Data I/O Corp (DAIO) 2008 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Data I/O Corporation's first quarter financial results.

At this time, all lines 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, we are recording the conference today.

I would now like to turn the conference over to Mr.

Fred Hume, President and Chief Executive Officer.

Please go ahead, sir.

Thank you, Art.

Thank you, and welcome to the Data I/O Corporation first quarter 2008 financial results conference call.

With me today is Joel Hatlen, Vice President 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 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 or forward-looking statements which may 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 levels of orders; 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, 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.

Revenues for the first quarter of 2008 were $6.2 million, up from $6 million in the first quarter of 2007.

Gross margin was $3.8 million or 60.8% of sales, up from 55.1% in the first quarter of 2007.

Operating expense was $3.1 million, down from $4.1 million in the first quarter of 2007.

Operating income was $626,000 or 10.1% of sales, compared with an operating loss of $789,000 in the first quarter of last year.

Net income was $2.6 million, including other income from the sale of patents announced previously, compared to a net loss of $785,000 last year.

Earnings were $0.30 per share compared to a loss of $0.09 in the first quarter of last year.

Cash at the end of the first quarter was $10 million, up from $3.4 million at the end of the first quarter last year.

Cumulative earnings for the three quarters following our restructuring actions in the second quarter of last year are $0.59 per share.

Joel will provide you with more details on the financial performance in a few minutes.

We are particularly delighted with the sales performance in Asia during the first quarter.

Orders in Asia were up 61% from the first quarter of last year.

Orders from customers in China alone were up 150% from the same quarter of last year.

This gives us confidence that the changes we made in our Asia sales team are bearing fruit.

Orders in the Americas and Europe were down 23% from the first quarter of last year collectively, primarily due to a delay in orders related to a major handset customer that changed contract manufactures in their supply chain.

We believe this to be a timing issue affecting Q1 only.

Substantial orders from this customer and related parties were received after the end of the quarter, and orders for April have been strong and more than $2.5 million to date.

We received additional orders from a large handset manufacturer for our flash media duplications solution built on the FLX 500 platform in the first quarter.

The FLX 500 sales were particularly strong in the quarter and we expect the momentum to continue.

In the past few calls, we have also mentioned our increasing emphasis on automotive electronics accounts.

This business is tied to increasing functionality across all models, independent of overall production and annual model changes.

We are developing new solutions for this sector that will be introduced this year, and believe that this business will grow for us in 2008.

We added a new sales channel, TekServe, serving Taiwan and China in March.

Their customer list in China outnumbers ours by a factor of 10, and we expect to see significant results from this channel during 2008.

We are also adding new channels in Israel and Brazil that were previously associated with a competitor.

We expect to add sales channels throughout the year to provide greater and more effective sales coverage globally.

Last year, we took several actions to improve our gross margin.

We transferred our adapter production to China; we increased prices on certain products where we had demonstrated substantial improvements in customer value; and we increased sales of our support contracts.

Our operations team is focused on achieving our gross margin goal of 60% and improving investment turnover through a focused initiative on improving factory controls and operating efficiency.

As a result, we again exceeded our gross margin goal in the first quarter.

During the past three quarters, we have demonstrated the financial leverage in our business model.

With that model in place, our focus is now on delivering meaningful top line growth.

Our new sales structure in Asia, the addition of sales channels in key markets, the introduction of new products, and the new business initiatives are all actions taken toward that end.

These actions give us confidence that the 15% revenue growth goal for 2008 is appropriate.

At this time, I will ask Joel to provide you with more information on our financial results.

Thank you, Fred.

Good day to everyone.

Revenues for the first quarter of 2008 were $6.2 million compared to $6 million in the first quarter of 2007, an increase of 3%.

International sales represented 84% of total sales for the quarter, with Asian sales increasing 22%; European sales were flat; and the Americas sales decreased by 8% compared to the first quarter of 2007.

The variation in sales percentages versus the order percentages Fred discussed, relates to the use of or generation of backlog.

The backlog at the end of the first quarter was $1.5 million.

While the first quarter had a typically seasonal weakness in revenues compared to the fourth quarter of 2007, we are experiencing -- we also experienced customers waiting until the last minute to place orders or delaying placing them until after the end of the quarter.

We have had strong orders so far in the second quarter with more than $2.5 million of new orders through the 23rd of April, as Fred mentioned earlier.

The gross margin for the first quarter of 2008 increased in dollars and percentage compared with the first quarter of 2007.

Gross margin as a percentage of sales was 60.8% for the first quarter of 2008, compared with 55.1% for the first quarter of 2007.

The primary causes for this change were due to favorable factory variances; savings from the move of adapter production to China; restructuring actions taken during 2007; and product mix changes.

The factory variances for the first quarter of 2008 compared to the first quarter of 2007 included $45,000 less scrap and material usage; $35,000 due to more depreciated cost on sales of used systems; and $32,000 of more favorable standard changes or purchase price variances.

Partially offsetting the favorable variance comparisons were inventory reserves, higher by $20,000, as well as freight in Euro-denominated costs.

Operating expenses were lower by $782,000 in the first quarter of 2008 compared with the first quarter of 2007, before amounts related to the restructure.

The restructuring actions taken during 2007 were the primary reason for the reduced expenses, as well as good expense controls.

Selling, general, and administrative expense were also impacted by approximately $100,000 of higher bonus expense offset in part by lower channel commissions.

Income from operations was $626,000 or 10% of sales for the first quarter of 2008 compared to a loss from operations of $789,000 in the first quarter of 2007.

Non-operating income during the first quarter of 2008 included a gain of $2.1 million from the sale of patents, which retained licenses, which had been previously announced.

In accordance with U.S.

Generally Accepted Accounting Principles, GAAP, net income for the first quarter of 2008 was $2,642,000 or $0.29 per diluted share, compared with a net loss of $785,000 or $0.09 per share in the first quarter of 2007.

Earnings per share included the impact of equity compensation expense under FAS 123R of $0.01 per share for both the first quarters of 2008 and 2007.

Data I/O's cash was $10 million at the end of the first quarter.

This higher cash balance reflects the funds from the patent sale and, compared to a year ago, reflects the collection and resolution of the Asian distributor receivables that had been delinquent.

During the quarter, Accounts Receivable increased, primarily due to sales being especially late in the quarter, as well as delays in collection of two large systems totaling $542,000 from the fourth quarter, for which payment has been received in April.

We were pleased to have operating results that reflected the work we did in adjusting our financial structure in line with both our breakeven model and relative to our target business model.

The leverage and profitability from growth in revenues is the cornerstone on which we are focusing for 2008.

At this point, I will return the discussion back to Fred.

Thank you, Joel.

With a seasonally weak quarter of the year historically behind us, good order strength in April and many substantive prospects in our sales funnels, we are looking forward to improving business in the second quarter.

At this time, we will take your questions.

(OPERATOR INSTRUCTIONS).

Rick Serafini, Elmwood Capital.

I'm wondering on the gross margin front, can you give us some more detail, Fred, and what you've done to -- or are doing to ensure it stays 60% or higher?

What's the possibility of getting to a 63% to 65% gross margin?

Is that possible?

Well, Rick, we took several actions to drive the gross margin up.

If you go back to the period of 2005/2006/2007, you see gross margins in the range of 55%, 56% -- in that range.

And our goal is to drive that up to 60% and to gain at least essentially five percentage points.

And we did that with a combination of three primary actions.

One was transferring adapter production to China.

The second one was increasing prices selectively on a number of key products.

And the third one was increasing the sales of support contracts of our automated systems.

And we are confident that the actions we took will raise that average gross margin by approximately 5 percentage points.

Now, it doesn't change the fact that from quarter to quarter, there will be some swings up and down, based on product mix and channel mix, that we just can't predict accurately at the start of the quarter.

Because the way orders come in affect actually what the result is.

But we are very confident in that increase of approximately 5% over where we have been historically in the business.

Now, looking forward, there are a lot of additional opportunities that we're pursuing to drive up the gross margin.

Now, we haven't set specific goals; we're still saying that for 2008, our goal is to deliver 60% gross margin.

And we are confident that we're going to be able to do that for the year.

In terms of named accounts, we see Apple as starting to ramp for the new introduction.

But I think today Motorola said they're introducing three new 3G models.

Are you starting to see activity from Motorola again, which has been dormant for 12 to 18 months?

Rick, I really can't answer that question.

You know, there's just -- it's just difficult for us to talk specifically about business directly from a customer, because in many cases, their supply chains are very long.

And it could very well be that some of the business that we got in the first quarter in Asia came through contract manufacturers that they were using.

And our people in Asia may not have even known, in some cases, that that business happened to be directly related to Motorola.

Okay.

Let me ask, then, about -- you mentioned you've signed on some distribution partners that you've taken from a competitor of yours.

Can you tell us about that?

And give us a sense of what these new distribution partners could add to Data I/O this year?

Well, as I mentioned, the first one is TekServe, our new channel for Taiwan and China.

TekServe is a substantial company.

They have very deep relationships with many companies in China, particularly those that are headquartered in Taiwan; companies like Foxcon and others; HTC; I mean, you could go down the list.

They're just a -- they're a very reputable firm.

They have the same values that we have.

They have a very substantial customer list, as I mentioned.

We've already established a good relationship with them in just the first month.

And I look forward to seeing the impact of their sales performance in 2008.

They don't really have a lot of hurdles to overcome.

They have the customer relationships behind them.

They're starting to work really closely with our Asian sales team that's based both in Taiwan and in China.

So TekServe is just, in my mind, kind of a slam dunk for us for 2008.

The other channels, the channel in Brazil and the channel in Israel, are channels, as I said, that have been selling our competitor's product.

They are substantially stronger companies than the companies that we had been using in those countries for channels.

They know the customers.

They have good relationships.

The company in Israel has been around for close to 40 years.

I've known the owner of that company for almost that same length of time.

So I feel very confident that these channels are going to perform well for us in 2008.

Rick Serafini Okay, thanks, Fred and Joel.

I'll go back in the queue.

David Kanen, Pointe Capital.

Hi, guys.

Congratulations.

Good quarter.

In your prepared remarks, you alluded to strength in new orders through April 23.

Can you just give me a little more detail on where the strength is coming from?

Which verticals?

Sure.

It's primarily in the wireless sector, although the automotive isn't very far behind.

We had expected some substantial business, Dave, in the first quarter, related to the wireless handset manufacturer that I mentioned.

And they made a number of changes in their contract supply chain, which impacted the timing of the orders.

And after the end of March, while we had expected those orders in the first quarter, they didn't go away; it's just that they got delayed into the second quarter.

And we've already started to see those orders flow in.

And we expect to see substantial business from that in the second quarter.

We also got an important order out of the automotive sector that came in just on April 1.

And that was another one that was pretty much almost certain was going to come in Q1.

And there was one last-minute signature that they couldn't round up until the very first day of April.

And so that flowed in, in April.

So we feel very good about sales -- the orders that have come in so far this month and the order funnels for the second quarter.

If you could comment on the handset customer -- which systems are they purchasing?

PS or Flex 500?

They're purchasing our high margin RoadRunner product.

The RoadRunner, okay.

Great.

I have a few questions, if you could bear with me.

Sure.

Was there any business from [Toyel] this quarter?

I would say that there was continuing business with respect to our legacy product lines.

Okay.

Do you guys have any visibility into their pipeline?

Have they communicated with you guys some of the deals that they're working on?

Well, yes.

We have sales funnels, Dave, that we review every week.

And I can tell you that there are opportunities on our sales funnels that they have identified and they are pursuing.

And we talk about those literally every week.

Okay.

Getting back to these new distribution partners.

You alluded to taking -- I'm sorry, you guys replaced a competitor, I guess a product that this distributor was carrying.

Do you guys have any sense as to, on an annual basis, how much business they were doing with your competitor?

We really couldn't talk about that, Dave.

You put out a press release, I think about two or three weeks ago, about an order for a PS System from Stoneridge.

I'm not really that familiar with them.

Can you give me a sense as to what the potential is there?

Is that a one-off type of order or is this a customer that you expect to get repeat business from throughout the year?

Well, it's a customer that we see ongoing business potential with.

This was an important customer for us because it represented an application that we wanted to talk about at the Society of Automotive Engineers Show in Detroit last week.

So that was a real important press release because it gave us an opportunity to talk specifically about those applications with customers that came to the SAE show in Detroit.

And so we see a lot of potential -- not just within that account, obviously, but with other companies like that firm.

Okay.

So you haven't seen any slowdown in interest from automotive at this point?

No.

No, we haven't.

I don't anticipate any, primarily because our business really isn't tied to specific production levels at this point or particular new vehicle introductions.

It's really tied to the introduction of new functionality in their existing -- in the existing cars as they implement new electronic systems.

And they're procuring this equipment to provide the production capability that meets the functionality needs of these new systems.

That sounds good.

And I know in a previous presentation, you had alluded to trying to get some more handset customers.

Have you had any progress there?

Are there any expectations this year or this quarter for adding new wireless handset customers?

Well, I can say that in the first quarter, our significant handset orders came from existing customers.

But we have every reason to believe that we're going to be adding new customers in the wireless sector throughout the year.

And we have encouraging opportunities.

And that's really all I can say about it at this point in time.

Okay, great.

And as far as your operating model, operating expenses were a little lower than I had thought, because in a previous call you alluded to Sarbanes-Oxley expense and then also, I believe, there was a tradeshow, so you had said that would probably drive OpEx up a little bit.

So the fact that it was at 3.1 sequentially, is it possible in Q2 and Q3 that operating expenses could actually move closer to $3 million or is that really pushing its?

You know, it can be a lot of different things.

I would have to say that we basically were very, very careful in the first quarter, given how slowly the orders were in coming in, in January and February, to really controlling our costs.

Because we, frankly, just didn't want to be in a situation where we had costs growing but without the revenues to match it.

So I think that we artificially held expenses down a little lower than they would normally have been.

That being said, we are really watching our expenses, and trying to leverage our overall model.

Joel, if you talk to the people out in the plant, I don't think any of them would think that you were holding it down artificially.

I think they would feel very seriously that you were holding it down.

Dave, as Joel said, we just watch it very closely.

And we want to make sure that we don't build any ongoing costs into the model.

Our goal is to turn the increased revenue that we're anticipating throughout the year into bottom-line results.

I would be happy to pay a lot more commissions though.

So, we're going to grow that revenue and pay more commissions, is my goal.

Okay.

And my last question, before I turn it over to someone else in queue -- what was interest income for the quarter, Joel?

Interest income for the quarter was not a lot of money.

It was -- actually, I don't have that here with me.

We're only making about 2.5% type stuff on our funds there, so it's just not a big factor.

Okay.

And I got one last question before I turn it over.

Fred, would you give consideration to a buyback that your cash level is now around $10 million?

And clearly your CapEx needs are pretty low.

And it seems like you'll be generating quite a bit of positive EBITDA the balance of the year.

So is that something you'd consider at this point?

Well, we're having lots of discussions, Dave, about the use of cash.

And this is an ongoing discussion with the Board.

And I really just can't comment specifically at this point in time.

Okay.

Great.

Well, thanks, and good luck.

I look forward to the balance of the year.

Thank you.

Thank you for the questions.

(OPERATOR INSTRUCTIONS).

And speakers, no one else has queued up.

Please go ahead with any closing remarks.

Well, thank you very much for joining us today for the first quarter earnings call.

And we look forward to talking to you at the end of the next quarter.

Thank you.

And ladies and gentlemen, that does conclude your conference for today.

Thank you for your participation and thank you for using AT&T Executive Teleconferencing service.

You may now disconnect.