Data I/O Corp (DAIO) 2009 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Data I/O third-quarter earnings conference call.

(Operator Instructions).

As a reminder, this conference is being recorded.

I'd now like to turn the conference over to your host, Mr.

Fred Hume.

Please go ahead.

Thank you, and welcome to the Data I/O Corporation third-quarter 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 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.

We were pleased to see a substantial improvement in the business environment in the third quarter of 2009.

Revenue for the third quarter was $5.3 million, up 37% from the $3.9 million recorded in the second quarter.

Gross margin was 56.2%, up from the 48.3% recorded in the second quarter.

Operating expense was $2.6 million, up slightly from the $2.5 million recorded in the second quarter.

Net income was $331,000, or $0.04 per share.

Earnings before interest, taxes, depreciation, and amortization were $701,000.

The Company's cash at the end of the third quarter was $15.3 million, up $571,000 from the end of the second quarter.

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

Orders for the third quarter of 2009 were $5.1 million, up 37% from the $3.7 million booked in the second quarter.

Orders in the Americas were up a modest 7% from the second quarter, reflecting the continued weakness of the business environment at home.

Meanwhile, orders in Asia were up 44%, reflecting the generally improving business environment we begin to see in the second quarter.

Orders in Europe were up 74%, reflecting a strong rebound from the very weak conditions we saw in the second quarter.

The improved conditions were generally spread across all of our markets.

Orders for our automated equipment were up 28% from the second quarter, primarily the result of capital spending for new projects and technology upgrades.

We also saw increased spending for process improvement as new customers adopted our RoadRunner solution for in-line programming.

Orders for our production-related aftermarket products were also up 36%, which we believe is a sign of increased capacity utilization.

If this trend continues, it could lead to new spending for increased capacity, something we have not seen in a very long time.

Total orders for aftermarket hardware and software were approximately 40% of the total.

Our order funnels grew substantially during the quarter, to end the quarter at the highest levels in many years, reflecting much higher levels of customer engagement with our sales force.

We believe that this is a sign that customers are once again planning for the introduction of their new products and for factory improvements as they prepare for growth.

But we also believe, however, that actual capital spending will continue to lag until the CFOs of these firms have confidence in the recovery.

As those of you that follow the Company closely know, in the past months we've added more than a dozen new sales channels around the world.

A few of these are starting to have success, and as the economy improves we expect the others to follow.

We've also completed the development of a new sales training program to supplement our formal product training program we launched last year.

The new training program will begin this week in Europe, and will spread to the other channels around the world over the next few weeks.

Some upgrade business was booked in the third quarter as the result of the FlashCORE III introduction, and we expect more upgrade business in Q4, along with orders for new FlashCORE III systems.

We demonstrated FlashCORE III technology at the Nepcon trade show in China, where it was well-received.

FlashCORE III technology is now available in our PS, RoadRunner, FLX, and FlashPAK families.

We would also like to invite you to visit us at the Productronica trade show in Munich November 10 through13, where our FlashCORE III products will be on display.

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

Good day to everyone.

Revenues for the third quarter of 2009 were $5.3 million, compared to $7.8 million in the third quarter of 2008.

Revenues were up 37%, compared to the $3.9 million of the second quarter of 2009.

International sales represented 88% of total sales for the quarter, with revenue declines in all geographies compared to the prior-year's quarter.

However, as Fred mentioned, all geographies were up compared to the second quarter of 2009, with revenues increasing in Asia 49%, the Americas 50%, and Europe 17%.

The variation in sales revenue percentages versus order percentages that Fred discussed relate to changes in backlog.

The backlog at the end of the quarter was $876,000.

The gross margin as a percentages sales was 56.2% for the third quarter of 2009, and compares with 59.7% for the third quarter of 2008.

The primary cause for this percentage change was due to the effect of decreased sales volume relative to fixed-factory costs.

Compared to the 48.3% gross margin percentages of sales in the second quarter of 2009, the eight percentage-point improvement was primarily due to the higher sales volume relative to fixed-factory costs, as well as more favorable mix of price and product costs.

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

This indicates that our actual product material margins improved, which has been a major thrust of our restructuring actions, especially related to our China adapter and inventory sourcing initiatives.

Operating expenses were $2.6 million, including $23,000 of restructuring costs in the third quarter of 2009.

The restructuring charge was due to finalizing legal fees and a severance settlement.

Compared to the third quarter of 2008, the third quarter of 2009 operating expense had $180,000 less bonus expense and reflects the savings from the restructuring actions taken during the past year, with these savings offset in part by increased commissions to sales representatives.

In accordance with U.S.

generally accepted accounting principles, GAAP, net income for the third quarter of 2009 was $331,000, or $0.04 per share, compared with a net income of $1.2 million, or $0.13 per diluted share for the third quarter of 2008.

This compares to the second quarter of 2009, which has a net loss of $683,000, or $0.08 per share.

Earnings per share included the impact of equity compensation expense of $0.01 per share for each of those quarters.

Data I/O's cash increased to one -- to $15.3 million at the end of the third quarter.

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

During the quarter, accounts receivable increased $1 million, reflecting the change in sales volume, but maintained approximately the same DSO, days sales outstanding, as in the second quarter.

We continued to reduce our inventories by $340,000 by carefully managing our purchasing during the quarter.

Over the past year, we have brought our delinquent accounts over 60 days down to $110,000 from $2 million, and lowered receivables by $4.3 million, as well as lowering inventories by over $1 million.

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

We are seeing improvement in today's current economic climate.

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.

With operating expenses at about $2.6 million, we estimate that our quarterly revenue breakeven is at approximately $4.7 million.

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

Thank you, Joel.

At this point, we will be happy to take your questions.

(Operator Instructions).

David Kanen, First Midwest Securities Inc..

Good afternoon, gentlemen.

Congratulations on the turning back to profitability, and I commend you on doing an excellent job of managing expenses and further strengthening your balance sheet.

First question is in regard to the FlashCORE III product launch.

Can you approximate to me revenues that contributed to the third quarter in that product family?

We appreciate your comments.

No, actually, we can't.

We are not in a position to break out our FlashCORE III revenue at this time.

As you know, this could be a competitive issue for us, and so it's a piece of information that we just don't feel appropriate to make public.

Okay.

Do you expect going forward for it to be a meaningful contributor to your overall results?

And then, is this a product that would be associated with a capacity add by customers, or is this something that you are selling into your existing customer base of already-installed systems?

Dave, it's actually all of those.

There are some substantial improvements in performance to support new device types that are just now being adopted by leading customers.

And so, it was -- the performance advantage was a substantial driver of the sales of the FlashCORE III upgrades and new products that we achieved in the third quarter.

And we believe that's going to be the case going forward.

It does provide the opportunity for substantial capacity increases for customers that already have our FlashCORE-related products at their sites.

They can upgrade to FlashCORE III, and it does give them a substantial capacity improvement.

So there's really multiple drivers of performance for Data I/O, but the principal driver for our customers, at least up until this point, has been the performance improvements.

And what will be the margin contribution from FlashCORE III?

Will it be about the same as your overall mix right now?

Or higher, lower?

We expect it to be higher.

Particularly as it gets ramped up, there are certain start-up costs associated with it.

But over time, it will add additional contribution.

I see.

Now I know gross margin was up considerably from last quarter on a sequential basis.

Had you achieved, let's say, revenues in the $6.5 million, $7 million range, would you have been back to your target of 60% gross margins, or do you think those days are gone?

No, those days aren't gone.

Go ahead.

At $7 million, we would be about 60%.

(Multiple speakers).

So it's just a question of absorbing some of the fixed costs.

I mean, it's a nice improvement, but I remember about a year ago you were pushing 60% or so.

That's still our target.

We don't see any reason to back off that target.

And it's come down from that target a year ago because we've restructured a lot of our expenses and just brought that breakeven point down.

So it should be a little easier for us to make it.

Okay, that's good to hear.

Were there any software sales in the quarter?

There were -- let's see, Joel.

Not stand-alone systems, other than our standard software options.

Right.

There were not.

We expected some substantial software sales in the quarter, and they did not materialize as yet.

Okay.

And then, unfortunately, I don't have the press release in front of me, but when I read it a little while ago, there was a line in there about a stronger sales funnel at the start of the quarter.

Could you just speak to that point, where you're seeing more activity, and does that give you confidence that we might see better revenues sequentially in the fourth quarter?

I know it's an uncertain economic environment, but your best guess is appreciated.

Well, I think the comment that we made in the press release is essentially that our order funnels are -- filled substantially during the third quarter.

And that we finished the third quarter with probably the strongest order funnels that we've seen in many years.

So that's significant for us, we think, going forward.

And it's really -- it really reflects the fact that we had a lot more customer engagement.

There's a lot more customers now talking about new projects, new programs, new initiatives, and I think that's a very positive thing.

When I reflect back on the aftermath of the downturn in 2000 and 2001, it seemed like it took two or three years before we really saw customer activity, customer engagement, ramping back up again in any significant way.

And the fact that it rebounded as quickly as it has has been encouraging to us.

I think, at the same time, we continue to be cautious just in the sense that actual spending related to these new things that customers are talking about really depends on the CFOs' willingness to take their checkbook out of the safe and actually start writing checks again for capital.

And -- so we think our business tends to be a little bit of a lagging indicator rather than a leading indicator.

And we do have new sales channels, and as you know it takes a fairly long time, sometimes, for orders to gestate in our business from the point of initial discussion to the point where we actually close the orders.

So with that bit of caution, however, I mean, we are really pleased to see the funnels where they are.

Okay.

So it sounds like you feel the fourth quarter will probably be better, but you don't know how much [that] third quarter, or you wouldn't commit to that?

It feels, at this point, better.

That's not a forecast, of course.

Okay.

And then, could you speak to the breakdown in your various revenue segments for the quarter, wireless, automotive, industrial, programming centers, approximately the percentages that came from each segment?

Honestly, we don't have that data at this point.

We haven't had a chance to go back through the third-quarter results and analyze it yet by market segments, so we just don't -- we just -- we just don't have that.

But I can say that we did see a substantial amount of rebound in wireless business.

And our automotive-related business in Europe, particularly, was strong during the third quarter.

So, hence the general comment that virtually all of our segments were up in the third quarter.

Okay.

Thank you, and -- I look forward to speaking with you soon.

Good luck.

(Operator Instructions).

David Kanen, First Midwest Securities Inc..

I apologize, I meant to ask this before.

So approximately what was stock-based compensation?

It was about -- a little above $50,000.

Mostly we had some forfeitures that brought our expense rates down during the quarter.

I'd probably predict it, going forward, it would be more in the -- let's say, $75,000 range.

Okay.

So on a non-GAAP basis, if I add back the restructuring charge and stock-based comp, you earned more like $0.05.

Does that sound about right?

Yes, that would be correct.

Okay.

Thank you.

There are no further questions from the phone lines.

Please continue.

Thank you all for joining us today.

We appreciate your interest in Data I/O, and we look forward to calling and talking to you again at the end of the fourth quarter.

Thank you.

Thank you.

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