Data I/O Corp (DAIO) 2009 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen.

Thank you for standing by and welcome to the Data I/O Corporation Second Quarter Results Conference Call.

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

Later, we will conduct a question-and-answer session; instructions will be given at that time.

(Operator Instructions).

As a reminder, this conference is being recorded today, on Thursday, July 23, 2009.

I'll now turn the conference to our host, Mr.

Fred Hume, President and Chief Executive Officer.

Please go ahead.

Thank you, Michael.

Welcome to everyone this afternoon.

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

Before we begin, I'd like 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, uncertainty 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 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.

Data I/O is under no duty to update any of these forward-looking statements.

Revenue for the second quarter of 2009 was $3.9 million, compared with $8 million in the second quarter of 2008 and with $4.4 million in the previous quarter.

Gross margin was 48.3%, down from the 56.8% recorded in the second quarter of 2008 and 55.7% in the previous quarter.

Operating expense for the quarter was $2.5 million, excluding the restructuring charge.

This was down from $3.5 million in the second quarter of 2008 and was consistent with our comment last quarter that we expected our operating expenses to be approximately $2.5 million for the second quarter.

The net loss for the second quarter was $683,000 or $0.08 per share, including one-time non-cash charges of $400,000.

Cash continued to build during the quarter, ending with $14.8 million, up $320,000 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 second quarter of 2009 were $3.7 million, down from the $8.8 million booked in the second quarter of 2008, but up from the $3.5 million booked in the first quarter.

Orders from Asian customers doubled compared to the first quarter and we saw substantive growth in the orders in the Americas.

The substantive gains in these regions were offset by further declines in Europe, as it continued to trend downward in the second 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.

So we were pleased to see the upturn in orders in Asia and the Americas in the second quarter.

And while we were disappointed that our European business weakened, we weren't surprised.

It was the last region to turn down with the business cycle, and we expected it to be the last to turn up.

Europe, of all of our regions, is also the most dependent on the global automotive business, as Europe is the hub for the development of electronic systems sold in many Japanese, European and American automobiles.

Europe has also been our most successful region in broadening our customer base and we expect that to be an important ingredient of their improved performance.

We are beginning to see an uptick in Europe in July and we expect to see substantially improved results in the third quarter.

Wireless handset manufacturers accounted for most of the improvement in orders during the second quarter.

We expect that their momentum will continue to build in the second half as DigiTimes reported this morning that branded handset manufacturers anticipate a 30% sequential growth in the second half of the year.

Programming centers continue to operate with substantial under-utilized capacity and we expect few orders from this segment until overall industry production levels recover.

While orders for all product lines were off substantially from the second quarter of 2008, orders for automated systems and after-market adaptors were actually up from the first quarter of 2009.

We introduced our new FlashCORE III offerings in the second quarter and shipped both our new FlashCORE III-based PS 388 and the PS 588 upgraded with those programmers.

These have been well received by the customers and we have already received repeat orders in July.

We expect these offerings and further FlashCORE III product rollouts, combined with our new software solutions, to be significant contributors to the revenue growth in the third and fourth quarters of the year.

Our order funnels have improved considerably from three months ago, with our new sales and distribution channels accounting for quite a few new items on the funnels.

We feel these channels will contribute substantially to our business during the second half of 2009.

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

Joel-?

Thank you, Fred.

Good day to everyone.

As Fred said, revenues for the second quarter of 2009 were $3.9 million, compared to $8 million in the second quarter of 2008.

International sales represented 87% of total sales for the quarter, with the revenue declines taking place in all geographies, compared to the prior year's quarter.

Compared to the first quarter of 2009, revenues from Asia increased 50%, while the Americas declined 6% and Europe declined 32%.

The variation in sales revenue percentages versus the order percentages Fred discussed, relates to changes in backlog.

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

The gross margin as a percentage of sales for the second quarter was 48.3% and compares with 56.8% for the second quarter of 2008.

The primary causes for this percentage change were due to the effect of decreased sales volume relative to fixed factory costs and inventory write downs of $188,000, offset in part by favorable warranty experience for the quarter.

Direct materials, as a percentage of sales, was actually slightly improved in the second quarter of 2009 compared to either the second quarter of 2008 or the first quarter of 2009.

This indicates that our actual product material cost margins were not eroded.

Operating expenses were $2.7 million, including $158,000 of restructure costs in the second quarter of 2009.

The restructuring charge was due to a $208,000 lease abandonment, resulting from consolidating our operations into a smaller portion of our leased space at our Redmond's headquarters, partially offset by reductions in previously accrued personnel, automobile leases and legal restructuring costs.

The lease abandonment will result in a corresponding decrease in rent expense spread over the next two years.

Compared to the second quarter of 2008, the second quarter of 2009 operating expense had no bonus expense, versus $300,000 in Q2 of 2008, and reflects savings from the restructuring actions taken during the past year.

In accordance with U.S.

generally accepted accounting principles (GAAP), net loss for the second quarter of 2009 was $683,000 or $0.08 per share, compared with a net income of $1.2 million or $0.13 per diluted share for the second quarter of 2008.

Earnings per share included the impact of equity compensation expense under FAS 123R of $0.01 per share for both the second quarter of 2008 and 2009.

As we pointed out in the release, of our $683,000 loss, approximately $400,000 represented a combination of one-time non-cash charges, primarily the lease abandonment and inventory write downs, which put us into an improved financial position for future quarters.

Data I/O's cash has increased to $14.8 million at the end of the second quarter.

Our cash is invested in money-market time-deposit government funds and not in auction-rated securities or other corporate debt.

During the quarter, accounts receivable decreased $695,000, reflecting our increased attention to and success in collections, as well as the change in the sales volume.

Despite the lower-than-expected sales level, we were able to reduce our inventories by $267,000 by carefully managing our purchasing during the quarter.

There were no stock purchases under the stock repurchase 10B5-1 plan during the second quarter.

While we are seeing improvement in today's current economic climate, lack of much forward visibility continues 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 introductions related to our new FlashCORE III rollout, some of which have shipped and others of which are expected to begin shipping in the third quarter.

With operating expense at approximately $2.5 million, we estimate that our quarterly revenue breakeven point is at approximately $4.7 million.

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

Thank you, Joel.

At this time, we'll be happy to take your questions.

Michael-?

Alright; thank you.

(Operator Instructions).

And our first question is from the line of David Kanen with First Midwest.

Please go ahead.

Good afternoon.

Good afternoon, Dave.

A couple questions; were there any new customers during the quarter, if so, how many?

On this one, it's a little difficult to say because they went through distribution and they're people that have been customers for other of our products, but they were the first buyers of our PS systems this quarter-- that were the new FlashCORE products.

Do you know if the end customer was new or are you saying these were the first sales through a new distributor?

No, they were not new sales.

They were not sales through a new distributor, but they were sales to new customers through a distributor, an existing distributor; and in many cases, we can say that the business maybe had originated or was driven by a customer that we have done business with before.

Okay.

Do you guys expect any software revenue in Q3 and Q4?

Yes.

Okay; both quarters or just in general the second half of the year?

I would say both quarters, but generally the second half of the year, yes.

Okay.

And then I see total operating expenses were around $2.5 million for the quarter, excluding the restructuring charge.

Is that going to come down post restructuring charge or is that a good level going forward?

Well, it's around about that level; the things that we talked about were the rent expense that will be reduced because approximately $25,000 per quarter has already been abandoned.

So, other than that, it's going to be basically around that same $2.5 million.

Okay, and can you tell me Joel; what were adaptor sales for the quarter?

Just a moment, Dave, while we look up the number here-- approximately 25% of total sales, Dave.

Okay, and then I think you had said in your prepared remarks automated systems sales were actually up sequentially from Q1 to Q2.

That's correct.

So implicitly as well as adaptor sales, so manual programmers really accounted for the majority of the decline, sequentially.

Is that correct?

That's correct.

Yes.

Okay.

What percent were automated systems of total revenue?

Roughly $1.8 million of the total revenue were automated.

Okay.

And then can you give me an approximate percentage of what you think automotive was?

That's a little bit more difficult to extract, David, because we have to go back into our order and booking reports after the fact, after we close out the quarter, and kind of reconstruct how the business came in by customer segment and I just don't think we have that data at our fingertips yet.

Do we Joel?

No, especially since we don't get the after-market revenue really broken out by the segments.

So it's a little bit difficult to construct.

Okay.

Are you guys starting to see more activity though, in Europe related to automotive?

Because I know car sales, since they implemented that credit-- I think it's a EUR2500 credit in Germany-- have been up double digits.

And in talking to some other companies that are in auto-related businesses, they're actually seeing pockets of strength there.

Are you seeing any increase in activity, anything-- I know it was down 33% year over year, but do you have any sense that in the second half of the year it's going to improve sequentially?

Well, we're beginning to see a lot of activity, Dave that would suggest that conditions are improving there.

I think I would just make one cautionary note on this though, in that the incentive programs that were put in place to encourage people to trade in cars early has really resulted in a significant increase in sales of the lower-end model cars.

The more expense cars like the Daimlers and the Benz's and the BMWs haven't really seen nearly as much pull through from that program.

So that's the only caution that I'd inject there.

Yes, understood.

And let's see-- where are you guys seeing the signs of strength in terms of orders to start the third quarter and in your sales funnel-- like hotter deals that you think you're fairly close to closing?

Well, I think as we remarked earlier, the introduction of the FlashCORE III related products, Dave, has driven a lot of business; particularly in Asia and that's continuing into the third quarter.

The wireless handset manufacturers; we expect to see continued growth there in the second half of the year.

And so those are really the spots where we see the greatest strength.

And in Europe, while we're expecting some increase in automotive, I think we're continuing to see the European team be effective at reaching out to new customers, companies we haven't dealt with before in new application areas.

And so we think that's going to continue throughout the balance of the year.

Okay.

What percent of your revenue was in the Americas?

We were 87% international, so 13% in the Americas-- in the U.S., in the United States, sorry about that.

13% in the U.S.; okay.

And then what percent was the Americas in total?

Because I believe last quarter, the majority of your Americas revenue came from South-- it wasn't North America, it was either-- you just said it was either Central or South America; correct?

Yes.

Hold on just a second on that.

The Americas were basically $1.6 million of the total sales for the quarter.

Okay, of which 13% of total sales was U.S.

That's correct.

I see.

Okay, so again, more came from Central and South America.

Then of course you have to include Canada in that as well.

I see.

Oh okay, yes.

Okay, I guess I'm done for the time being.

I may have a follow up.

I'll let somebody else ask a question.

Thank you.

Thank you.

Alright, thank you.

(Operator Instructions).

Michael Potter with Monarch Capital; please go ahead.

Just a quick question; I'm trying to back into the EBITDA number for the quarter.

Okay?

I don't have that depreciation piece right here in front of me.

There was really no substantive change in depreciation from last quarter.

So if you just grab last quarter's depreciation out of our cash flow, you'd have roughly the right number.

Okay, so what was the-- so you don't have depreciation with you; what about amortization and other non-cash?

We don't really have other amortization of any substance, so the other piece would be things like the inventory write downs, the restructure reserve related items, it would be including things like the change in our deferred revenue balance.

In terms of coming up with cash flow, those are not EBITDA items.

Okay.

So we have the $400,000 plus the approximately $94,000 for equity compensation?

Yes, those are all items affecting the cash flow, but again, those aren't adjustments to EBITDA.

So EBITDA is just the depreciation and then the taxes that are right here on the face of it and virtually no interest.

I see.

Okay.

And have we added any additional-- I guess sales or distribution for Asia in the quarter?

This was the quarter that we had added a company called Le Champ down in Singapore to cover the Southeast Asia region and so they were brought up and trained early in the quarter and we're trying to do more things to get the service training and they're going to be coming to our China facility for additional training.

So we're anxious to see them really start to create traction in Southeast Asia.

Okay.

So they really haven't hit the ground yet?

No they haven't, Michael.

Okay.

That's it.

Thanks.

Alright, thank you.

(Operator Instructions).

We do have a follow up from David Kanen.

Please go ahead.

Can you give me a sense as to how much of your sales were direct versus indirect?

I actually do not have that information right here.

In Europe it was fairly balanced.

In Asia, it's almost all indirect.

And in the Americas, the stuff that was in the U.S.

is considered direct even though we pay a rep commission for that, whereas the stuff that goes to South America or Canada would be considered distribution.

So you have the sales to the Americas and that would mostly be through distribution and the sales to the United States would be basically considered direct, even though it's using an indirect channel.

Okay.

I think in the press release, there's an implication that you're seeing a nice pickup to start the third quarter and then I think Fred said in the beginning of the conference call that "you expect substantially improved results in the third quarter."

Can you give me a sense at this point, for the first three weeks or so into the third quarter, is there an increase over the second quarter at this time?

Well Dave, obviously we haven't seen an increase over the second quarter in terms of absolute numbers at this point.

What we've seen is-- we've seen certainly additional sales of the FlashCORE III products that we introduced in the second quarter.

We saw repeat orders for those already in the month of July.

We've seen a substantial upturn in business for the automated products in Europe, which almost were non-existent in the second quarter.

And so I would simply have to say that the automated systems part of our business, which is pretty much the bellwether in terms of where the business is going to go in the quarter, has been substantially improved in the first three weeks of July and I think that's about as definitive as we can be at this point.

Okay.

Does it feel like past third quarters-- the way it's starting up, the communication with customers and the orders at this point or does it still feel like people are in recessionary clamp-down mode?

Well, there's certainly-- business is certainly not at the robust levels that they were back before the business turned down.

But I think directionally it's showing improvements and would suggest that if the trend continues, that we're going to continue to see growth throughout the rest of the year.

We obviously can't predict that because there is a lot of conflicting information out there.

But I think if you look at the-- just the general tone of the earnings releases from high-tech companies in the last couple of days, on the whole they've been rather positive.

And we think that, as best we can tell based on what's out there, a lot of the inventory issues have been completely flushed out of the system and new demand is starting to be created that ultimately is pointing toward an improvement at the end-user level.

So assuming that continues the way it appears, we're on the path toward recovery.

The level-- is I think the issue that no one is really completely sure about right now.

And as Fred mentioned in his script, he actually had mentioned that our funnels are looking substantially better than they did three months ago and you saw both new opportunities being raised by these new channels, and then particularly in the automotive area you're seeing some projects get put back on the funnel lists, especially over in Europe.

So there are some things that give us an idea that things are improving.

I mean I can give you one definite piece of data that will give you at least an indicator and that is that for one funnel, one particular funnel for one of our regions-- and we keep a separate funnel for each of our three regions-- we actually have more potential orders in that funnel in terms of number of line items in the funnel at the start of this quarter, compared to the start of the second quarter by a factor of three.

Okay.

So that's an indicator that there's a lot more people out right now, starting to talk about spending money.

Okay.

In a more macro sense, could you speak to the point that smartphone sales, as a percentage of total handset sales, is growing at a very rapid pace.

If one looks at total unit sales of the handset market, this year it's not going to grow, probably not.

But smartphones as a percentage is going to grow rapidly and in absolute units.

And it seems probable in the next couple of years that it's going to become the majority of total handset sales.

Can you speak to what that-- what are the opportunities for you guys and are you starting to see activity from customers at this point to address those needs?

Well Dave, yes, we can address that.

I think let me start at a raw technology level.

One of the things that is driving the growth of smartphone sales of course is new features, new performance, new capabilities.

And that's generally due to some new changes in the technology, the new memory technology and higher density memory technology, cost declines in memory technology that allow them to increase the functionality in the phones for the same price.

And it's really the FlashCORE III engine that we have that really supports the higher performance of these new generation chips; especially combined with some of our super-boost technology that we now are providing some of these smartphone manufacturers.

It delivers the kind of performance they need to implement these new designs.

And so it's really bound up very much with this migration toward higher-end smartphones and the growth that the smartphone manufacturers-- LG did extremely well this last quarter, as you know.

They had a record quarter and they shipped 30 million handsets in the quarter, and a substantial number of those handsets were in fact smartphones.

RIM continues to do very well and has very aggressive growth plans and we think those kinds of factors are the factors that will be driving our business over the coming months.

Okay.

Good luck and I'll speak to you soon.

Okay.

Thank you, Dave.

Alright, thank you.

I have not registered any additional questions at this time.

Mr.

Hume, Mr.

Hatlen, please continue with any closing comments you might have.

Well thank you very much for joining us on the call today and we look forward to talking to you at the end of the next quarter.

Alright, thank you.

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