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Operator
Ladies and gentlemen, thank you for standing by.
Welcome to the Data I/O Corporation third-quarter earnings conference call.
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).
As a reminder this conference is being recorded today October 24, 2007.
I would now like to turn the conference over to our host, Mr.
Fred Hume.
Please go ahead, sir.
Fred Hume - President and CEO
Thank you, Josh.
Welcome to the Data I/O Corporation third-quarter financial results conference call.
With me today is 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 may be construed as a prediction of future performance or events are forward-looking statements which involve now 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 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.
DAIO I/O is under no duty to update any of these forward-looking statements.
Good afternoon.
New orders for the third quarter were $8.3 million up 33% from the $6.2 million recorded in the previous quarter.
Revenue was $7.3 million, gross margin was 62% of sales and total operating expense for the quarter was $2.9 million.
Income for the third quarter was $1.6 million resulting in earnings $0.18 per share.
I reported last quarter on our plans for restructuring the Company to lower the breakeven revenue to $5.3 million and achieve our operating profit model of 15% based on 60% gross margin and 45% operating expense at the 7 to $7.5 million revenue level.
I'm very pleased to report that the restructuring action was completed in the third quarter and operating results exceeded our goal with actual operating profit for the quarter of 22% of sales.
Joel will share more information on the financial results shortly.
Orders were particularly strong up from the second quarter by 57% in North America and 24% in Europe driven primarily by significant business with major wireless handset manufacturers as well as with our automotive customers.
Orders in Asia were up 3% from the second quarter with declines in China being more than offset by orders in the rest of Asia reflecting continuing recovery in this region from the weakness in the first half of the year.
I will say more about our Asia sales activity in a moment.
Orders for automated equipment, approximately 60% of our business in the third quarter were up 68% from the second quarter while orders from manual equipment declined 24%.
Orders for aftermarket products, principally adapters, were up 15%.
Earlier this month we reported on a major sale of road runners to a leading automotive electronics manufacturer.
We expect to receive further orders from this customer in the fourth quarter of 2007 and in 2008.
One of the exciting elements of this success is that the business was driven entirely by the potential for process improvement and cost savings rather than the need for more programming capacity.
This was a major validation of our added value message to OEM customers that had been the focus of our sales strategy.
During the third quarter we also shipped a new solution for duplicating flash media to the world's largest handset manufacturers.
This solution includes new capability for the FLX500 as well as special software that integrates our solution into their factory data management environment to replace manual processes.
We expect additional orders from this customer in the coming quarters.
In the third quarter, Harald Weigelt our Vice President of worldwide sales and I had the opportunity to spend over two weeks in Asia meeting with our channels as well as our direct employees.
During my visit to Japan I observed Toyo's progress in building their sales and marketing program and I expect to see tangible results particularly with automotive accounts soon.
We met with our Korean, Taiwanese and Southeast Asia distributors and reviewed their sales plan for the coming months and spent time with our direct operations team and sales team in Shanghai.
I came away from these meetings with a sense that our business environment in Asia is improving.
We were also able to announce a new sales management structure for Asia while we were there.
[Nick Deffen] has now become director of Asia sales reporting to Harold.
Nick was part of our Asia sales team several years back but has most recently been the key driver of the flash media solution that I mentioned earlier.
Nick has lived in China and speaks Chinese.
We're very pleased to have him back as part of the Asia sales team.
I'm also pleased to announce that Richard Chan has joined us as Asia's sales manager based in Taiwan.
Richard was until recently a Sonny Ericsson and a Nokia account manager for Fox Link.
With Nick and Richard in their new positions I'm confident that we will gain momentum in our sales programs in China as well as the rest of Asia.
Next month we will be introducing several new products and application solutions at Productronica in Munich the world's largest tradeshow for our type of equipment.
The introductions will include the flash media solution provided to the handset manufacturer mentioned previously as well as new solutions for our automotive customer groups.
At this time I will ask Joel to provide you with more information on our financial results.
Joel?
Joel Hatlen - CFO
Thank you, Fred.
Good day to everyone.
Revenues for the third quarter of 2007 were $7.3 million a 26% increase compared to the $5.8 million in the second quarter of 2007 and a 7% increase compared to the $6.8 million in the third quarter of 2006.
International sales represented 86% of total sales for the quarter a four percentage point increase compared to the second quarter of 2007 and an eight percentage point increase compared to the third quarter 2006.
Sales in Europe and the Americas were responsible for the revenue increase compared to both the second quarter of 2007 and the third quarter of 2006.
The increase in revenues versus orders as Fred discussed compared with the second quarter of 2007 and the third quarter of 2006 resulted from all three areas -- automated systems, nonautomated systems and aftermarket adapters.
Two main shifts in revenues were important during the third quarter -- increased roadrunner sales, a record quarter, and higher percentage of sales that were taken direct.
The gross margin for the third quarter of 2007 increased in dollars compared to the prior quarter and the third quarter of 2006 primarily due to the sales volume increase but also due to the higher average selling prices received in direct sales business.
The gross margin percentage was 62% in the third quarter of 2007 up from 49.1% in the second quarter of 2007.
We had very favorable material margins for the quarter due especially to the favorable product mix and sales of some depreciated used equipment.
Margins benefited by the channel mix from the direct sales higher average selling prices.
We had favorable manufacturing variances this quarter in particular for labor and overhead resulting from the volume of product built and the restructure related cost savings compared with the previous quarter and the third quarter 2006.
Operating expenses before restructuring charges in the third quarter of 2007 were down by 309,000 compared with the second quarter of 2007 and down by 650,000 compared with the third quarter of 2006.
All areas of spending were down due primarily to the receiving the full benefit of the cost savings from the restructuring actions taken.
Also impacting operating expense were engineering hours assisting production and charged to operations of approximately $100,000 and savings related to employees high use of vacation time.
Selling expenses included higher commissions of $175,000 due to the volume and payments to representatives in sales taken direct.
The restructure cost reversal of $107,000 was primarily severance related and most of the remaining accrued amounts are expected to be paid during the next two quarters.
Our GAAP-based net income was $1.6 million or $0.18 per share for third quarter of 2007 compared with a net loss of $1.1 million or $0.13 per share for the second quarter of 2007.
Net income for the third quarter of 2006 was $47,000 or $0.01 per share.
Each of these quarters included expenses of $0.01 per share that results from the impact of expensing options under FAS 123R.
As Fred mentioned were very pleased to have exceeded our target operating model of 60% gross margin and 45% operating cost.
At this point I will return the discussion back to Fred.
Fred Hume - President and CEO
Think you Joel.
And now Joss, we will be happy to take questions.
Operator
(OPERATOR INSTRUCTIONS) Rick Serafini, Elmwood Capital.
Rick Serafini - Analyst
Good quarter.
I wanted to ask you were there any 10% customers during the quarter?
Fred Hume - President and CEO
For the quarter the answer is yes.
We had a new automotive customer that all by themselves were over 10% for the quarter.
We also had one of our big handset manufacturers that they combined with the various EMS contract manufacturing sites that they have also represented over a 10% customer.
Rick Serafini - Analyst
You mentioned, Fred, about selling more direct now and that raising ASPs.
Could you give us a better idea of the effect that it's had and what the trend for that is?
Fred Hume - President and CEO
Well, part of our strategy going back now over a year was to sell more direct, that is take the orders directly from customers rather than sell through distributors.
And it does increase our operating expense as a result of commissions as Joel mentioned.
But it also allows us to report higher gross margin because we are essentially invoicing directly to the customer.
And the net benefit is substantial for us.
That's been one of our strategies.
It's been one of our trends and it's particularly important in those areas where we are dealing with significant major customers.
Joel, do you want to add anything else to that?
Joel Hatlen - CFO
No; the only other thing I would add to that would be to the extent that our product mix -- channel mix is more international than domestic, we do tend to get a slightly higher average selling price in the international areas than we get in the US.
So that also was a piece of that channel -- actually geography mix that helps us as well.
Rick Serafini - Analyst
And I guess two other questions about two other accounts.
Number one, I noticed RIM announced they're beginning to sell in China.
How should that business play out for you over this quarter, next quarter?
And Motorola is starting to come back.
When should that business kick in for you?
Fred Hume - President and CEO
Well, it's hard to answer those questions definitively.
I can tell you of course that they are both major customers of ours and certainly RIM has had a lot of momentum in the third quarter, momentum in the fourth quarter.
We expect to see some significant sales resulting from this opportunity that they have now to sell in China.
That looks very favorable.
And I would expect that as Motorola starts to further pick up we're going to see the full impact of that.
It's difficult for us to predict whether those are just Q4 effects or how much of that is Q1, Q2 effects.
But certainly the momentum is building.
Joel Hatlen - CFO
From the standpoint of RIM since right now when they produce a phone they're using our equipment, anything that helps increase their distribution is always a good thing for us.
Operator
David Kanen, Pointe Capital.
David Kanen - Analyst
A couple of questions.
In regard to -- OpEx was around $3 million for the quarter.
Is that a sustainable run rate going forward?
Obviously, if sales really grow I know there's some variables expense, commissions.
But if we were to do the same type of revenue number is that sort of a steady-state OpEx number?
Fred Hume - President and CEO
No.
I think the couple of things that I mentioned in my remarks I would say that we had some special benefits as a result of employees using lots of extra vacation during the third quarter and that's probably about a $70,000 benefit during the quarter that we didn't have in a previous quarter, for example.
The R&D guys, the engineers that were doing some work in production -- we don't anticipate a continued extensive use of them in production.
So that's another piece that I would not normally expect to repeat.
So those costs while they are staying the same in the Company with regard to those engineers, it's the classification as to whether they're operating expense in engineering or whether they're up in cost of goods sold as part of operations.
The last piece is that we don't have on a seasonal basis tradeshows in the third quarter compared to maybe the first and fourth quarter.
So there are some things that on a seasonal basis will flip around.
But this is in keeping with what our target was which is when we're at our breakeven point we would be at about the $3 million in operating expenses -- is kind of what our target was.
The only thing that I add is that in this number of course we did have this extra commission of $175,000 as you point out.
So I just caution you we are in this broad range around this number.
We feel pretty good but it isn't absolutely fixed.
David Kanen - Analyst
okay, I just wanted to get a flavor for the leverageability.
Clearly if revenues grow there's quite a bit of expansion potential to operating margin -- okay.
It seems like -- very impressive quarter -- but yet Asia was up only 3%.
Is that something that you expect to improve going forward in Q4 for example?
You expect that business to grow a little better than 3%?
Fred Hume - President and CEO
The business outside of China grew substantially during the quarter.
So we had very good growth in the other regions of Asia.
And that was offset by a weakness in our operation in our sales agents that we have in China and that's been a problem.
We've had a transition in our sales team in China.
We think during our visit their Harland and I had a chance to address some of the issues.
We've announced some changes there in China as a result of our visit.
And then we have a management team now in place with Nick and Richard that we didn't have in the third quarter.
So they are now in place and so I think that's really going to help address the issues that we've had in China.
So I look forward to seeing improving results in the Asia area.
It's significant if you think about it in the sense that we are probably missing close to $1 million from where we would normally be running in our Asia operations.
David Kanen - Analyst
So it should improve the near future?
Fred Hume - President and CEO
Yes.
David Kanen - Analyst
What percent was Toyo of revenues, if you can break that out?
Fred Hume - President and CEO
Very very small.
Joel Hatlen - CFO
We don't have that information and we probably wouldn't be making that publicly available.
But it was not a material part of revenue during the quarter.
David Kanen - Analyst
Do you expect Toyo to generate meaningful revenues going forward?
Joel Hatlen - CFO
Yes.
David Kanen - Analyst
It was not this quarter but going forward you expect that?
Joel Hatlen - CFO
Yes I do.
David Kanen - Analyst
And then also there was a -- I guess you can't mention them by name -- but a major consumer electronic company, MP3 player company announced a new phone.
Is that something -- you expect to do business with them on a going-forward basis, the programming or selling to who their outsourcing programming to in Q4 and beyond?
Fred Hume - President and CEO
They are a customer and they're using our equipment.
We expect to see additional business as a result of their success.
Now, our big machines for example, our [PS580A] machine has got the capability of programming five or six million parts a year.
So it takes a period of time for them to add to essentially utilize that capacity and need additional increments.
But as they do use up that capacity and need additional equipment, we expect that because we have proprietary software that relates to providing certain intellectual property protection for them.
So yes we believe we will see increased business as result of their success.
David Kanen - Analyst
Seasonally is the fourth quarter generally as good or better than the third quarter?
Can you give me a sense as to -- I know the first half of the year has been really slow.
Is that reasonable to expect that the fourth quarter generally is seasonally strong and is as good as the third quarter?
Fred Hume - President and CEO
Well that's a little bit more difficult to say.
What I can say for sure is that Q3 and Q4 have historically always been our strong quarters.
They really have been the quarters that have driven the years' results.
And you know some years the third quarter's a little stronger.
Some years the fourth quarter is a little stronger.
It depends a little bit on whether you're looking at orders or revenue.
But you know we had a lot of momentum going into the fourth quarter.
We have major customers RIM, Nokia, Apple, Continental, Siemens, [VDO]; they're all doing well.
We have an experienced team in place to address the issues that we have faced in the past and in Asia; so we are encouraged.
David Kanen - Analyst
Okay, that's good.
I will let some other people ask questions.
Again, congratulations and I will speak to you soon.
Operator
(OPERATOR INSTRUCTIONS) Mr.
Hume, at this time we do not have any further questions.
Fred Hume - President and CEO
Well thank you very much for joining our conference call today and we look forward to talking with you at the end of the fourth quarter.
Thank you very much.
Operator
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