Data I/O Corp (DAIO) 2008 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Data I/O Corporation fourth quarter and 2008 conference call.

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

Later, you'll have the opportunity to ask questions and those instructions will be given to you at that time.

(Operator Instructions).

As a reminder, this conference is being recorded.

I would now like to turn the conference over to our host, President and CEO, Mr.

Fred Hume.

Please go ahead, sir.

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

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

Before we begin, I would like to remind you that the 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 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 level 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 & 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.

Good afternoon.

Orders for the fourth quarter of 2008 were $6.2 million, remarkably strong considering the extremely weak industry conditions that persisted throughout the quarter.

Asia continued to demonstrate strong growth with orders up 44% from the fourth quarter of 2007.

Orders from customers in Europe were down slightly from the fourth quarter of 2007, but much stronger than we expected considering the weak demand for automotive electronics.

Orders in the Americas were down substantially from the fourth quarter of 2007 but consistent with general industry conditions here.

Orders for our automated systems were down 3% from the fourth quarter of 2007, again, remarkably strong considering the low levels of capacity utilization that persisted throughout the electronics industry in the fourth quarter.

Orders for our manual programming products were off 24% from the levels in the fourth quarter of 2008 and orders for our after-market products were down 14%.

Revenue was $5.6 million with some automated system shipments delayed into January at customers' requests.

Gross margin was 58.3%, down from the 59.7% recorded in the third quarter of 2008, but consistent with lower revenue that was down over $2 million from the third quarter.

The most recent quarter with revenue under $6 million was the second quarter of 2007 when gross margin was 49%.

So, we feel pretty good about the fourth quarter results.

Operating expense for the fourth quarter was $3.2 million including a restructuring charge of $535,000.

The electronics industry contracted sharply after the collapse of Lehman Brothers, so in October we initiated action to reduce operating expense.

These actions continued throughout the quarter and lowered our effective revenue break even going into 2009 by several hundred thousand dollars.

Net income for the fourth quarter was $78,000, or $0.01 per share, again, including the $535,000 in restructuring charges.

Cash continued to build during the quarter ending with $13.3 million driven by strong collections in inventory reductions.

Joel will give more details on these financials during his remarks.

For the year, orders were $27.5 million.

This was disappointing considering that growth had been in the double-digit range for the first nine months.

For the year, Asia was our star with orders up 43% from the prior year.

Orders in Europe were down 6% from the prior year and in the Americas were down 10% with those declines largely reflecting conditions in the fourth quarter.

Wireless handset manufacturing, particularly smartphones, was our largest customer segment in 2008, followed by automotive electronics.

We also saw growth in the industrial segment with the addition of several new customers.

The programming centers, traditionally a major customer segment, had sufficient capacity from previous purchases and were not a significant contributor to revenue in 2008.

Revenue for the year was $27.6 million, up 3% from 2007.

Gross margin for the year was 58.8%.

Operating expense was $13.1 million, again, including the restructuring charge mentioned above.

Net income was $5.1 million or 18.6% of sales.

Fully diluted earnings per share were $0.56.

At this time, Joel will provide you with more details on the financial results and then I will return to make some comments regarding the general state of the industry.

Joel?

Thank you, Fred.

Good day to everyone.

As Fred mentioned, revenues for the fourth quarter of 2008 were $5.6 million compared to $7.7 million in the fourth quarter of 2007, a decrease of 27%.

International sales represented 85% of total sales for the quarter with Asia sales increasing and European and American sales both decreasing.

The variation in sales percentages versus order percentages that Fred discussed relates to the use of and/or in the case of the fourth quarter, generation of additional backlog of $700,000.

The backlog at the end of the quarter was $2 million.

The gross margin as a percentage of sales for the fourth quarter of 2008 was 58.3% for the fourth quarter compared to 56.6% for the fourth quarter of 2007.

The primary cause for this percentage change was due to having more factory favorable variances, savings from our restructuring actions as well as a favorable product mix.

Operating expenses were $3.2 million including $535,000 of restructuring costs, primarily severance, in the fourth quarter of 2008.

In accordance with U.S.

generally accepted accounting principles, GAAP, net income for the fourth quarter of 2008 was $78,000, or $0.01per diluted share, compared with a net income of $1.1 million, or $0.12 for the fourth quarter of 2007.

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

For the year ended December 31, 2008, revenues were $27.6 million, a 3% increase compared to $26.8 million for 2007.

International sales represented 83% of 2008 and 82% of 2007 revenue.

Gross margin as a percentage of sales was 58.8% compared to 56.1% for 2007 with the increase related to the sales volume effect, more favorable factory variances, and the savings from the restructuring actions we have taken.

Operating expenses were $13.1 million for 2008 and $14.2 million for 2007 and included restructuring charges of $542,000 for the year 2008 and $725,000 in 2007.

Included in expenses were equity compensation under FAS 123R of $401,000 and $316,000 for 2008 and 2007 respectively.

A gain of $2.1 million from the sale of patents with retained licensing was included in the 2008 results.

In accordance with U.S.

generally accepted accounting principles, GAAP, net income for 2008 was $5.1 million, or $0.57 per diluted share, compared with a net income of $832,000 or $0.09 per diluted share for 2007.

Data I/O's cash increased to $13.3 million at the end of the fourth quarter.

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

During the quarter, accounts receivable decreased $2.2 million, reflecting the change in sales volume as well as our increased attention to collections.

With the current economic climate making forecasting more difficult, we're continuing our practice of managing cost and spending controls, preserving cash and focusing on generating new customers and revenue opportunities.

At this point, I'll turn the discussion back to Fred.

Thank you, Joel.

Fear is rampant throughout the electronics industry because of the uncertainty regarding how deep the current downturn will go or how long it will last.

So, companies are retrenching and the easiest place to start is with capital spending.

They can freeze capital spending with a simple e-mail with few, if any, personnel ramifications.

When they do, orders for our equipment are affected directly and immediately.

We believe, however, that fear will slowly subside and capital spending over time will return to normal.

Here's why.

One, the electronics industry isn't going away.

Leading industry analysts estimate that the worldwide production of electronics is down no more than 10% to 15% from the levels in January and February of last year.

Considering that the worldwide electronics industry is greater than $1.5 trillion, that means there are still a lot of electronic products being produced around the world.

Two, end markets for electronics will recover.

Much has been made of the decline in consumer spending, particularly in the U.S.

But consumers will continue to spend money for things they consider essential like cell phones and computers.

60% of the world's population has a cell phone, but only 23% have access to the Internet.

Imagine what's going to happen when those two get fully connected!

The automotive electronics market is also weak for obvious reasons.

But this, too, will not last forever.

People love the freedom that the automobile provides and the rich panoply of electronics content now available brings great pleasure to the ride.

Three, electronics companies are continuing to spend money on R&D.

They're investing in a dazzling array of new products with more new capabilities than we can imagine.

The recession may delay the roll-out of these new products but they will be introduced.

In many instances, the launch of these new products will require production equipment, including ours, that isn't currently in place.

How long it will -- I don't know how long it will take for confidence to drive out fear.

We're beginning to see some encouraging signs.

Earlier this week, the Commerce Department reported that personal consumption rose 0.6 of a percent in January.

That's not much, but it is enough to break the slide.

Personal income was also up 0.4 of a percent in January.

And while manufacturing continued to contract in February, the rate of contraction actually slowed.

Now, some semiconductor companies report that their OEM customers are actually starting to provide forecasts once again.

iSuppli released a report this week indicating that smartphone sales will actually grow between 6% and 11% in 2009.

Taken together, these signs might just indicate we're nearing a bottom but it is too early to tell.

Looking beyond the short-term turmoil in the industry, we remain confident in our market.

According to a report released by Gartner, the number of NAND flash bits requiring some form of programming will increase by 64% in 2009 despite the economy.

Also, Cisco predicted last week that the advent of 4G or long-term evolution networks will increase global mobile data by 131% annually through 2013 to two exabytes per month.

So, we won't compromise our long-term future to the expediencies of the moment.

There are still many customers with financial resources that despite tight controls on capital expenditures will spend money for our solutions where we can demonstrate cost savings and operational advantages with a strong return on investment.

For the moment, we've scaled our operations to the realities of the business environment and we continue to take actions to keep our expenses in line with revenue projections.

Given our strong financial position, we're continuing to maintain our momentum on high priority new products and on finding new customers now to help offset the declines in established customer demand.

These actions will position us for strong growth when the current downturn is over.

At this time, we will take your questions.

Operator?

Yes.

(Operator Instructions).

Our first question comes from the line of Mr.

David Kanen.

Please go ahead.

Hi, Fred.

Hi, Dave.

Okay.

First thing is excluding the restructuring charge, the way I read the earnings is you would have earned about $600,000.

Is that correct?

Or $0.06 a share excluding the one-time restructuring.

That's correct.

That's correct.

Okay.

I have to commend you, I was disappointed on one hand with the revenues, but I understand the economic environment, but I have to commend you on getting in front of this deterioration and managing expense.

It is quite impressive that you can earn $0.06 on $5.6 million in revenue because it seems as though when capital spending returns to normal levels, you're going to achieve quite a bit of leverage to the upside.

Is that fair to say?

That's the way we feel about it, Dave.

Yes.

Okay, okay.

I feel a lot better also with the cash balance.

I see it was up almost $1.8 million sequentially.

Right now, you've got about $1.50 in cash as I calculate it.

Fred, what were adapter sales for the quarter?

They were about 22% of our revenue.

Pardon me, about 22% of our bookings.

Okay .

And what were the new customers that you alluded to in the press release?

Is there any information you can share on that, who they are and then also the markets that they're in, both geographically and specifically what business

Dave, I don't have that specifically at my fingertips.

Joel may have a report handy.

Joel, can you help me out on this one?

You know, we had a number of them where it is hard to say that they're a new customer, but it was all new plants that we've never sold to before.

So, for example, we had a Panasonic plant in the Czech Republic and we had a new Bosch plant in Germany.

We had a new opportunity that we sold to a new Continental automotive plant.

So, again, customers where we sold to other divisions and parts of their company, but these were new customers from our solution standpoint.

So, these are Tier 1 type customers?

That's correct, yes.

Okay.

Next question.

How many -- I know through the quarter you announced some new sales partnerships or channel expansions.

Can you quantify that for me in total how many new channels you added during Q4?

Is there anything so far in '09 that you've added?

We added three channels in the fourth quarter, Dave.

And we've added --

It all started in the first quarter.

Yes, essentially, they all started -- they were trained in January.

They really all started their activity in January.

And then since January, we've added, I believe, just one channel that we announced last week.

Perhaps it is this week.

So, you've got four new channels since Q3 at this point?

That's correct.

Okay.

And is this -- is this giving you new geographic coverage?

And if so, in what regions?

In primarily the -- we started, Dave, first with filling in the holes in the eastern region of the United States.

So, we added a representative in New England, one in the Mid-Atlantic region and one in the Southeast.

We've now added a second in covering additional states in the Southeast.

And now we're turning our attention to the West.

And you know, so that's going to be the focus as well as Asia.

We're focused on adding some additional channels in Asia.

Okay.

Great.

And I noticed backlog -- I'm going by memory, but I'm going to say backlog was at the end of Q3, about $1.3 million?

That's correct.

And it seems like it had a big jump to $2 million.

My question is -- that's an impressive number going into seasonally a weak quarter.

Is the majority of the shippable or -- I shouldn't look at it as a -- that kind of an indicator at this point.

Well, of the increase in backlog, those systems were all ones that would be expected to be shipped and installed in the first quarter.

I see.

Okay.

So, you're actually going into Q1, which is seasonably a weak quarter, with a strong backlog number versus historically what you go into it with, is that correct?

Well, I would say that that's mostly correct although, for example, last year, we also had roughly $2 million, so again, we had a very strong backlog going into Q1 last year as well.

Okay.

With this new lean model, though, it is a little more exciting with OpEx down around $2.65 million a quarter.

How about software?

Late last year, you were talking about rolling out some new software products and specifically I believe in IP protection, flash media duplication.

Can you give me an update there?

Is this something -- is there business that you think you can recognize, as challenging as the environment is, maybe in the first half of 2009?

Dave, yes.

The answer to that is, yes, we think we'll recognize some revenue in the first half of 2009.

We've had some development delays to be honest that added a few weeks to the development schedule and where we were hoping, for example, back in the -- at the start of the fourth quarter to be able to actually deliver to our first customer prototypes by the end of December.

That really got delayed a few weeks.

And so it was just recently installed at the customer's site.

But that said, we remain confident that we're going to be able to continue to build on that and see revenue in the first half of 2009.

Okay.

This one particular customer that you were expecting to install in Q4, is that now Q1 business?

The prototype installation has been accomplished.

Now, we have to meet the tests and the acceptance and that type of stuff, so I'm not exactly certain for the schedule for that particular recognition event whether we can actually complete all of that stuff this month.

Okay.

But it is either Q1 or Q2?

Yes.

We have at least one piece of software business which will be first.

Now, what kind of margin impact will this have?

Well, as far as software, it is pretty much kind of all margin.

But it all depends on how much of it is sold during the quarter.

So, I really can't answer that question, Dave.

Dave, I don't think we've quantified that.

I think, really, until we get -- until we get acceptance from the customer, I really hate to start quantifying the actual amount.

Okay.

Okay .

Let's see if there are any other questions that I have here.

Did you -- it doesn't look like you guys, given the big jump in cash, I'm assuming you guys didn't buy back any stock during the quarter.

Is that right?

Or did

We have no stock that got repurchased during the quarter.

Okay.

Do you expect to be active in the first quarter?

I can't make any comment about that.

Okay .

Okay.

If there are any other people in queue that ask questions, I'll turn it over to them now.

Thank

Thank you, Dave.

(Operator Instructions).

And we do have a question from the line of Mr.

[Jim Henley.] Please go ahead.

Good afternoon, Fred and Joel.

Good afternoon.

How are you?

Very good, thank you.

Good.

Congratulations on all things considered what I think is a super quarter.

Thank you.

I'm really surprised you did as well as you did.

I had a question on software which got answered.

The stock buyback as well got answered.

The only other additional question, are you guys seeing any interest at all or any traction at all around computers moving to the solid state drives versus the hard drives and is there anything there for the Company that looks promising in, let's say, the medium term?

Well, I think we can certainly -- we can certainly acknowledge the fact it is becoming an issue and it is becoming increasingly important and there is some new memory technology that is being talked about to address some of these applications.

But I'm not sure that I can put my finger on any specific piece of business that we have tied to that yet at the moment.

Joel, do you --

No, other than seeing the increase in, particularly the netbooks using solid state memory because they don't have a lot of memory in the netbooks.

That's where we're seeing it take place.

But we have not seen any major chunk of business arrive as a result of that.

In theory though, would that market -- would that application play into your product portfolio at all?

Or is that something that Data I/O would -- if it did take off in theory, would there be anything there for the Company?

It is hard to say.

I would say this that in the past, the computer manufacturers have been finding their own proprietary in-house solution to program -- this type of memory in an in-line type solution.

There could, in fact, be some opportunities and we're exploring some things that might be relevant, but to talk about it at this point would be speculation.

I think we would be better off to hold it for the time.

Very good.

Thanks very much.

Good quarter and good luck in '09.

Thank you very much.

Operator, do we have any other questions?

I'm sorry.

We don't have any questions at this time.

Please continue.

Well, thank you very much for joining our conference call this afternoon, and we look forward to talking to you at the end of the next quarter.

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