going to start to drive in our customer presentations is why do you choose Data I/O? I can tell you, Dwayne Jones has been here for 30 years. That's 10 years longer than Dediprog, one of our competitors even been alive. So to not promote that educate the knowledge base that's in this building, it just needed to be unlocked. And that's what we're doing. And I think it's obviously helping us solve these complex problems and get to where we need to go, but it's also driven a lot of excitement. And the collaboration, like I said, we've got some interns in here now that are learning and that they're loving doing the business. They're learning -- what they're learning they love. And some of our best hardware engineers were those very interns 5 years ago. So yes, I just think as we build more and more knowledge, we need to be viewed as the experts in this space, and that's what we're doing. So I want to thank everybody. It was definitely a hard quarter. This was not easy. The first 2 months were ugly, and we had a great close to the quarter. My goal is to get through the first half a little unscathed, I guess, and not too many scars because I know the second half is going to be better. So thanks, everyone.

And ladies and gentlemen, with that, we'll conclude today's conference call and presentation. We do thank you for joining. You may now disconnect your lines.