Data I/O Corp (DAIO) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by.

Welcome to today's First Quarter Earnings Release Conference.

(Operator Instructions.) And now, it's my pleasure to announce your host, Fred Hume.

Thank you, and welcome to the Data I/O Corporation First Quarter 2010 Results Conference Call.

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

This afternoon, Joel and I will discuss the first quarter of 2010 operating results.

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 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 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 first quarter of 2010 were $6.3 million, up 43% from the $4.4 million recorded in the first quarter of 2009, and up 26% from the $5 million recorded in the fourth quarter of 2009.

Net income in the first quarter was $709,000, or $0.08 per share.

Cash grew to 15 million-- $15.7 million.

We have worked hard to build financial leverage into the business model over the past three years.

The substantial income generated by the firm in the first quarter, despite the seasonally high public company costs, demonstrates that leverage.

Joel will provide you with more information on the first quarter's financials in a few minutes.

The first quarter started well and momentum continued to build throughout the quarter.

Orders were 5.9 million and were strong in all three regions, with Asia up 136% from the first quarter of last year.

Europe was up 43% and the Americas were up 68%.

Orders were also strong across all product lines led by orders for automated systems of 3.3 million, up 85% from the first quarter of last year.

We also saw strength in the aftermarket with orders for adapters at 1.5 million, up 52% from last year.

All of our major customer groups were in the buying mode.

Orders from wireless handset manufacturers and their subcontractors remained strong and orders from our automotive customers continue to rebound.

We even saw a resurgence in orders from programming centers, the first significant orders from this customer group in several years.

The introduction of the FlashCORE III technology into all of our major product lines contributed to the strong demand in the first quarter as customers were eager for a better solution to cope with the increasing use of very high density flash memory.

Our FlashCORE III technology has received industry awards in all three geographic regions.

The majority of our new sales channels were on plan at the end of the first quarter.

Some of these were also successful selling our automated systems.

I attribute much of that success to the extensive training our sales management team provided them, their general competence, and their strong position in their respective markets.

During the quarter, management visited virtually every new channel and we recently launched a new form of weekly communications with the channels that we expect to increase the healthy amount of team work with them that already exists.

During our call in February, we reported a significant order for our security and process control software.

Toward the end of the quarter, we received a mid-six-figure order for software to meet a special customer need.

We believe that the software side of our business will continue to grow over time and will contribute positively to earnings from the higher margins than our traditional business.

As we have reported in the past, competition comes primarily from alternative programming methods rather than from other programming equipment vendors.

We developed and trained our sales force on the use of a site seller that equips them with information they need to take potential customers through a review of their programming strategy.

The sales force has given the site seller very high marks as they have been using it successfully in many sales situations.

After placement programming, where devices are programmed after they have been soldered on the printed circuit board either at test or at the end of the line, has been the de facto standard method for short programming time devices.

As the file sizes have grown typically 25% or more per year, the after placement method has become a production bottleneck for many companies.

We are now beginning to see business from these companies that are eager to maintain manufacturing velocity in the face of longer programming times, since it has a direct impact on inventory and asset utilization.

For several years, we have been building a strong culture of cross functional collaboration and innovation at Data I/O.

That activity extends to our subsidiaries in China and Germany.

Some of the personnel actions we have taken that might not be fully understood by investors have been to achieve that end goal.

The progress has been truly gratifying.

Our cross functional business initiative teams performed well during the first quarter.

They maintained a high level of communication with potential new customers, and the customer feedback continues to reinforce the value proposition of the initiatives.

One of the teams passed an important gate review in the quarter, and we expect two other teams to achieve the same milestone in the next three to four months.

We expect this renewed culture of innovation and collaboration to have a profound impact on our ability to grow by meeting the expanding set of needs of an expanding customer base.

At this time, I will ask Joel to provide you with more information about the first quarter financial results.

Thank you, Fred.

Good day to everyone.

Revenues for the first quarter of 2010 were $6.3 million, compared to $4.4 million in the first quarter of 2009, an increase of 43%.

International sales represented 89% of total sales for the quarter, with revenues increasing in Asia 87%, the Americas 34%, and in Europe 35%.

The variation in sales percentages versus order percentages Fred discussed relates to the use of backlog.

The backlog at the end of the quarter was 1.1 million.

Part of the quarter's reduction in backlog was due to a shift to deferred revenue, which increased to 290,000 and is expected to be recognized as revenue during the next two quarters.

The gross margin as a percentage of sales for 2010--the first quarter of 2010 was 60%, and compares with 55.7% for the first quarter of 2009.

The primary causes for this percentage change were due to the effect of increased sales volume relative to fixed factory and service costs, and the product mix, especially from additional software revenues.

Factory variances were low for both the first quarter of 2010 and 2009.

Operating expenses were $2.9 million in the first quarter of 2010, compared to $2.7 million in the first quarter of 2009.

The first quarter of 2010 had more commission expense due to the higher sales volume, and more incented compensation due to the operating results.

Included in the first quarter of both years are the expenses of the audit, NASDAQ, and other public company related costs that are much less in other quarters.

In accordance with U.S.

Generally Accepted Accounting Principles, GAAP, net income was $709,000, or $0.08 per diluted share, for the first quarter of 2010, compared with a net loss of $464,000, or $0.05 per share for the first quarter of 2009.

Earnings per share included the impact of equity compensation expense of $0.01 per share for both the first quarter of 2010 and 2009.

We had an income tax provision for the quarter due to profits in foreign locations.

Our net operating loss carry forwards in the United States are available to continue to offset our future United States-based net income, and we will continue to annualize and manage taxes as the year progresses.

Data I/O's cash increased to $15.7 million at the end of the quarter.

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

During the quarter, accounts receivable increased $1.5 million, reflecting the increase in sales volume.

We were able to continue to reduce by 200,000 our inventories during the quarter by carefully managing our purchasing.

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

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

Thank you, Joel.

For some time I've been reporting on the growth we have seen in our sales funnels.

It's great to see that trend continue and to see it result in a meaningful increase in orders.

We came through the most severe economic downturn in the electronics industry that I've experienced since I went to work in 1961 remarkably well.

We now see signs of growth in the general economy and particularly robust conditions for the electronics industry.

This suggests that we can look forward to a prolonged period of prosperity.

At this time, we will take your questions.

Can the operator please check on the questions?

Sure thing.

(Operator Instructions.) And it does look like we have a couple questions.

Our first is coming from David Kanen from First Midwest.

Good afternoon, gentlemen.

Excellent quarter.

Congratulations.

Thank you, Dave.

First question, Fred, is approximately what percentage, if you can share with us, was--of quarterly revenue was software?

Dave, we haven't disclosed that.

We don't break that out specifically.

We haven't disclosed that, and so we really aren't prepared to talk about that at this point.

Okay.

Next question.

This is sort of like a general or macro type of question.

In this let's say next capital spending cycle, which it appears we're just starting, is there the potential for you guys to reach a higher peak revenue in this cycle given better--you've got more sales coverage, much, much higher density files, which you would think would create growth in programming, and then also FlashCORE III, and software.

Is it reasonable to assume this cycle we're going to hit higher peak revenue?

I think so, Dave.

I mean, that's obviously not a guarantee.

But just when you look at the macroeconomic conditions and what's happening in the industry right now and what other companies are reporting, what they're seeing, what they're planning for, that certainly is in the cards.

Okay.

And next question is in regards to operating expenses.

You did a nice job of keeping the OpEx line sticky as revenues grew.

Is this something we can expect for the balance of the year or do you have plans to hire people and invest and grow OpEx?

Dave, we plan to keep a really tight lid on expense.

We've--we watch that constantly and we plot on a curve the spending in all of the critical areas - sales, R&D, marketing.

And as you know, for the last few--well, the last few years we've been on the path to drive those down.

We do see this year the potential for some increase in the R&D line related to some of the new initiatives and the use of some contract engineering resources.

We expect that increase to be modest, but there's some potential to accelerate some of the new activities that we have underway through the use of some outside resources.

So there might be a modest increase related to that.

But generally speaking, I think the expenses are going to continue to be pretty tightly controlled.

Okay.

And the contribution to revenues from software this quarter, is that anomalous or is this something that you guys are going to continue to focus on and try and grow as a percent of the overall revenue?

And then, what impact do you expect that to have to your operating margins?

Well, I'll let Joel comment on the impact on operating margins.

I think, as I've said for some time now, we see software as being a strategically important business area for Data I/O.

We've been looking very carefully at that in our planning.

We've launched initiatives related to software.

And we've had those programs underway now and they're actually at the point where they're starting to produce revenue and we see that continuing.

Now, like any big business area for us, when you get mid-six-figure orders, those tend to be lumpy.

So we don't expect them every month.

But we certainly look in terms of the trend to see an increase in contribution from software in terms of total revenue.

I'll let Joel comment on the margin contribution.

Well, clearly, at least from my opinion, the margin contribution will be greater from the software as a percentage of revenue.

It will be a little bit changeable with regard to whether it's gross margin or operating margin, because in some of our software contracts we will actually be having some of the R&D type engineering hours be reclassified to--as an operating expense associated with that development with cost of goods.

But as a general rule, we're going to see improved margins because of the value added on the software.

Excellent.

And then, Joel, something in the income statement I didn't quite understand - non-operating income expense of $57,000.

I would have thought that would be interest income, that there would be some there.

Can you just--it was a deduction of $57,000.

Yes.

What was that?

The biggest single factor ends up being currency effects, which are not--.

--I see--.

--Considered an operating income effect.

I see.

Okay.

So really, earnings would have been closer to $0.10, if it wasn't for taxes--an accrual for taxes and FX.

That's absolutely correct.

Okay.

And last question, this is for Fred.

It seems like things are really coming together.

You've got a great story.

And in the second half of the year I know there's a seasonality where revenues ramp up versus the first half, and you should be able to earn much more.

What are--do you have any plans in terms of going out and telling the story to the investment community?

Are you--will you be participating at any upcoming investor conferences to go out and tell the story?

We plan to, Dave.

We're going to be at the B.

Riley Conference the end of May, and that will probably be the first major opportunity for us.

I will plan on going out on the road a number of times during the course of the year.

And I look forward to that.

It's a good time and it's a fun time.

It's a good story to tell.

Okay, excellent.

Thanks very much, and good luck.

Thank you.

Thank you.

Our next question is coming from Marcel Herbst from Herbst Capital Management.

Hello.

Good afternoon, and congratulations to a very, very good quarter.

Thank you.

Thank you very much, Marcel.

You had really strong revenue momentum in Q1.

And has this momentum carried over into the second quarter so far?

Well, April isn't over yet, so it's a little early in the second quarter.

But I would say from everything I've seen, the momentum is continuing in the second quarter, yes.

Oh, excellent.

And what are you booking in Q4--I mean, in Q1?

5.9 million.

5.9.

And there were two announcements about ProLINE RoadRunner being integrated into machines from MYDATA and Siemens.

And this seems to be a brand new market segment for you.

And I was wondering when did you adjust your RoadRunner product with this capability and what is the revenue potential here in this market segment?

Well, the two units, Marcel, are quite different.

As you know, Siemens is a major provider of surface mount placement machines.

And we've had versions of RoadRunner that ran on their previous versions of the SIPLACE machines.

They introduced the X Series this last year.

And so, the addition of the Siemens X Series RoadRunner is really to leverage Siemens' momentum.

They've got a lot of momentum right now with the very high performance of the X Series SIPLACE machine.

And so, we see plenty of opportunity to further build momentum with the RoadRunner product line from sales to companies that are embracing the X Series placement machines.

So that's good news and that's a recent introduction.

The MYDATA RoadRunner is--it's a little bit different in the sense that MYDATA is a company that offers more modestly priced placement equipment--surface mount placement equipment, and their market segment is primarily the smaller electronics manufacturers.

We really haven't had a version of RoadRunner to play in that marketplace before, so the introduction of the MYDATA RoadRunner is sort of a new venture in a way for us.

And we've had a lot of support from MYDATA.

We collaborated with them at a recent trade show.

There's been a lot of interest in it.

It's reaching out to customers that we haven't tapped before for RoadRunner.

So while it's still early with the MYDATA unit, we're very hopeful that we'll see some good business for it this year.

It's very nice to see you breaking into new markets there.

That's really great.

I also have a question, a follow-up on your software products, because they seem to be received very well by your current customers.

And I was wondering if you are planning at all versions that would also work with other machines other than Data I/O machines.

That's an interesting question, Marcel.

And there is certainly some things in the software architecture that we've developed - the underlying architecture - that would allow this software to work with other machines.

We don't have any specific plans to do that at this point in time, but there is nothing architecturally that would keep us from doing that.

Okay.

And finally, I'll ask you, you mentioned the seasonal impact of the public company costs and I was wondering how much that was.

It's generally about $200,000 for the first quarter.

Okay, excellent.

Thank you so much.

Thank you.

And I am showing one more question at the moment from Steve Spence from RBC Wealth Management.

Good afternoon, gentlemen.

Good afternoon, Steve.

Could you, Joel, quickly go over the deferred revenue issue again?

I'm having a little trouble tracking what you were referring to there.

Sure.

This quarter we had some of these software sales and we also had a large number of systems that went out towards the end of the quarter.

And so, we didn't get a chance to install some of those.

And as a result of those in essence pre-billing before we do the installation or before we provide delivery of the software, we end up having to do a deferred revenue.

Now, that's like backlog, but since it's already been invoiced it isn't sitting in backlog.

So from my standpoint, that $290,000 in deferred revenue is kind of just like backlog that will turnaround in the next two quarters.

That is fair enough.

And that's all software related again?

Software and some of the installation of our big automated systems.

Okay, great.

Can you talk a little bit about--we're starting to see some improvement in the EMS sector.

And I don't know what sort of capital capacity position those particular customers may be in at this time.

Is there an easy way for you to characterize that from Data I/O's point of view?

Boy, Steve, that's a good question.

Obviously, it's--the EMS companies are important to us.

We work closely with the OEMs as well as the EMS companies.

And so, we track the business in many cases directly back to the OEM and the OEM's impact in terms of participating in the buying decision making process.

Ultimately, of course, the EMS companies won't spend money unless they get contracts.

So it's important for us to tie those together, and we do.

So for example, if a wireless company places an order on an EMS company that results in us getting an order for a RoadRunner or for a PS system, we identify that order as wireless, rather than breaking out the EMS sector itself.

Because large EMS companies, like Foxconn or Flextronics and so forth, participate in so many markets we really have to tie it back to the end customer.

And so, we're seeing a significant amount of business continue to come through the EMS companies.

We don't actually break out our revenue that way, so I can't give you any specific numbers.

But that's certainly an important factor.

Thank you.

That's helpful.

Tell me a little bit with respect to wireless end markets and the extent of the share of the circuit board that you guys enjoy there, and what may be going on from a demand standpoint in that area.

Well, the--certainly the smart phone handsets are accelerating.

They've been a strong performer.

They were a strong performer during the downturn and they've continued to accelerate as we've come out of the downturn on this other side.

They were a significant contributor to revenue and to orders in the first quarter.

We haven't gone back yet and done our analysis where we break out the actual orders in detail by segment.

So I can't even give you a number at this point in time in terms of how much they represented of our business in the first quarter, except to say that they were significant.

And we have several companies that--in the wireless handset space that placed orders during the quarter.

And we see the opportunity for this to continue, particularly as a result of our FlashCORE III now and our ability to support some very large file sizes with very fast programming times.

Okay.

Thank you.

In the past we've not seen much in the way of noise from Data I/O with respect to currency translation.

If I recall correctly, it was rare that you booked an order in other than U.S.

dollar currency.

Yes.

This is--a large chunk of this happens to be based on the intercompany and the sales that are held between our German euro-based business and our U.S.-based business.

And so, what you end up with, you end up with situations where, while we may hedge certain of our customer contracts, certain--a lot of stuff is not hedged.

And in this particular case, the currency effects really did take a big chunk out of us in terms of having currency over in Germany.

Okay.

And then, finally, what kind of a number would you suggest that we use--a tax rate for the year this year?

Boy, that is a good question, because I'd sure like to know it, too.

But we won't have any really U.S.

taxes unless it's an alternative minimum tax, because we have NOLs that will shelter many years worth of income.

In the China market, we're still in a tax holiday where we are like 25% off the normal rates.

In Germany, we're pretty much at the full rates.

And those are our three big territories from a tax standpoint.

And so, I would probably guess that we would be looking at something like a 10% to 15% at most tax rate is my expectation.

Great.

Thank you, again, very much.

Thank you, Steve.

Okay, thank you.

(Operator Instructions.) And I'm showing no further questions at the moment.

Very good.

Thank you very much for joining us today on the conference call, and we look forward to talking to you again at the end of the second quarter.

Thank you.

Thank you, ladies and gentlemen.

This conference will be available for a replay after 4:00 p.m.

Pacific today through May 3, 2010.

You may access the AT&T teleconference replay system at any time by dialing 1-800-475-6701 and entering the access code 154171.

International participants dial 320-365-3844.

Those numbers again are 1-800-475-6701 and international number is 320-365-3844, and again, the access code is 154171.

That does conclude our conference for today.

Thank you for your participation.

You may disconnect.