Data I/O Corp (DAIO) 2009 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your conference today. At this time, all participants will be in a listen-only mode, but later, we will conduct a question-and-answer session, which instructions will follow at that time. (Operator Instructions). And as a reminder, this conference call is being recorded.

And now it's my pleasure to announce your host, President and CEO, Fred Hume.

Thank you, John. Thank you, and welcome to the Data I/O Corporation first quarter of 2009 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, 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 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.

Revenue for the first quarter of 2009 was $4.4 million compared with $6.2 million in the first quarter of 2008, and with $5.6 million in the previous quarter. Gross margin was 55.7%, down from the 60.8% recorded in the first quarter of 2008 and 58.3% in the previous quarter.

Operating expense for the quarter was $2.7 million, including annual audit fees and seasonal public company expenses. This was down from $3.1 million in the first quarter of 2008. The operating loss for the quarter was $287,000. The net loss for the first quarter was $464,000, or $0.05 per share, including a tax provision of $128,000, primarily related to Germany.

Cash continued to build during the quarter, ending with $14.4 million, up $1.1 million from the previous quarter, which was driven by receivables collections and inventory reductions. Joel will give you more details on these financials during his remarks.

Orders for the first quarter of 2009 were $3.5 million, down from the $5.5 million booked in the first quarter of 2008. Orders in Europe were down 22% from the first quarter of 2008, including the effects of euro to US dollar currency exchange, and in the Americas, were down only 4%, which is surprisingly strong, considering the state of the economy.

Orders in Asia were down 75% from the first quarter of 2008. Most of the weakness in Asia was concentrated in the months of January and February. We began to see recovery in Asia in March, and that has continued into the second quarter, with the receipt of two orders for automated systems from Asian customers in April.

Orders for our automated systems were down 24% from the first quarter of 2008, with Asia accounting for essentially the entire decline. Orders for our manual programming products were [off] 41% from the first quarter of 2008, and orders for our aftermarket products were down 40%. These declines reflect the very low capacity utilization rates at electronics factories and programming centers worldwide, but particularly in Asia in the first quarter.

Those of you that have followed the Company for some time know that our first quarter is seasonally the weakest of the year. The seasonality was compounded this year by the global recessionary pattern. Orders from the wireless sector -- particularly Smartphones, traditionally our largest customer group - were delayed, as firms rebalanced inventory and production in their supply chain.

The Smartphone segment continues to grow as recent financial results from RIM, LG, Samsung and Apple suggest. We believe that the improved order flow we are starting to see from customers in Asia is a signal that the inventory correction is complete, and additions to production capacity have begun.

Orders from our automotive customer group also declined in the first quarter, as our customers delayed or canceled new projects due to poor economic conditions throughout the industry. This particularly impacted our business in Europe, where we do a substantial amount of our automotive-related business. It's not clear how long this situation will prevail in different parts of the world, but we assume that any improvement in the second quarter will be modest.

In the first quarter, we delivered our software solution for protecting a customer's intellectual property to a wireless customer. This was a significant milestone, and the first installment in what we believe will be an expanding family of complete software solutions to help our global customers manage their programming process, ensure data integrity and timely software releases, while protecting their intellectual property.

Due to the widespread economic weakness throughout the electronics industry, we have continued to keep a tight lid on operating expenses. We expect them to be approximately $2.5 million in the second quarter. This is down approximately $1 million or 30% from the $3.5 million recorded in the second quarter of 2008.

At the same time, we have continued to invest in R&D, and are pleased to announce that we will be releasing a number of new products during the second quarter, including the new PS3 [DE], an automated programming system, and our new Flash Core 3 programming engine that will be available, in addition to our Flash Core 2 programming engine, on our PS FOX RoadRunner and Flash Pack product lines.

Flash Core 3 programs at the maximum theoretical speeds for the latest technology memory devices, to provide our customers with a substantial boost in overall system performance. These introductions will contribute to revenue in the second quarter. We will also be delivering more application-specific solutions to customers during the quarter, which will contribute to the increasing software portion of our revenue.

In the past few months, we have strengthened the sales and distribution system with the addition of 10 new sales channels in the Americas and the recent selection of a new sales channel for Southeast Asia. We are already beginning to see the benefit from these channels. We increased our visibility in the industry through participation in regional trade shows, and have also added a new advertising and PR firm that we expect to generate additional sales opportunities for our channels.

Morale is positive, and the effective teamwork throughout the organization is at an all-time high. With cash of more than $14 million, a greatly improved business model with a much lower breakeven, and a strong new product lineup for Q2 and beyond, the Company is well-positioned to grow and gain share as the recovery takes hold. We are also positioned to take advantage of other business opportunities as they may arise.

At this time, Joel will provide you with more details on the financial results, and then I will return to take your questions.

Thank you, Fred. Good day to everyone.

As Fred said, revenues for the first quarter of 2009 were $4.4 million compared to $6.2 million in the first quarter of 2008, a decrease of 29%. International sales represented 89% of total sales for the quarter, with revenue decreases in Asia of 62%; the United States of 48%; and Europe of 12%, but an increase in sales in the rest of the Americas.

The variation in sales percentages versus order percentages Fred discussed, relates to the use of backlog of $880,000 during the quarter. The backlog at the end of the quarter was at $1.2 million.

The gross margin as a percentage of sales for the first quarter of 2009 was 55.7% and compares with 60.8% for the first quarter of 2008. The primary causes for this percentage decline were due to the effect of decreased sales volume relative to fixed factory and service costs, and the impact of the strengthened US dollar, especially on amounts translated from euros.

At the lower sales volumes, our margins based on product mix were benefited by a higher percentage of software and aftermarket sales that have generally better-than-average product margins. Factory variances were low for both the first quarter of 2009 and 2008.

Operating expenses were $2.7 million, including $22,000 of restructure costs, primarily severance, in the first quarter of 2009. Compared to the first quarter of 2008, the first quarter of 2009 had less commission expense, due to sales volume, as more distributor versus representative sales in the channel mix; less travel and entertainment; and less compensation expense, due to restructuring actions that have taken place during the past year.

In accordance with US Generally Accepted Accounting Principles, GAAP, net loss for the first quarter of 2009 was $464,000 or $0.05 per share, compared with a net income of $2.6 million or $0.29 per diluted share for the first quarter of 2008. The first quarter of 2008 net income included the $2.1 million patent sale gain.

Earnings-per-share include the impact of equity compensation expense under FAS 123R of $0.01 per share for both the first quarter of 2009 and 2008. We had an income tax provision for the quarter, due to profits in foreign locations despite the consolidated first quarter of 2009 loss. We will continue to analyze and manage taxes as the year progresses.

Data I/O's cash increased to $14.4 million at the end of the first quarter. Our cash is invested in money market, time deposit and government funds, and not in auction rate securities or other corporate debt.

During the quarter, accounts receivable decreased $2.5 million, reflecting our increased attention to and success in collections, as well as the change in sales volume. Despite the lower-than-expected sales level, we were able to reduce by over $100,000, our inventories, by carefully managing our purchasing during the quarter.

With the current economic climate, continuing to make forecasting difficult, we are continuing our practices of cost and spending control, preserving cash, and focusing on generating new customers and revenue opportunities, especially with the new product introduction and expected startup shipments during the second quarter.

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

Thank you, Joel. First of all, I would like to express my appreciation to Ed Lazowska and Dan DiLeo that have served as Directors of Data I/O for many years. They are stepping down from service as a part of our ongoing cost reduction, that will reduce the number of outside directors from 5 to 3.

They have both made numerous contributions to the success of the Company and they will be missed. At the same time, our relationship with them as great friends has not been severed. They will continue to support the Company, and I'm confident that we can call on them as needed.

I would also like to invite you to come to see us at AeA Monterey on May 4 and 5.

And at this time, we will take your questions.

(Operator Instructions). [David Cannon], First Midwest.

First, I would like to commend you. I know you don't have control over the macroeconomic environment, so I commend you for your control over the things that you do have control over, meaning expenses.

The question is related to software. Last year, you had spoken to some new software products that you were going to roll out in 2009. Was there any revenue for software specifically in the first quarter? And what should we expect for the balance of the year?

Yes, we did ship our first initial version of a product that we're calling FDM Lite. And that's an initial iteration of our overall larger product line that's going to be evolving from and built on that. That -- we did have our first shipment and recognized revenue in the first quarter on that.

Okay. Approximately how much revenue was that?

The customer was billed $60,000 associated with that particular product.

Okay. So at this point, it's pretty much nominal. Do you expect to record other software sales throughout the balance of the year?

The answer to that would surely be yes, that's in our expectations.

Okay. And then in your prepared remarks, you said that you were going to pursue, quote, other business opportunities. Could you give me some more color on what you mean by that?

Yes, David, I'd be happy to do that. With as much cash as we have now available to us, it provides some opportunities, particularly when the competitive landscape is as weak as it is. So it gives us the opportunity to invest to gain marketshare, add things to our portfolio that serve the same customers and match with our existing offerings, so we continue to look very carefully at opportunities that come along.

I can't speak to a specific opportunity, nor can I commit that we will actually do something like that, other than our ongoing continuing investment programs that we have in place right now.

You know, I'd like to add a couple of things. When I wrote that in my remarks, I was thinking particularly of the launch of the Flash Core 3 and the new products that are associated with the Flash Core 3 this quarter.

I'm also thinking about the ongoing pieces that we've talked about, where we have put teams together to really focus on how to win customers and take them into our marketplace, from where they're not currently doing an in-socket programming-type effort.

And then the third piece is really more along the lines of what Fred had talked about, which is doing things to really figure out how to differentiate our products.

Okay. The other question I have related to your prepared remarks, was the Asian customers, the two Asian customers that you had received orders from for automated systems in April. Is this seven figures? Or below that at this point? Can you give me some sense as to where you guys are in orders thus far. I mean, I know it's very early in the quarter and even in April, but is there anything more you can tell me?

Well, David, what we can tell you is that these were orders for two of our PS systems. And you know that those systems typically go anywhere from $200,000 to $400,000 or, in some cases, even more. But that gives you kind of a range of what those system revenues typically represent for us.

We can't be more specific than that. I mean, this is a very uncertain time for any company, and so we have to watch it carefully. But what we can tell you is that we saw a very substantial improvement in the Asian picture in March. And we believe with the receipt of these orders for these two PS systems, that trend is definitely continuing. And that's boding very well for us for improving results in the second quarter.

And has Fred had mentioned earlier, we're actually seeing around the world very much improved sales funnels. Now, we don't know how easy it's going to be to close that business or that it will close in the quarter, but dramatically better sales funnels than there were last quarter.

Okay, that's good. And you also, in the press release, made reference to new sales coverage. Can you talk about those markets, those geographies and if there's been any progress yet in those areas?

Well, David, if you turn the clock back six months ago, we had roughly 30% sales coverage in the Americas -- that is, areas where we were either covered with direct salespeople or with representatives. And by the end of March, we had completed sales coverage essentially 100% in the Americas.

And so we feel quite good now that that's been done. We have -- most of those new sales channels have been trained. They're functioning effectively now. And we have the most recent additions coming in for training in two weeks.

So we feel really good about how that has progressed. We went through an extensive study in the first quarter. We hired a consulting firm to help us select the best possible new channel for us in Southeast Asia. And the consulting firm did that; gave us a number of recommendations.

We then interviewed these firms in detail, and as a result of that process, selected a new firm and are in the process of finalizing the agreement with them. And you'll see an announcement on that shortly.

So, we expect to see good results from these channels. They're already turning up new leads for us, new opportunities. Our sales managers are aggressively working with them to bring business out of this. So we feel very pleased.

And I think the fact that the Americas orders were only down 4% in the first quarter compared with the first quarter of 2008, I think reflects the substantially improved performance that we're getting out of the Americas sales channels in the midst of a pretty serious economic downturn.

Did you say that you increased your coverage in the Americas from 30% to 100%?

That's correct.

Okay. So it's more -- it's not so much that things are picking up in the US; it's just a better job of sales coverage and execution on your part?

More feet on the street.

Yes, more feet on the street. I think that's definitely the case. I wouldn't say that there's been any drastic turnaround in the economic environment yet. And I think because we are a capital equipment provider, we'll tend to lag some of the other areas in an upturn.

Okay. But is -- I mean, is it safe to say, you're just doing a better job of selling in the Americas, so when the economy does pick up in the Americas, you'll probably exceed the peak revenues that you did during the last cycle?

Absolutely.

Okay. So, you're -- well, I don't want to put you in a position where you're talking about your competitor, but are you seeing opportunities where perhaps you can displace a competitor in the Americas where -- accounts where you just haven't been before?

That's correct.

You are? Okay. That's good. And then, I think, Joel -- I don't know if it was Joel or Fred, you gave a number for OpEx quarterly run rate for next quarter, pro forma, the restructuring.

Yes, we had indicated that we expected the Q2 expenses to be around $2.5 million.

$2.5 million, wow. Okay. It seems like when things pick up, I mean, your poised to get a lot more leverage than you even did last year. Is that safe to say? Or is there variable expense that will take away a lot of that leverage?

David, there is a slight amount of variable expense associated with the selling organization, because we have added these additional sales channels and they are variable expenses.

On the other hand, that's a relatively small expense compared to the gross margin that we get from increased sales. So we expect a lot of leverage in the model. We don't -- we're doing a lot to improve our internal operating efficiency and reduce the overhead. We've transferred a lot of functions to our operation in China.

We're just much more efficient. Our cost accounting systems are more effective. It's easier to get the data. We just reduced a lot of the overhead burden, so that the people here can actually make things flow a lot smoother and quicker and better. So that positions us well to sustain the sales momentum as they build, without adding a lot of fixed expense.

Okay. I guess that answers all of my questions. Again, excellent job on cost containment and good luck for next quarter.

(Operator Instructions). [Marcelle Herbis, Herbis Capital Management].

I have to chime in with Dave and commend you on a great job in keeping the expenses in line, and but what I'm particularly excited about is the great job in expanding your footprint and getting the feet on the street and covering 100% of the Americas. That's very exciting.

Yes, we think so too. And it certainly has generated a lot of enthusiasm within the Company, I could tell you that.

That's excellent. I have a question regarding pent-up demand and how to understand it. If we are in this environment, if the slowdown in sales creates pent-up demand or not -- I mean, has it more to do with your customers needing your machines but holding tight to their checkbooks? Or has it more to do with the customers producing below capacity, and they simply don't have a need for your product right now?

Well, I think there are both factors. First of all, we saw virtually no capacity-related purchases in the first quarter. Normally, we always have some capacity-related purchases in our business. In some years, some quarters, it's a significant contributor; but there was virtually nothing in the way of capacity additions that we could trace in the first quarter.

So, all of the orders that we got in the first quarter were primarily related to new programs, new projects or support agreements and so forth.

We do have our aftermarket devices, our algorithms and adapters. And that's very much a measure of what's going on in terms of capacity utilization. As capacity utilization goes up, the sales of those go up. And conversely, when production levels go down, the sales of those tend to fall.

And they were down -- they were off 40%, as I mentioned in the quarter compared to the first quarter of 2008. So that's a reflection, really of what's going on in terms of capacity utilization.

The other piece really is what Joel alluded to when he spoke of the much more robust sales funnels -- the many new sales opportunities that we have created during the first quarter, reflecting the fact that our sales funnels are just much fuller at this -- they were much fuller at the 1st of April than they were the 1st of January.

And in many cases, those new opportunities depend on programs that customers have committed to. For example, an automotive company in Europe may have a new infotainment system that they're planning to release. And they plan to buy our equipment to support the release of that product.

Well, it may be that they delay that as a result of their own economic conditions, what they're seeing from their customers; we don't know. But at least we know now what the opportunity is. We know that we've got our equipment specced in, and we have a fair degree of confidence that when they do release that equipment, that we'll get the order.

The other thing that's going on, of course, is that a number of the semiconductor companies have been introducing new device technologies, new types of devices. Samsung has some new devices out -- one NAND, movie NAND, a lot of different new devices are on the marketplace.

And these are being adopted more rapidly by certain segments of the industry, particularly the Smartphone segment. And these devices really need the capability of our new Flash Core 3 offering that will be shipping this month.

So, that's another driving force. And I think we see a lot of business in our funnels building as a result of that.

Excellent. That sounds actually very exciting.

Another quick question on -- last year, you announced the stock repurchase program. And I was wondering if you did repurchase any shares?

There were no stock purchases under the stock repurchase 10b5-1 plan during the first quarter.

Okay. Is there any plan to execute on that repurchase program or are you holding back? Or what's the strategy here?

The 10b5-1 plan has a prearranged arrangement for share purchases, and it just didn't kick in.

Okay. And the prearrangement, I would assume, has to do with the price level of the stock?

We can't make any comment about that.

Okay. Well, very good job. Thank you so much.

Thank you, Marcelle. Thank you for the questions.

(Operator Instructions). David Cannon, First Midwest.

A quick follow up. What were adapter sales for the quarter?

$1.2 million.

Okay. All right, thanks, guys. Good luck.

Thank you. (Operator Instructions). At the moment, I'm showing no further questions.

All right, John. We'll bring the conference to a conclusion. Thank you very much for joining us, and we look forward to talking with you again at the results for our second quarter.

Ladies and gentlemen, this does conclude your conference for today. Everyone have a great day. You may now disconnect.

Thank you, John.