Data I/O Corp (DAIO) 2009 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Data I/O fourth-quarter and 2009 earnings release conference call.

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

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

(Operator Instructions).

As a reminder, today's conference call is being recorded.

And with that, I would now like to introduce your opening speaker for today, President and Chief Executive Officer, Fred Hume.

Please go ahead.

Thank you, Doug, and welcome, everyone, to the Data I/O Corporation fourth-quarter and 2009 financial results conference call.

Joining me today by phone is Joel Hatlen, our Chief Financial Officer.

He's in Waterloo, Ontario, participating in the annual review of our Canadian sales channel.

This afternoon, Joel and I will discuss the fourth quarter of 2009 operating results and presented it in the context of the whole year, as well as the operating environment of 2010.

Before we begin, I would 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 result 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 in 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.

Revenues for the fourth quarter 2009 were $5 million compared with $5.6 million in the fourth quarter of 2008.

Net income in the fourth quarter was $6000 compared with net income of $78,000 in the fourth quarter of 2008.

Orders were $5.9 million.

Backlog at the end of the quarter was $1.9 million, up from $900,000 at the start of the quarter.

As mentioned in the press release, several customers requested that the equipment they purchased be delivered after January 1, 2010.

This reduced fourth-quarter revenue, but improved the prospects for the first quarter with the net addition of $1 million in backlog, most of which has already been delivered in the first quarter.

The fourth-quarter orders of $5.9 million were up 16% from the $5.1 million recorded in the third quarter of 2009, up 59% from the $3.7 million recorded in the second quarter of 2009 and up 69% from the $3.5 million recorded in the first quarter of 2009.

Compared to the bottom of the downturn in Q1 of 2009, when we booked $3.5 million, orders for the fourth quarter of 2009 were up 147% in Asia, 54% in Europe, and up 37% in the Americas.

The strength in Europe was a very good sign as it is our largest territory and heavily dependent upon the automobile industry.

Our subsidiary in Germany began to see an upturn at the beginning of the second quarter, and the fourth quarter was its best quarter of the year.

Orders in the fourth quarter for our automated products, a bellwether of industry activity, were $3.1 million.

That is up 36% from the third quarter of 2009 and up 75% from the first quarter of 2009.

During 2009, we added a dozen sales channels to help us reach new customers for our solutions.

These channels contributed positively to the financial results.

I am pleased to report after meeting with many of them in their regions during the last few weeks that they are excited to be representing Data I/O and have many good prospects for 2010.

Most of them reported that they started to see their business pick up for all of their principles in the second half of the year, and they expect 2010 to be much improved.

In the second half of 2009, we released the FlashCORE III programming technology, which is now available in all of our product platforms, including the ProLINE RoadRunner, FLX, FlashPAK and PS product families.

A significant portion of the growth that we have seen in our sales funnels comes from customers' needs for additional programming power to support their adoption of higher density flash and larger file sizes.

In November of last year, we exhibited at the Productronica trade show in Munich, Productronica is held every two years and is one of the largest of its kind in the world.

While attendance was clearly down from 2007, we generated a substantial number of sales leads, many a result of the introduction of our FlashCORE III products.

Many of the prospects reported that they were seeing generally improved business conditions and were making plans for capital purchases in 2010.

We also developed new versions of our ProLINE RoadRunner to support the new Siemens X series surface mount placement machines, as well as a version to support the Mydata surface mount placement machine.

Siemens is well-known as a manufacturer of the highest performance class.

Mydata, on the other hand, is particularly attractive for lower volume, higher mix production applications and represents a new class of customers For the RoadRunner solution.

The public introduction of these products will occur during this quarter.

At this time, I will ask Joel to provide you with more information about the fourth quarter and the full year of 2009 financial results.

Joel?

Thank you, Fred.

Good day to everyone.

As Fred mentioned, revenues for the fourth quarter of 2009 were $5 million compared to $5.6 million in the fourth quarter of 2008.

Revenues were down compared to the $5.3 million of the third quarter of 2009 because of the orders that ended up in backlog.

International sales represented 86% of total sales for the quarter.

Revenue declined in Europe by 22% and Asia by 15%, offset in part by 6% revenue growth in the Americas compared to the fourth quarter of 2008.

Compared to the third quarter of 2009, fourth quarter of 2009 revenues increased in Europe 4% and decreased in Asia 24%, and the Americas, 4%.

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

Backlog at the end of the fourth quarter of 2009 was $1.9 million, up from $876,000 at the beginning of the fourth quarter.

The gross margin as a percentage of sales was 53.4% for the fourth quarter of 2009 and compares with 55.3% for the fourth quarter of 2008.

The primary cause for this percentage change was due to the effect of decreased sales volume relative to fixed factory costs, as well as unfavorable labor variances.

Compared to the 56.2% gross margin as a percentage of sales in the third quarter of 2009, the 2.8 percentage point decline was again primarily due to the decreased sales volume relative to fix factory costs, as well as the unfavorable labor variance effect related to reducing inventories.

Operating expenses were $2.7 million for the fourth quarter of 2009 compared to $3.2 million for the fourth quarter of 2008.

The fourth quarter of 2008 operating expense had $535,000 of expense related to restructure actions.

In accordance with US Generally Accepted Accounting Principles, net income for the fourth quarter of 2009 was $6000 compared with a net income of $78,000, or $0.01 per diluted share, for the fourth quarter 2008.

This compares to the third quarter of 2009, which had net income of $331,000 or $0.04 per diluted share.

Earnings per share included the impact of equity compensation expense of $0.01 per share for the fourth and third quarters of both 2009 and 2008.

For the year ended December 31, 2009, revenues were $18.5 million, down with the down economy, resulting in a 33% decrease compared to revenues of $27.6 million for 2008.

International sales represented 88% of 2009 and 85% of 2008 revenue.

Gross margin as a percentage of sales was 53.7% for 2009 compared to 58.8% for 2008, with the decrease related primarily to the sales volume effect on fixed factory overhead, again, as well as the labor variance effect resulting from reducing inventory.

Operating expenses were $10.8 million for 2009 and $13.1 million for 2008.

And included restructuring charges of $203,000 in 2009 and $542,000 in 2008.

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

In accordance with US Generally Accepted Accounting Principles, net loss for the 2009 was $811,000 or $0.09 per share compared with a net income of $5.1 million or $0.57 per diluted share for 2008.

Data I/O cash increased to $15.6 million at the end of the fourth quarter.

Our cash continues to be invested in money market time deposit and government funds and not in auction rate securities or corporate debt.

During the fourth quarter, accounts receivable decreased $303,000, reflecting the change in sales volume, but also improved slightly the DSO, days sales outstanding, compared to the third quarter of 2009.

We continued our efforts to reduce inventories by $325,000 during the fourth quarter, by carefully managing our purchasing.

Over the past year, we have brought our delinquent accounts over 60 days down to $130,000 from $780,000 and lowered receivables by $2.5 million, as well as lowered inventories by $1.8 million.

There was no stock purchases under the stock repurchase 10b5-1 plan during the fourth quarter.

That plan expired at the end of the year and a new plan has been approved and will be effective starting in March.

We're seeing continued improvement in today's current economic climate.

We're continuing our practice of careful cost and spending control, preserving cash, and focusing on generating new customer and revenue opportunities, especially with the product introductions related to our new FlashCORE III.

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

Thank you, Joel.

One year ago, during our call, I told you that fear was rampant throughout the electronics industry and capital spending was essentially frozen but that fear would subside and capital spending would return to normal because the electronics industry wasn't going away and the end markets, such as wireless and automotive, would recover.

In the last year, we have seen that play out.

Most electronics companies continued to invest heavily in R&D during the downturn, and as a result, there are many new projects in the development pipeline.

The worldwide semiconductor industry moved into positive territory in November for the first time since the start of the downturn with sales up 8.5% from November of 2008.

Some analysts are suggesting that capital spending by the semiconductor industry this year will be up 45% from the level of 2009.

The consumer electronics industry was down nearly 8% in 2009 according to the Consumer Electronics Association, but they are expecting a very positive 2010, driven by wireless handsets, smartphones, netbooks, and high levels of innovation in the home entertainment market, as demonstrated in Blu-Ray players with Internet connectivity, as well as 3-D displays and OLED technology.

As a result of this increase in industry activity, we have seen the size of our sales funnels more than double compared to the size of the funnels one year ago.

The substantial growth in the sales funnels, combined with the increase in orders for our automated products that we saw in the fourth quarter of 2009, suggests that capital spending for equipment is entering a recovery phase.

At the same time, I think it is important to recognize that our customers' buying cycles are typically long, often in excess of six months or more.

So there is a natural lag between the time that we see an upturn in our sales funnels and when we see the upturn in orders.

Also, in light of the significant economic uncertainty, many customers remain cautious with respect to capital expenditures and may elect to delay spending until their business outlook is more certain.

It took more than two years for capital spending in the electronics industry to fully recover in the aftermath of the 2000, 2001 downturn.

The actions we took during the downturn to further reduce operating expense by $500,000 per quarter, to improve accounts receivable and inventory terms, and to strengthen the Company's cash position up $3.3 million in the past year, have created substantial financial leverage.

Our financial model calls for 60% gross margin and 15% operating income at $7 million in quarterly revenue and above.

That positions us well to deliver substantial shareholder returns during the upturn.

I'm also pleased to report to you that in January, we booked our largest software sale to date.

This order from a smartphone manufacturer will contribute more than $150,000 in profit for the first quarter.

We expect the software portion of our revenue to continue to grow throughout the year.

At this time, we will take your questions.

(Operator Instructions).

David Kanen, First Midwest.

Good afternoon, gentlemen.

Just want to commend you on doing a good job over the things that you have control.

It sounds like with orders at the $5.9 million level and backlog being just under $2 million, things are clearly picking up for you.

Can you give me a sense for the first two months of the quarter, what orders look like if this momentum has continued?

Because I know seasonally the first quarter is always down sequentially versus the fourth quarter.

Do you think this year you will buck that trend?

David, we haven't really released any order information at this point for the first two months.

February, frankly, isn't over yet.

And as you know in our business, we often book a substantial amount even the very last day.

So, I think I would just simply say that we see continuing a positive improving trend.

I'm not sure the seasonality has completely gone away.

We could wish that that were the case, but I think with the size of the order funnels and the movement we've seen and the activity that we've seen, we feel pretty good about 2010.

And I really can't say much more than that at this point.

Okay.

And was there -- total operating expenses were what, $2.7 million for the quarter?

Is that correct?

Yes.

Okay.

Was there anything anomalous in that?

Should we expect that to decline a little bit sequentially -- Productronica or anything else?

Well, the one-time expense type things during a seasonal year would include Productronica.

They would include some bonus-type pay that would be in the accruals for the quarter.

But, typically, that's sort of offset by the higher seasonal audit fees and NASDAQ and those types of fees that we typically have in the first quarter.

So, I was sort of estimate that we would be fairly similar with regard to our spending, maybe up a little bit on the audit fees.

Okay.

Okay.

I'll let someone else ask questions.

Thank you.

(Operator Instructions).

Steve Spence, RBC Wealth Management.

Good afternoon.

Can you touch on the increase in SG&A in the quarter, and what the makeup of the increase was?

And then maybe some life force on bonus accruals for the quarter?

Joel, do you want to handle that?

Yes, I will.

So the big piece on the that was really the additional bonus expense that was in the quarter, which was about $77,000 on the one.

And that compares to the fact that we actually reversed bonus accruals of about $118,000 in 2008 in the fourth quarter.

So that's probably the biggest single factor.

The other large factor was that we had a fairly significant amount of people that did not take vacation and what we call paid time off during the fourth quarter, and had taken a lot of that time in the third quarter.

And that actually resulted in about $100,000 swing in the expense levels for the fourth quarter of 2009.

Joel, what were the bonus accrual for the entire year?

For the entire year, the bonus accrual was $231,000 for 2009 versus 580,000 for 2008.

Okay.

What can you tell me about the stock repurchase program for calendar '09?

How many shares were purchased?

No shares were actually purchased in 2009 under the 10b5-1 plan that had been put in place.

So the decline in shares is a function of options expiring, and I assume the pricing of the options?

Well, let me --

Year over year, you reported a decline of about 80,000 shares.

Yes, that ends up being as a result of the dilution factor, so yes options expiring or in other cases, being forfeited.

And then the other piece would be that we had -- for the year 2009, because we had a loss, that figure is a basic earnings per share as opposed to a diluted earnings per share.

Okay.

And can you -- I'm sorry to be so thick on this.

But help me a little bit again as to how the earnings would impact the share count?

When you have a loss for the year, which we had for the 2009 as a total, you end up using what they call the basic earnings per share, which means you don't add in the dilutive effect of the options that are in the money.

Whereas if you had profit, then there's an assumption that you would spread the loss over the diluted -- you would spread the income over the diluted shares and reduce the earnings per share.

Okay.

I must admit, as you have managed to grow the balance sheet rather nicely, particularly the cash component, and with the value of cash being so low, coupled with the stock selling at a discount from book value at the start of the year, I am really disappointed that you folks bought no stock back.

And can you provide some insight as to what that's about?

I mean to go to your Board and to request permission to buy it back and for you to have grown the balance sheet in part from operating expenses and then also from extraordinary items in the sale of the patent, and not to have used that window -- we spoke of this -- to repurchase stock, I have to tell you, dumbfounds me.

If there ever were circumstances where one would think it would have been something that the Board and management would have been aggressive about, this would have been it.

And I don't understand the lost window.

Steve, I think you know -- I understand your perspective on it, and I appreciate your perspective.

I have to tell you that this is an issue that the Board of Directors spends considerable amount of time talking about.

It weighs a lot of factors.

It weighs one factor, the factor that you speak about, which is the attractiveness of the stock for a buyback for immediate return for the Company against the long-term needs that the Company has with respect to growth of the business and other strategic opportunities.

And I can tell you that the Board takes these factors into consideration, deals with them very carefully, deals with them very thoughtfully, and establishes a plan.

And those plans have trigger points.

And while I can't discuss the exact trigger points, they weigh all of these factors together.

And I can understand how the outcome may not be what you want, all I can assure you is that it was done very deliberately, very considerately.

A lot of factors were taken into the consideration of the ultimate decision.

And that's what it came down to be.

My only comment is that as a shareholder personally and for our clientele, is that the pipe of illiquidity we had in the markets and these windows, at the same time you were building your balance sheet and the extent to which you have capital spending opportunities, you can't acquire any business worth owning at a discount from book value while you are accreting cash on your own book.

There is no CapEx that I know of that would be immediately accretive to earnings and grow the value of the enterprise on a per-share basis to the shareholders than the window that the Company had.

And it causes me to question the wisdom and insights of the Board.

Because this is numbers which can be run very easily, and I know you folks have opportunities from time to time in the bolt-on M&A areas.

I shouldn't say I know -- I'm sure that you do.

And I doubt that you can buy any of them at a discount from book that are immediately accretive.

That, at the same time when the cost of capital is measured by a return that has a decimal point in front of it.

The concept of lost interest income is negligible in this environment.

And so, I would appreciate if you would pass along to the Board that I think that they owe an explanation as to what this philosophy is so we can have an understanding as to what it would take.

You vote a plan in place, but apparently the hurdle rate wasn't sufficient to be crossed.

If you couldn't cross in this environment, then maybe from a shareholder perspective, you can understand that some form of an explanation as appropriate.

Steve, I appreciate that very much, and I will be sure to pass that on.

Okay.

I appreciate that.

And then I've got one more question for you.

The [owe on] mix of revenue between software and hardware for the year, I haven't had a chance to run the numbers yet, so -- and I don't have that detail.

Is it up from last year?

Yes.

As a percentage, it was up substantially.

Of course, I think we -- I have to go back and look at it to see how much it was up in absolute terms because the overall revenue was down, obviously.

Joel, I don't know if you know offhand.

I do not have that number right here with me, Fred.

Sorry.

Right.

I'm sorry, Steve.

I don't have that.

But I can tell you that aftermarket, including the adapters and the software support agreements and so forth, represented more than 40% of our bookings in 2009.

Okay.

In that regard, should we assume then because of the decline on a year-over-year basis in gross margin, should we assume that there are some price pressures in the hardware area right now?

You know, there are always some price pressures, Steve.

But really, the biggest thing that impacted our gross margin was really just the lower production level and the absorption of overhead associated with that.

And, we don't believe that there is any fundamental deterioration in our gross margin structure that we see as a result of what happened in 2009.

Okay.

And then just a last question, if you can comment in general on the competitive environment for you.

And then secondly, the extent to which you have any vision at all as to what you expect the CapEx environment on behalf of your customers may be, as we are sort of coming out of this tornado?

Joel, you want to take the first part of that?

Could you repeat that, Steve?

Probably not.

I just wonder if you can tell us a little bit about what you think the CapEx environment may be like for your customers in the current year?

Do they have a tremendous amount of idle capacity that's something you have to overcome?

Or has there been sufficient maybe technological obsolescence and things that will affect the CapEx cycle?

And then secondly, I would be interested to know from a currency standpoint what your headwinds are there.

Joel, I'll take the first part and I will let you deal with the currency; how's that?

Okay, that would be great.

Okay.

Steve, there is a fair amount of pent-up demand.

There's not much doubt about that.

And, we see it in a number of areas.

We see it particularly in Europe.

And so, we think that's going to be improving throughout the year.

I think the semiconductor industry is a representative example, which we saw just between the third quarter and the fourth quarter that capacity utilization jumped from 87% in the third quarter to 89.2% in the fourth quarter.

And I think it's going to continue to go up.

So, on the whole, I think we're feeling good about that.

Is there a capacity number where generally where it's sort of -- when you see the needle tick over maybe 90, does that -- is there a point at which it really materially starts to choke our order flow?

Well, actually, Steve, it depends a little bit on customers.

But in some cases, our customers' threshold is more on the order of 75%.

And the reason is, that they may have a normal level of business that's okay at a certain level, but, then they might get a large order, which they have delivery requirements.

For example, a handset manufacturer will get an order from a service provider; and I will just pick one -- Verizon, for example.

And Verizon wants 600,000 of a particular handset and they want them delivered in six weeks.

So all of a sudden, their capacity utilization might go from let's say 70% to close to 100%.

Almost an unreasonable number or may even take it -- the requirement would take it over 100%.

So, many of the customers try to have enough excess capacity so that they can support burst demands by their customers.

And it depends a little bit on the nature of the particular customers we have, whether that trigger point is 70% or 75% or 80% or 85%.

But it's in that region, at which they make purchase decisions.

And, in some cases, they may even purchase backup equipment that they leave in the boxes and not even take it out of the box as just as a contingency in the case that they get a demand for some high volume in a short period of time.

Okay thank you.

That's very helpful.

So with regards to the currency part of your question, we are going to see that we don't have quite as much translation power of a German sale made in euros to our dollars as we had back in November.

November was pretty much the peak of the strengthening of the dollar, where basically, you were at the point where the weakening of the dollar so that you saw that the dollar was as low as $1.50 to buy a euro.

Now it's more like $1.00 takes $1.36 to buy a euro.

So you have essentially 14 points of difference there in terms of that conversion.

So that means that it will take us more sales in Europe in order to equal the same amount of Europe to dollar sales as we saw in the fourth quarter.

However, that in -- if you look back over the whole year, we are back more in a normal range of the dollar to the euro in our experience.

So, we kind of would guesstimate that we would probably stay somewhere around this current level, and it would be what we expect in our planning for a euro-based piece.

We don't probably see any big change between the Asian and other currencies and the dollar.

Okay.

Thank you very much.

(Operator Instructions).

Steve Wilhelm, Puget Sound Business Journal.

obviously.

Hello, gentlemen.

Just wondering what you can say about employment and how it's been in 2009?

And with the uptick you are thinking about, how it looks for this year?

Well, Steve, in 2009, we did add a couple of people in critical positions that added some strength and technology for the Company.

We are being very selective on our hiring.

We don't have any large-scale hiring plans, but we are continuing to fill a few key positions over time, and we will continue that in 2010.

Okay.

But did it go down in 2009 compared to 2008 overall?

No, it was pretty much flat.

The adjustments that we made were really back in 2008.

And in 2009, we basically managed the Company by not resorting to mass layoffs.

And we didn't do the hour cuts and the cuts in wages.

We were very careful with regard to how we had structured the Company around our operations so that that did not have to take place.

Okay.

Thank you.

Speakers, at this time, we have no additional questions in our queue.

Well, at this time, I would like to thank all of you for joining our conference call today, and we look forward to talking to you at the end of the first quarter.

Ladies and gentlemen, today's conference call is being made available for replay starting today at 12 PM in the Pacific time zone.

That will run for one week until Thursday, March 4, 2010.

You can access our service by dialing, domestically, 800-475-6701, or internationally at 320-365-3844.

And at the voice prompt, enter today's conference access code of 146-930.

(Operator Instructions).

And that does then conclude our conference call for today.

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