Data I/O Corp (DAIO) 2008 Q3 法說會逐字稿

Welcome to Data I/O Corporation's third-quarter financial results conference call.

At this time all participants are in a listen-only mode.

Later we will conduct a question-and-answer session with instructions being given at that time.

(Operator Instructions) As a reminder this conference is being recorded.

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

Fred Hume.

Please go ahead.

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

With me today is Joel Hatlen, Vice President and Chief Financial Officer.

Good afternoon.

Revenues for the third quarter of 2008 were $7.8 million, up 7% from the $7.3 million recorded in the third quarter of 2007.

For the first nine months of 2008 revenues were $22 million, up 15.3% from the $19.1 million recorded in the first nine months of 2007.

Gross margin for the third quarter was 59.7%, very close to our operating model of 60%.

Expenses were $3.3 million, or 42.6% of sales, which is below our target model of 45%.

Operating income in the third quarter was $1.3 million, or 17.2% of sales, exceeding our financial model goal of 15% of sales.

Net income for the quarter was $1.2 million or $0.13 per share.

For the nine months of 2008 net income was $5.1 million, or $.56 per share, compared with a loss of $258,000 during the same nine months of 2007.

Cash at the end of the third quarter rose to $11.6 million, up from $4.1 million at the end of the third quarter of 2007.

Joe will provide additional information on the balance sheet items in a few minutes.

Orders for the third quarter of 2008 were $6.9 million, down from the $8.3 million recorded in the third quarter of last year.

Orders in Asia were up 46% over the same quarter of last year, but orders in the Americas and Europe were down 27% collectively from the third quarter of last year.

Approximately $2 million of orders that were expected slid out of the third quarter.

While we always see some orders slide to future quarters, this figure was higher than expected and was likely due to the increased economic uncertainty.

Orders for automated systems were approximately 46% of over business in the quarter down from 61% of our business in the third quarter of last year.

You may remember that in the third quarter of last year we closed a number of large automated system orders including the large order from Continental.

Orders for consumables in the third-quarter increased to 30% of total orders up from 21% in the third quarter of last year.

Some of the highlights for the quarter included, the filling of key sales positions in the Americas and completing the groundwork for the addition of more sales channels globally; the sale of the PS588 to Zollner Elektronik AG, an EMS company in Europe.

This customer had special requirements that made this the most capable automated system that we have ever delivered.

We believe that some of this additional capability delivered to Zollner will have value among other customers as well.

We were also pleased to be one of the few handpicked third-party vendors asked to participate in Siemens SIPLACE Compare Convention in Munich last month.

This was an invitation-only event that brought together 600 of their top customers from 400 companies around the world.

We expect that the numerous contacts we made at the convention will lead to substantial business in the coming months.

We continue to add new customers and broaden the customer base to reach new customer groups.

For example, the Siemens Industrial Automation Group standardized on our equipment.

During the past year the amount of programmable content worldwide grew by approximately 90%.

Much of that demand for programming capacity was served by the equipment and solutions already installed.

Many market research firms such as WetFeet Research, iSuppli, and others have reported on the trends in programmable content and expect it to grow in excess of 100% annually over the next five years.

At this rate of growth the capacity of the installed base of programming solutions will be consumed rapidly setting the stage for a new round of spending.

While we have no inside track with respect to the direction of the general economy in the short term, these data suggest that we have very good reason to expect continued good growth over an extended period of time.

I am particularly pleased with our current product portfolio.

The past three years of technology development has established robust platforms for new application solutions.

This month we received an order from a major wireless handset manufacturer for a software solution to manage the security of their programmable content that was the largest dollar value ordered the Company has ever received for a true software product.

We believe that the new software solutions we are developing for these platforms will be the basis for substantial revenue and earnings growth over the long term.

We are also privileged to share some of the world's finest companies in a variety of industries as customers.

These companies have very strong balance sheets and take a long-term view of their business.

They are continuing to invest prudently to grow their business and we expect to be the beneficiary of that investment.

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

Joel?

Thank you, Fred.

Good day to everyone.

I would like to remind everyone to look at the forward-looking statement at the bottom of our press release.

Revenues for the third quarter of 2008 were $7.8 million compared to $7.3 million in the third quarter of 2007 an increase of 7%.

International sales represented 80% of total sales for the quarter with Asian sales representing 92%, European sales flat, and the Americas sales decreasing 12%.

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

The backlog at the end of the quarter was $1.3 million.

Sequentially revenue was down 3% from the second quarter of 2008.

The gross margin for the third quarter of 2008 was $4.7 million, and as a percentage of sales was 59.7% for the third quarter of 2008 approximately at our business model target of 60% and compares with 62% for the third quarter of 2007.

The primary causes for this change were due to the product mix, as well as having not quite as favorable factory variances for the quarter.

Operating expenses were $3.3 million including $300,000 of bonuses in the third quarter of 2008 compared with $3 million and no bonus expense in the third quarter of 2007.

Note that the third quarter of 2007 included a reversal of expense, a credit of $107,000, related to the restructure.

Income from operations was $1.3 million, or 17% of sales, for the third quarter of 2008 above our target business model and compares to an income from operations of $1.6 million in the third quarter of 2007.

In accordance with US Generally Accepted Accounting Principles, net income on -- net income for the third quarter of 2008 was $1.2 million, or $0.13 per diluted share, compared with a net income of $1.6 million, or $0.18 per diluted share, for the third quarter of 2007.

Earnings per share included in the impact of equity compensation expense under FAS 123(R) of $0.01 per share for both the third quarter of 2008 and 2007.

Note that the year-to-date net income includes a gain of $2.1 million from the sale of patents with retained licenses which have been previously announced in the first quarter of 2008.

Data I/O's cash increased to $11.6 million at the end of the third quarter.

Our cash is invested in money market and government funds and not in option rate securities or corporate debt.

During the quarter, accounts receivable increased primarily due to the sales late in the quarter, but also reflected slowness in collecting international receivables where we are increasing our attentions to collections.

With the current economic climate making forecasting more difficult, we are continuing our practices of cost and spending control, preserving cash, and focusing on generating new customers and revenue opportunities.

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

At this point I will turn the discussion back to Fred.

Thank you very much, Joel.

And at this time we will be prepared to take your questions.

Operator?

Absolutely.

(Operator Instructions) [David Kanen]

First question is can you give me a geographic breakdown of where revenues came from?

Hello?

Dave, we are just checking this out.

Hold on just a second.

Okay.

Hello, Dave?

Yes.

We actually provided the information with regard to how much is in the United States, which for the quarter was $1.5 million versus international which is $6.3 million roughly.

So that is the 80% to 20% split on domestic versus international revenue.

We don't actually break out and say what our actual Asian versus European versus Americas revenue is.

However, we do try and give some directional piece saying which territories were strong or not.

So that is what we have made public at this point.

Okay.

Then I believe you mentioned what recurring revenue was for consumables.

I missed it, can you please repeat that?

Yes, Dave, it was 30% of sales for the quarter.

Okay, so that has kind of been steadily growing, which is good.

What was backlog at the end of the quarter?

$1.3 million.

Okay.

Then, Fred, can you comment on this partnership with SIPLACE, which I guess is a unit of Siemens, and the opportunity in working with them?

Sure.

Dave, we have had a long association with Siemens going back to the year 2000 when we first introduced the RoadRunner, because the Siemens SIPLACE SMT placement machine was really the highest performing machine at the time when we introduced RoadRunner.

And we immediately got a substantial number of sales for the Siemens version of RoadRunner.

So we have continued to work together over the years, but we really see an opportunity right now -- actually both companies do -- to increase our collaboration and our working together.

This Siemens Compare Convention that was held last month was a wonderful example.

We were one of just a very small handful of third-party vendors that were invited to participate.

We were given time on the platform with -- on the agenda to be able to address the whole group of attendees at the convention, and so we were quite pleased with that.

These are typically companies that build electronics products and they use programmable devices.

And so we see a lot of opportunities for joint marketing activities, and I think that is just going to continue to increase over the coming months.

Okay.

Then you also alluded to the opportunity in some of these software offerings that you have productized that -- I forgot the exact wording that you gave, but something to the effect of let's say substantial revenue opportunity.

Could you give a little more color on that?

When do you expect that to contribute in a meaningful way?

And your go-to market strategy, are you going to a initially approach your existing installed base or are these new customers both -- give me a little more detailed explanation, please?

Sure.

Well, the software specifically is designed to help them manage the security of the content that they program into their cell phones.

And it's very similar to the security software that we delivered to another large portable music player and computer company sometime back, Dave, that -- well, now since then is also into the wireless handset business.

But these are significant products for us.

They are new platform, software platform offerings that we have been developing.

We do plan to take them first to our installed customer base and build from there.

They are a very interesting departure from our traditional business model because they have -- they are much more of a license model structured around an enterprise license and site license and seat license structure.

So it's an opportunity for the company to really branch out and make a clear position for itself in an area we might call content management.

We expect substantial revenue, but it's really going to be occurring, we believe, in 2009 as opposed to 2008.

Okay, when you say substantial revenue, does that mean in the 10% range or meaningfully above that?

Well, we believe it can get to the 10% range, clearly.

It just takes time.

Okay, and this will be typical software license margins like in the 95% to 98% range?

Yes, that is correct.

Okay, then last question is -- and I'm sure you have heard this before -- as a small company you face certain challenges and it's hard to leverage some of the public company costs.

Do you see yourself in the future better served being part of the larger organization?

Is that something that you guys talk about internally?

Because the public company cost has to be at least $1.5 million to $2 million a year.

Does it make sense remaining an independent public company?

Dave, I think we can clearly acknowledge the fact that public company costs are significant at Data I/O, and so that is something we talk about all the time.

With respect to your other question, we really can't deal with that.

That is -- all I can say is that the Board considers alternatives all the time.

Okay.

I will let somebody else ask questions at this point.

I may have a follow-up or two.

Thanks.

(Operator Instructions) Steve Spence.

Good afternoon, gentlemen.

I wondering if you can give us a little bit of color about stock repurchase for the quarter and actual ending shares outstanding as opposed to weighted average.

I'm sorry if you released that information, I don't have access to the release at this point.

I am on an off-site location.

We actually have not published that number and I don't have it here at my fingertips.

It's not a lot different than our weighted average, but it is a little bit.

We have not made any stock repurchases during the quarter.

We have a plan that is ancient and in place, but we don't have any authorization from our Board of Directors to execute on that plan at this time, although that could happen at any time by the Board of Directors.

I guess that is about it.

Okay, is there anything with respect to the existing repurchase plan from a policy standpoint that you would care to comment upon?

I guess for those of us who are in the market in an environment of illiquidity I would be looking for the corporations that we own stock in to try to capitalize on that illiquidity to the benefit of the shareholder.

Well, Steve, I can tell you this that it's an issue that the Board discusses regularly.

And there is a whole list of issues, both legal issues as well as policy issues, there are issues with respect to what is in the best long-term interest of the shareholder that we have to continue to evaluate.

So all I can tell you is that there is a complete list of things that the Board of Directors looks at when they consider this issue and that certainly is something that is frequently discussed.

Okay.

I know this isn't the right environment for us to get into a big debate about it, but I would say to you it's, I think in the view of most of your shareholders, it's one of these if not now then when?

You know, Steve, I appreciate your perspective and I understand it.

And I'm certainly not arguing with it, but I do have to say that I have met with a number of our larger shareholders and have actually been advised by one of our very largest shareholders that he would not look favorably on a stock repurchase.

So, I don't think there is complete unanimity of thinking on this particular issue.

Okay.

I appreciate that, too.

Can you comment a little bit for me on another topic with respect -- it's gotten really noisy for companies with 80% of their sales internationally for us to try to follow the moving dot as to currency impact on reported earnings per share.

Last year being one kind of environment then in particular the second half of the year this year being another as we look at year-over-year comparisons.

Yes, Data I/O sells most goods in dollars everywhere around the world.

The exception to that really for the most part is in Germany where we sell some of the things in our direct territories both in Germany and some of the eastern parts of Europe in the euro.

And so there is a functional currency effect there.

We see those sales translating back into our US sales right now at less than we saw earlier in the year because of the strengthening of the dollar and the devaluation of the euro in comparison.

That is a small piece of the European flat sales or declining orders value piece, but that is probably not a huge factor in terms of what the piece was there.

With regard to China and Asia, most of that area is pegged to the dollar or a very narrow floating band, so we don't really have much in the way of fluctuation in there today.

With regard to Chinese policies on the currency, that could change at any time, but at this present time there has really not been any effect there.

Does that answer your question?

Yes.

Obviously, if we had a little bit more in the concept of the impact being less than $100,000 or something like that that would be a little bit better color for us, if that is something you are prepared to share.

If you look and said that you looked at our 10-K for the year and saw in the back of it how much we had in German sales that would be probably the best way.

Then you could say, okay, back at the beginning of the year we were at like $1.45 to a euro.

Today we are at EUR1.31 to the dollar or roughly thereabouts.

That would tell you that we are talking about a 10% change.

Great, thanks.

I appreciate and needed the tutorial, and I appreciate the guidance.

One last item for you.

Can you give some more background about this new product development?

I'm sorry again, I got on the call a little bit late, right as you were beginning discuss this issue of it's potential broad applicability for shipment on the effort for the quarter.

Are you referring, Steve, to the software product that we mentioned?

No.

You mentioned that you had jointly developed product and that you thought it would have broad application to additional customers.

Yes --

Can you provide some additional background on the product and how it might be applicable to others?

Yes, I sure can.

It's a variant of our PS588, which is our top-of-the-line off-line handling machine which has a number of special features and capabilities that we have developed specifically for Zollner.

We will be issuing a press release shortly that goes into a fair amount of detail on the specific features and capabilities that this has.

So I think you can look forward to seeing a press release soon that describes this in some detail.

But we believe that the capability that we have added to Zollner based on discussions that we have had with other customers is appropriate.

Now we haven't quantified that in terms of how much that actually means in the fourth quarter or in 2009.

Can you tell us a little bit about what end-markets Zollner sells and your product is being used?

Well, yes, I can.

Zollner is an electronics manufacturing services firm, so they build products for others.

They needed a machine that had a certain amount of flexibility that was beyond what we had in our standard machine to be able to cope with the diversity of business that they have in the electronics manufacturing environment.

As you can imagine, since they manufacture for a number of different companies they need a lot of flexibility in the way that the system is configured.

And so it has a lot of special features with respect to special vision systems that handle very unique parts, special handling in terms of parts handling, special marketing things.

So, it was quite a system and probably the most capable system -- well, certainly the most capable automated system we have shipped.

And obviously the most expensive as well.

Thank you, that is helpful.

The last question I have for you -- 18 to 24 month ago shipments to the auto industry was a real bright spot for you.

Can you comment a little bit about what is going on in that sector today and the extent to which it was impactful in the most recent quarter?

Well, Steve, the automotive industry remains an important target for us.

Certainly, we all read the same headlines and we all know what is going on in the automotive electronics space.

So you know clearly there is some impact there that we expect.

On the other hand, we have many more opportunities than we have ever traditionally closed in a quarter.

We are constantly going out and talking to customers about their opportunities and their needs, and our funnel continues to grow.

So despite the fact of what we might read in the paper, we still see lots of opportunities.

Now, whether or not customers have money or not at the end of the day is another question, but we are not backing off in any way from our thrust into automotive.

We are certainly increasing our thrust into broader industrial areas as well.

So, that is about all I can say at this point.

Thank you very much.

David Kanen

How many new customers were there during the quarter?

You know, Dave, we haven't actually quantified that and certainly Zollner was a new customer.

We had any other division of Siemens that was a new customer we had never reached before.

We would have to quantify that and we just haven't -- Joel, you haven't quantified that yet have you?

I haven't quantified it, but I do have a list just to see if --

It just one second here and we will --

Would you say it was mostly on the industrial side?

Yes.

Okay.

While he is looking that up, if you can quantify it for me, Apple had reported quarterly good earnings but I guess the real surprise was the number of iPhones that they sold exceeded what people were expecting by about I believe it was about three or four -- no, 3 million units.

Are you guys starting to see business there?

I would think that there is going to have to be capacity ads?

And then also, T-Mobile announced the Android phone from Google.

Is that a product that you expect to touch?

Well, Dave, I really can't comment specifically on that.

Certainly Apple has been a customer, Apple's EMS providers and programming centers have been customers.

And certainly HTC that manufactures the Android phone for T-Mobile is a customer.

So we think the success of companies like Apple and like HTC and like [Rim] will be good for us.

No question about it, but I can't really say more than that.

Okay.

Okay, thanks.

(Operator Instructions) Gentlemen, there are no further questions in the queue.

Well, thank you very much for joining us on the conference call together and we look forward to talking to you next quarter.

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

Thank you for your participation and for using AT&T Executive Teleconference.

You may now disconnect.