Data I/O Corp (DAIO) 2011 Q1 法說會逐字稿

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  • Operator

  • Ladies and gentlemen, thank you for standing by, and welcome to the Data I/O Corporation first quarter 2011 earning results conference.

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

  • Later there will be an opportunity for questions.

  • Instructions will be given at that time.

  • (Operator Instructions.) As a reminder, this conference is being recorded.

  • And I'd now like to turn the conference over to your host, President and CEO, Fred Hume.

  • Please go ahead.

  • Fred Hume - President, CEO

  • Thank you, Rochelle, and welcome to the Data I/O Corporation first quarter financial results conference call.

  • With me today is Joel Hatlen, Vice President and Chief Financial Officer of Data I/O.

  • This afternoon Joel and I will discuss the first quarter of 2011 operating results and present it in the context of the operating environment we expect for the full year.

  • 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 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.

  • Revenues for the first quarter of 2011 were $7 million, up 13% compared to $6.3 million in the first quarter of 2010.

  • Net income in the first quarter was $532,000, or $0.06 per diluted share, compared with net income of $709,000, or $0.08, in the first quarter of 2010.

  • The decline in net income is attributed primarily to higher development expenses associated with new products to be released later this year.

  • Joel and I will provide more details on the increases later in the call.

  • Cash at the end of the quarter was $19 million.

  • Orders worldwide in the first quarter of 2011 were $6.1 million, up from the $5.9 million booked in the first quarter of 2010, but down from the $6.6 million booked in the fourth quarter.

  • Asia's orders were up 88% from the first quarter of 2011.

  • Orders in Europe were up 15% over the same period last year, and they were up 68% in our direct territories.

  • Unfortunately, these gains were offset by substantially lower order levels in the Americas, particularly in Canada and Mexico.

  • However, the weakness in the Americas appears to have run its course, as the Americas sales funnel is now up 69% since the first of the year.

  • Overall, the worldwide sales funnels grew during the quarter from a 15-month low in early January 2011 to just shy of a record level by March 31.

  • Funded business, which is projects where the customers confirm the allocation of funding, was up 50% from the level at the end of the first quarter of last year.

  • We are encouraged to have rebuilt our sales funnel to pre-recession peak levels and believe this indicates an ongoing resurgence in demand for our technology.

  • We were also pleased during the first quarter with the success we achieved in winning new accounts.

  • We added five new accounts in Asia that contributed to the 88% growth in orders there during the quarter, we added three new accounts in Europe, and three in the Americas.

  • The results are consistent with the emphasis on new account generation we put in place several quarters ago.

  • Orders were unusually strong for January, despite the slowdown we typically see around the Chinese New Year.

  • And that, combined with the strong backlog going into the year and rapidly growing order funnels, allowed us to deliver more than $7 million in revenue in the first quarter, the highest level of revenue in a first quarter for us in more than 10 years.

  • Equipment sales were approximately 63% of revenue, with 37% coming from adapters and software.

  • Backlog at the end of the quarter was $900,000.

  • Orders have started off strong in April, consistent with the higher levels of business in the sales funnels, and we have seen the rebound in the Americas business that we expected.

  • We replaced two representative channels in the US during the quarter.

  • The new channels should be a much better match for our business opportunities.

  • We also had great customer response at the APEX trade show earlier this month.

  • We will be participating at the SMT show in Nuremberg, Germany, next month, as well as six other trade shows during the quarter.

  • As mentioned previously, we have many new products in development planned for release later this year, and our limited internal resources had become a bottleneck on the path to their market introduction.

  • To compensate for these limitations, starting back in the fourth quarter, we turned to the use of outside consultants and contractors to maintain or accelerate schedules rather than increase fixed expenses.

  • This continued through the first quarter, as we indicated on our previous call.

  • And these expenses, combined with additional R&D material purchases, resulted in a $402,000 increase in engineering, from $950,000 in the first quarter of 2010 to $1.3 million in the first quarter of 2011.

  • We feel that the level of engineering investment will decline later in the year as our new software suite and other new products come to market.

  • A significant amount of our investment, and much of the increased expenses in the first quarter and in the fourth quarter, is in software development.

  • The work we are doing builds on elements of software we have already sold and delivered to customers.

  • Last year we sold over $1 million on this basis, and we continued to do so during this development period.

  • The practice of selling various versions of the software that we plan to introduce publicly later in the year allows us to validate its performance in a use environment while helping to establish the price and value position of the business model.

  • The feedback we have received from these early customers has been positive, so we are looking forward to the product introduction and its general availability.

  • We remain very optimistic about the potential for this opportunity and firmly believe the investment we are making today will benefit shareholders, the Company, and our customers.

  • We plan to introduce several versions of this software during 2011 and expect it to make a significant contribution to our revenue and income during the second half of the year.

  • We can look forward to providing more detail on this initiative after we publicly launch the software.

  • We are focused on preserving our market leadership position, and innovation is key to achieving this goal.

  • In addition, we think these investments expand our market opportunity.

  • The organization we have built continues to perform well at all levels.

  • We've had several critical and pending vacancies over the past months due to retirements, illness and, in one case, the untimely death of a long-term employee.

  • I am pleased to report that these vacancies have been filled.

  • Our sales and service teams in Europe and in the Americas are back to full strength.

  • In the past quarter, we moved one of our Redmond employees to Shanghai to take a full-time position with our China team.

  • This will further strengthen the strong bond of collaboration that ties the organization together and facilitates the sharing of knowledge and practices that improve our effectiveness in serving customers and efficiency in the use of money.

  • At this time, I will ask Joel to expand on the first quarter's financial results.

  • Joel Hatlen - VP, CFO

  • Thank you, Fred, and good day to everyone.

  • As Fred mentioned, revenues for the first quarter of 2011 were $7 million, up 12.7% compared to $6.3 million in the first quarter of 2010, and up sequentially compared to $6.9 million in the fourth quarter of 2010.

  • International sales represented 92% of total sales for the quarter.

  • Revenue increased in Asia 101%, and in Europe, 6%, while the Americas declined 33% compared to the first quarter of 2010.

  • The Americas sales were impacted by a decline in custom software sales and by a decline in sales in Mexico that we believe is attributable to the effects of violence that has been taking place there.

  • Orders increased 3% in the first quarter of 2011 compared to the same period in 2010, with Asia up 88%, Europe up 17%, and the Americas down 47%.

  • The variation in sales percentages versus order percentages relates to the change in backlog and to deferred revenues.

  • Backlog at the end of the quarter was approximately $900,000, down from $1.6 million at the start of the quarter, and from $1.1 million at the end of the first quarter of 2010.

  • Deferred revenue at both the start and end of the quarter was $1.6 million.

  • From a product perspective, we saw our FlashPAK product line and adapter sales benefiting from the increased demand in Asia.

  • Meanwhile, increased programming center related business resulted in good PS family sales.

  • The gross margin as a percentage of sales was 59.1% for the first quarter of 2011, down from 60% from the first quarter of 2010, which had more favorable variances.

  • The primary causes for the sequential improvement compared to the 56.4% gross margin for the fourth quarter of 2010 were due to product and channel mix as well as improved factory variances.

  • Operating expenses were $3.5 million in the first quarter of 2011 compared to $2.9 million in the first quarter of 2010.

  • The increase in research and development of $402,000 was primarily due to the use of outside resources and materials, as Fred mentioned earlier, to accelerate our growth initiatives, including our new software rollout and other new product initiatives to be introduced later this year.

  • The increase in sales, general, and administrative expense was related to increasing use of outside professional consultants and contractors, higher compensation costs, and higher incentive compensation based on financial results.

  • These additional costs associated with outside resources, including consultants, contractors, and patent specialists, are similar to those additional costs we described and reported in the fourth quarter of 2010.

  • In addition, our first quarter G&A is always seasonally higher due to the audit, NASDAQ fees, and public reporting costs.

  • In accordance with US Generally Accepted Accounting Principles -- GAAP -- net income was $532,000, or $0.06 per diluted share, for the first quarter of 2011, compared with net income of $709,000, or $0.08 per share, for the first quarter of 2010.

  • Earnings per share included the impact of equity compensation expense of $0.01 per share for both the first quarter of 2011 and 2010.

  • We had an income tax provision of effectively 14% for the quarter due to taxable profits in four locations, especially China, for the quarter, as well as certain states and the federal alternative minimum tax.

  • We have net operating loss carry-forwards of approximately $16 million, as well as other credit carry-forwards in the United States that are available to continue to offset future US net income, and we will continue to analyze and manage taxes to take advantage of these tax attributes.

  • Data I/O's cash increased to $19 million at the end of the first quarter.

  • Accounts receivable increased to $5.5 million from $5 million last quarter, primarily due to the sales shipments taking place relatively late in the quarter.

  • Inventory decreased to $3.5 million at the end of the first quarter compared to $3.6 million at December 31, 2010.

  • During the quarter, we renewed our headquarters lease, reducing the square footage about 6,000 square feet and lowering the lease rate.

  • The long-term liability on the balance sheet relates primarily to lease incentives that are spread over the lease life, ending in August 2016.

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

  • Fred Hume - President, CEO

  • Thank you, Joel.

  • As I mentioned earlier, our sales volumes are at near record levels.

  • Our key customer segments -- wireless, automotive, consumer, and industrial -- are all experiencing growth.

  • Our organization is increasingly effective, and we have a strong lineup of new products.

  • We feel this puts us in a good position for success in 2011.

  • At this time, Rochelle will entertain the questions.

  • Operator

  • (Operator Instructions.) Dennis Van Zelfdin, Brazos Research.

  • Dennis Van Zelfdin - Analyst

  • Fred, I missed a couple of sentences when you were talking earlier, so I apologize if you've got to repeat something here.

  • But the first quarter was generally in line with my expectations in that the revenue was flat sequentially, which is good because of the seasonally slow first quarter.

  • And you guys had also warned us that the R&D would be above normal because of all the new products coming in and outside consultants and things like that.

  • And here's where I didn't quite hear you when you were talking about the second half of the year.

  • Are you still confident that the extra expenses you're incurring now are going to be well more than offset with additional sales growth in the second half of the year from these new products and software?

  • Fred Hume - President, CEO

  • Yes, I am, Dennis.

  • As I mentioned in my remarks, the software that we've been developing, it's a modular software.

  • And it's software, really, that works with all of our products.

  • Certain versions of it work, really, with all of our products, and as well as with new products that we're going to be introducing later in this year.

  • And the fact that we've been already delivering this software under nondisclosure agreement with selected customers, and we've collected a substantial amount of revenue through that, we've been able to validate, first of all, the utility of that software, its functionality, its performance, and the value proposition.

  • So we really think we've taken out all of the major development risk, which is really the thing that has given us the confidence to use outside contractors and consultants to help us accelerate it and make sure that we have it running on all of our respective platform products.

  • Dennis Van Zelfdin - Analyst

  • Okay, so it's unlike -- I know stuff happens in business -- but it's unlikely that we're going to hear, come the third quarter, that there's been a delay in this or that, and this new product didn't get out or whatever?

  • You're telling us that they're pretty much done and that the sales are coming in the second half?

  • Fred Hume - President, CEO

  • Yes.

  • Dennis, I'd like to say that there's always risk.

  • But maybe I can add a little bit more color that will help you put that into context.

  • Last summer, we were very fortunate to be able to bring in a new software development manager.

  • And this software development manager had extensive experience with agile software development, a process called scrum, some of the modern techniques in what you can do to accelerate software development.

  • And he was very effective in strengthening our software team, restructuring it to some extent, and getting in place the processes and things that we needed to make sure that we were able to meet certain critical schedules.

  • And the scrum process is a wonderful process, because it results in essentially deliverable software with every turn.

  • And every turn is about every two weeks.

  • So every two weeks, you get a new chunk of the software that's fully tested and ready to ship.

  • And so it's one of these wonderful processes where you take out risk and uncertainty early in the development process, compared to other processes where you're doing a lot of development and you get to the end, and you have all this stuff to test.

  • And that's where you discover all these problems, and then you have delays in all the other things.

  • And this agile software development process, as I said, it accelerates that discovery of risk and uncertainty and brings it forward well early into the development process.

  • So when you get down toward the end, you just don't have a lot of exposure.

  • Dennis Van Zelfdin - Analyst

  • Okay.

  • And would you say that of all of your -- I think you said there are 10 products coming or something like that -- is this software, does it have the most potential of all of them?

  • Is this like the big daddy here?

  • Fred Hume - President, CEO

  • Dennis, I wouldn't put it exactly that way.

  • But this software is very significant because this software works with every major product in the Data I/O product line, as well as with the new products that we're developing that will be introduced later in this year.

  • So there are several versions of this software that we'll be introducing this year, and it's the fact that this software layers on and adds value in the areas we've articulated before -- process control, security, user interface, a number of things -- that adds value, essentially, and increases the attractiveness and competitiveness of all of our offerings.

  • So it may not be the biggest thing just in itself, but in the way that it adds value across everything we have, and will have, makes that very significant.

  • Dennis Van Zelfdin - Analyst

  • Okay.

  • On the last call, you had talked about -- I think I asked the question about this software can be retrofit on your older machines out there in the field, which opens up a huge market opportunity.

  • I'm curious, and I don't know if you even want to do this, but is it possible to sell this software for a much higher price to those people who have machines that are not yours?

  • Fred Hume - President, CEO

  • That certainly is a possibility, Dennis.

  • Obviously, our priority at this moment is to roll it out in support of our own equipment.

  • But that's certainly something we could consider down the road once we get our top priorities completed.

  • Dennis Van Zelfdin - Analyst

  • Okay, last question from me, and I'll let someone else ask.

  • I guess, given that the revenue is coming in the second half, and I guess these expenses are going to continue in the second quarter, so I guess we shouldn't be expecting a whole lot in terms of growth in the second quarter, correct?

  • Another probably subpar quarter coming compared to last year?

  • Fred Hume - President, CEO

  • I separate the issue of growth and earnings.

  • Certainly, the earnings will be impacted by the higher development expenses associated with the use of these outside resources.

  • But with respect to growth, really, that's a function of how the orders materialize and, basically, the business operating environment.

  • And that's pretty robust right now.

  • As I said, the funnels are at near record levels.

  • We've had a very strong first few weeks here of April.

  • And so I can't really say anything more about that, but those two are really different things.

  • Dennis Van Zelfdin - Analyst

  • Okay.

  • Good luck.

  • I think we're all looking forward to a great back half of the year.

  • Thanks.

  • Operator

  • David Kanen, Williams Financial Group.

  • David Kanen - Analyst

  • Food afternoon, gentlemen.

  • Congratulations on very strong revenue.

  • Fred Hume - President, CEO

  • Thank you very much.

  • David Kanen - Analyst

  • A first question -- I'm in my car, getting ready to start my weekend here on the East Coast -- excluding some of this development cost for the new products and the software, what would earnings have looked like had we not incurred that expense?

  • And what is your certainty level that much of that expense goes away in the second half of the year?

  • Joel Hatlen - VP, CFO

  • Since R&D spending was up $402,000, divided by the 9 million shares outstanding, you're talking about, clearly, $0.04-plus per share of cost that our earnings per share was hit by the fact that we spent this additional R&D money.

  • We certainly will be having the products start shipping in the late second quarter or early third quarter.

  • And so, as a result, the costs of those particular development resources will go away.

  • But the problem is, when you're talking about projects, you have spending for materials that happens at different points.

  • So, for example, this last quarter, we were probably $100,000 more in materials than we were, for example, a comparable quarter in Q3 of last year, or Q2 of last year.

  • So that's something that we certainly don't expect to repeat.

  • And sometimes we have, like the first quarter of 2010, where we actually had negative R&D materials because we had the engineering team finish stuff and return things to inventory because they didn't actually consume them in the research process.

  • So yes, I do believe that there's a lot of things that we certainly would plan for to go away.

  • But on projects and things like that, I certainly wouldn't say that we just absolutely know that all of those costs would go away.

  • Fred Hume - President, CEO

  • I think, David, just to add a little bit onto Joel's comments, I think this is something that we can address again at the next quarterly call and give you a little bit better sense of that.

  • But I think it's important to put in context that we're in a very strange -- well, "strange" may not be the right word -- a very unique situation.

  • I've never had, in my career, a case where we had so many new products, and I'm looking back onto my years of experience at Fluke and at Keithley, where I experienced so many significant new products coming to market at roughly the same time, or within a relatively few month period of time.

  • And that's why it's a little bit more challenging to give you specifics, because we just have so many things going on right now that are related to initiatives that we launched in the last 18 months to two years that are just coming to fruition.

  • And it's a great experience.

  • It's also -- it's a high-intensity environment, because we just have so many things we're doing right now.

  • Joel Hatlen - VP, CFO

  • That being said, I want to make sure we're very clear.

  • We did this on a very temporary basis by using outside resources, contractors, and temporary help, as opposed to putting in permanent structural changes to our cost structure for new hires.

  • David Kanen - Analyst

  • Okay.

  • Yes, for an outsider, sometimes it's difficult for the investment community to grasp this.

  • But I understand you're running a business, and while you're sacrificing short-term EPS, I'm sure there's a much longer-term, bigger payoff that we'll see, hopefully, in the back half of the year.

  • So I understand what you guys are trying to accomplish.

  • It makes perfect business sense.

  • Another question is, Fred, you've used the term "significant opportunity." I believe that was the word that you used.

  • In terms of software, Fred, is it reasonable that when you guys get going in the third and fourth quarter, and then fiscal, in calendar 2012, that software could become 15% of your overall mix?

  • Is that a reasonable goal, to be comfortable with that?

  • Fred Hume - President, CEO

  • Yes, I think that's a reasonable goal.

  • David Kanen - Analyst

  • Okay.

  • So if I'm going to model out, let's say, the back half of the year or 2012, is it reasonable that we should get gross margins north of 60% and some really meaningful operating margins?

  • Does that seem fair at this point?

  • Fred Hume - President, CEO

  • That certainly is our goal, yes.

  • David Kanen - Analyst

  • Okay.

  • And then first quarter, $7 million is unusual for a first quarter.

  • What do you think the drivers are?

  • Most of the strength, I know, was in Asia.

  • What end markets, what do you think, were the drivers for the revenue number?

  • Fred Hume - President, CEO

  • Certainly all of the ones that have high visibility right now -- the smart phones, the tablet computers, any product that uses high-density Flash, so all of the consumer products and the wireless products, particularly in Asia.

  • I would say that the automotive area was particularly strong during the first quarter.

  • And so we did good business with the automotive companies.

  • And just as a side note, they've expressed a tremendous amount of interest in this software that we're releasing.

  • And then, as Joel mentioned, the third element was the programming centers, that we got a substantial amount of business from programming centers during the quarter, as I'd mentioned, really, back on the February call.

  • So there were just a lot of things that lined up.

  • We went into the quarter with a strong backlog, and we were able to ship more than we might have otherwise shipped, because number one, we had that strong backlog.

  • We had good results in Asia and in Europe, as Joel mentioned and I mentioned earlier.

  • And then we had strong funnels filling in margin and so forth that gave us confidence that the business was going in the right direction.

  • David Kanen - Analyst

  • Okay.

  • Okay, I'm going to let else someone ask a question.

  • Thanks.

  • Good luck.

  • Operator

  • (Operator Instructions.) Michael Potter, Monarch Capital Group.

  • Michael Potter - Analyst

  • Just a couple of questions.

  • You have 10 new products being launched this year.

  • Is that correct?

  • Fred Hume - President, CEO

  • Let me say that's -- I'd rather not say specifically the number, but you're in the ballpark.

  • Michael Potter - Analyst

  • Okay, so approximately 10 products being launched.

  • And does that number take into account different modules on the software side?

  • Or is it one of those is the software product, and then we're looking at approximately eight or nine different types of new hardware products?

  • Fred Hume - President, CEO

  • The software is one product, although there are several versions of it.

  • But we consider it as one product.

  • Michael Potter - Analyst

  • One product.

  • Okay.

  • As you said, that is a pretty big initiative all in one year.

  • How will you be launching these different products?

  • Let's take the software first, I guess, because that's separate.

  • How do you anticipate your initial launch of this product once it is ready to come to market?

  • Fred Hume - President, CEO

  • Michael, I wish I could answer that question.

  • The problem is that anything that I would tell you would tip our hand to competitors, and we just can't risk that with the software.

  • Because as I mentioned earlier, particularly with the software, it works with all of our products.

  • And the potential business disruption that could come from revealing our strategy on rolling out the software, it's just too big a risk for our shareholders.

  • And as much as I'd like to answer your question, I just can't, from a competitive standpoint.

  • Michael Potter - Analyst

  • Okay, let me try and ask it another way.

  • Again, your competitor knows that you're developing this product.

  • It's been no secret, obviously, and the competitor knows that you've been in this space for several years.

  • That's been no secret as well.

  • But what I'm trying to understand, is this, on the software side, is this going to be launched at a trade show, or is this going to be launched where we have one of our key customers that's lined up, and when it is ready, they're going to be first to implement, if you will, and then we're going to go out to the rest of our system?

  • Fred Hume - President, CEO

  • Michael, I think I can help a little bit in answering that by telling you that much of this software has already been sold to customers under terms of a nondisclosure agreement.

  • Everything that's been done has been done on the basis of a nondisclosure agreement.

  • So if anyone has revealed any information about this software to competitors, that's in violation of the nondisclosure agreements that we have in place.

  • And so the introduction, selectively, has been underway since the first quarter of last year.

  • Michael Potter - Analyst

  • Okay, but that's primarily been on a customization product, correct?

  • Fred Hume - President, CEO

  • It's been on exact modules of this software that we'll be introducing publicly later this year.

  • Michael Potter - Analyst

  • Okay.

  • And you anticipate that the increased R&D expense of approximately $400,000 should be about the same in Q2 as we've seen it so far in Q1 and Q4 in the prior year?

  • Fred Hume - President, CEO

  • I think the R&D spending will be very similar.

  • The spending should be about the same.

  • I can't tell you that they will absolutely show up in R&D, or whether some of it will show up as custom software costs of goods sold associated with some of these custom software development projects.

  • But the spending on an overall basis probably is going to be in that same ballpark.

  • Michael Potter - Analyst

  • Okay.

  • And then with regards to the hardware products that we're launching, same question.

  • How do you anticipate launching those products?

  • Fred Hume - President, CEO

  • There are certain critical trade shows that are taking place throughout the year.

  • I mentioned six trade shows in the second quarter.

  • So there are things that we do with every one of these products.

  • For example, we create a sales and marketing plan associated with the launch of those products.

  • And each of our three regional sales managers prepare a rollout plan in terms of how they plan to roll those products out into their regions.

  • And that includes trade shows, it includes going out with our individual sales channels in the various geographies and developing sales plans for the key accounts, actual launch plans within those key accounts.

  • It includes the messaging, the collateral sales material, and so forth.

  • So there's a lot of work underway right now associated with developing those sales and marketing plans for each of those major projects.

  • Michael Potter - Analyst

  • So the hardware launches will be staggered, I guess, through the next three quarters -- Q2, Q3, and Q4?

  • Fred Hume - President, CEO

  • Yes, I think that's a fair way of characterizing it.

  • Michael Potter - Analyst

  • All right.

  • So we should hear about some of the new hardware launches in the current quarter?

  • Fred Hume - President, CEO

  • Some of the new additions, we'll be able to start announcing what we're doing.

  • Michael Potter - Analyst

  • Okay, terrific.

  • Something positive to look forward to.

  • That will be great.

  • With the earthquakes in Japan, did that cause any significant -- well, obviously, the revenue numbers were good -- but going forward, did that cause any shift in, I guess, demand from some of our customers?

  • Did the contract manufacturers in other countries need to increase their production rates in order to make up for the facilities in Japan that were perhaps idle?

  • Fred Hume - President, CEO

  • Mike, we haven't been able to put our finger on any particular thing that we could trace to that.

  • I think that, generally speaking, there was a certain amount of uncertainty, a lot of fear and doubt about companies' abilities to sustain their production levels and so forth as a result of this disaster in Japan.

  • So I think that as a result of that, just that uncertainty and concern, a lot of companies held back on their spending plans in the quarter and didn't spend perhaps as much money as they would have spent otherwise.

  • But we didn't see any direct attributable business or lack of business that we could say this specific piece of business was related to anything that happened in Japan.

  • Joel Hatlen - VP, CFO

  • On the supply side, we had not really seen anything hitting us, other than we witnessed that there was some, I'll call it "panic buying," where some people were trying to make sure that they were not going to be having problems.

  • But we really haven't seen anything other than we have had some lead times that have gone and stretched out.

  • And so we're being very careful ourselves with regard to making sure that we have the adequate sources of inventory for us to build our stuff.

  • But we really haven't seen anything directly associated with Japan that was impacting us from any material standpoint.

  • Michael Potter - Analyst

  • Okay.

  • And Joel, just a quick question.

  • I'm trying to back into the adjusted EBITDA.

  • Can you help me back into that number, please, for the quarter?

  • Joel Hatlen - VP, CFO

  • Yes.

  • You're going to have -- depreciation and amortization is just about $200,000.

  • Our income taxes were about $86,000.

  • And your net interest stuff is about $13,000.

  • So that would take you to an EBITDA of about a little over $805,000.

  • Michael Potter - Analyst

  • And stock compensation?

  • Joel Hatlen - VP, CFO

  • I believe it was $87,000 for the quarter.

  • I've got to make sure I double check that, but I believe that's what it was.

  • And it was, again, $0.01 per share was how we disclosed it in my remarks.

  • Michael Potter - Analyst

  • Okay.

  • Okay.

  • All right, guys.

  • Thanks a lot.

  • I guess we'll stay tuned.

  • It should be a very busy quarter for us.

  • Joel Hatlen - VP, CFO

  • Yes, exactly.

  • Thank you, Michael.

  • Operator

  • Walter Ramsey, Walrus Partners.

  • Walter Ramsey - Analyst

  • Thank you.

  • Congratulations.

  • Got a couple of questions.

  • Could you go over the geographical sales breakdown for the quarter again?

  • I didn't catch that.

  • Joel Hatlen - VP, CFO

  • Sure.

  • So from the standpoint of our sales piece, we had revenue growth in Asia of 101%, we had European growth was 6%, and the Americas was a decline of 33%.

  • Walter Ramsey - Analyst

  • What was the actual contribution from the three?

  • Joel Hatlen - VP, CFO

  • So from --

  • Walter Ramsey - Analyst

  • What percentage of the sales did North America generate?

  • Fred Hume - President, CEO

  • What percentage -- you said of the -- ?

  • Joel Hatlen - VP, CFO

  • The United States was 8% of sales, and international sales were 92%.

  • And --

  • Walter Ramsey - Analyst

  • Okay.

  • What about the three categories you had there?

  • You don't divide that up?

  • Joel Hatlen - VP, CFO

  • We have not typically given out the exact amount of revenues and bookings by geography.

  • So I'd really rather not --

  • Walter Ramsey - Analyst

  • Okay.

  • That's not really what I'm that concerned about.

  • I was just curious.

  • Those percentage changes are pretty wild numbers.

  • Can you just tell us the story of why they went flying up in Asia and crashing down in North America?

  • And was that just the same business shifting around, dodging the Mexican gangs?

  • Or was there more to it than that?

  • Fred Hume - President, CEO

  • I think there was more to it than that, Walter.

  • First of all, Asia, independent of what happened in the Americas, Asia had a very significant first quarter.

  • There was just a lot of business that happened.

  • Asia came out of the starting blocks in January with a very, very strong January.

  • January's generally weak because of the Chinese New Year that typically hits the end of January.

  • But we didn't have that, and so they just had a strong quarter, and it started out strong and stayed strong through the whole quarter.

  • As we mentioned about Europe, Europe has traditionally been our strongest territory, and we had a good, solid growth in Europe in our direct territories -- that is, Germany and Eastern Europe, where we're direct.

  • Those territories performed extremely well in the quarter, with substantial growth over the same period in 2010.

  • The Americas area was a combination of the Mexico situation that Joel mentioned, companies concerned about willingness to spend.

  • And I think the other thing that's important to keep in mind and perspective is that in the first quarter of 2010, one year ago, the Americas had a very strong quarter, because they sold almost $1 million in custom software in the first quarter of last year.

  • So on a comparative basis, compared to the first quarter, when Joel mentions that they were down 33%, a significant amount of the decline was really related to the fact that they were, on a comparative basis, comparing against a very strong first quarter last year.

  • And I think the other thing that impacted the Americas was just simply timing.

  • With so many of our large systems -- one of our large systems can sell for as much as $400,000 to $500,000 -- and sometimes it's very difficult to, they're lumpy, and you never know exactly what quarter they're going to hit in.

  • But yet you may have very high confidence in the business.

  • And that's actually what happened to the Americas, is that some of the business that we really expected that they would close in the first quarter didn't close.

  • And we got some business in April, and April's been really strong for the Americas.

  • So I think that's about the most I can add in terms of color that could be helpful.

  • Joel Hatlen - VP, CFO

  • I would make one comment in addition, that we saw at least a couple of the opportunities where business that we had previously expected might be in Mexico, we actually were able to pick up when the project actually went to someplace in Asia.

  • So it's isn't something like we totally lost the business; it's something where the OEM or the EMS company that was involved in the production made the decision not to site that business expansion in Mexico.

  • They ended up choosing somewhere else to do it.

  • We actually had a few instances of that being over in parts of Europe as well, where there are some projects that moved out of the EU when some custom and tariff taxes went away, and they chose to put them in the Philippines, for example, or Malaysia instead.

  • Walter Ramsey - Analyst

  • Okay.

  • That all makes sense.

  • So just the bottom line, the Mexican gang situation isn't that big a deal, or it is?

  • Fred Hume - President, CEO

  • I think it's a big deal, because we'd like to see strength in all three regions, and I think we'd like to see customers closer to home geographically.

  • I think we've made a commitment to Mexico.

  • We have people down there, and we have resources there, and we'd like to see those fully utilized, Walter.

  • Walter Ramsey - Analyst

  • Yes, I would think so.

  • So is that situation improving at all, or is it still pretty bad?

  • Fred Hume - President, CEO

  • I think it's bad, and it's still early to tell whether they're going to get their arms around it.

  • Walter Ramsey - Analyst

  • Yes, okay.

  • So I've just got one other question.

  • I don't know if you can answer this one or not.

  • But the -- whatever you call them, the presales or the nondisclosure sales that you've been making to the various customers -- have you actually booked those as sales, or are they deferred somehow and haven't hit the income statement yet?

  • Joel Hatlen - VP, CFO

  • The vast majority of the ones that we have discussed have actually been recorded, probably 90%-plus in terms of P&L during 2010, and a little bit, still, in this last quarter.

  • And those were the items that we had indicated during this last year that we've been recognizing on a percentage-of-completion basis.

  • And literally, we've probably had $140,000 to $150,000 worth of cost being taken out of our engineering dollar spends and put associated with the cost of goods on those projects during, for example, the second, third, and the fourth quarter of last year.

  • Walter Ramsey - Analyst

  • Okay.

  • I just was wondering if you had a big pop coming in the third quarter when the thing went commercial, but it sounds like you've already recognized that.

  • Joel Hatlen - VP, CFO

  • No, we don't have a backlog associated with that.

  • Walter Ramsey - Analyst

  • Yes, okay.

  • All right.

  • Anyway, thanks for taking all the questions.

  • Good luck, you two.

  • Operator

  • (Operator Instructions.) Tom McGuire, Private Investor.

  • Tom McGuire

  • From what Joel said earlier, I take it that the second quarter will begin to show some revenues from some of these 10 new growth initiatives, but they'll be back-end loaded in the second quarter, and it probably won't amount to a lot of sales, and I should expect that the third and fourth quarters should take more and more of the brunt.

  • Is that a fair assessment?

  • Joel Hatlen - VP, CFO

  • That's a fair assessment.

  • Tom McGuire

  • Okay, thank you.

  • The other question is to Joel.

  • Joel, you mentioned about the SG&A costs and how they're up, and it's because of the audit and the NASDAQ costs and also the public reporting costs.

  • I'm just wondering if you can ballpark to me, how expensive is it for a company of your size to be public?

  • Does it cost you $1 million a year, or is that too high, or is that too low?

  • How expensive is it to be public?

  • Joel Hatlen - VP, CFO

  • It really is close to $1 million a year in terms of public company costs and having a public company board and having auditors and having D&O insurance and those kind of costs.

  • Maybe there's some of those that you'd actually have to have if you were a private company that was part of a private equity group.

  • But if you were part of a larger organization, we just wouldn't have those kind of costs within an entity like Data I/O.

  • So that is a significant cost burden for a small public company.

  • So yes, that's absolutely correct.

  • So, for example, just this last quarter, we had $130,000-some worth of audit costs.

  • We had $29,000 worth of NASDAQ fees, and we had different public company reporting proxy and attorney-related costs.

  • And it's pretty close to $200,000 in the first quarter, which is something where other quarters only probably cost us less than $20,000 worth of those type audit costs.

  • Tom McGuire

  • Yes, okay, good.

  • Thanks, Joel.

  • Okay, I'm not going to try and put words in your mouth, but I'm going to take anything that you can offer on this.

  • I'm going to touch on a question that was asked earlier about what can happen with your margin structure with the introduction of these new products.

  • I've heard you guys say before, and I look at your presentations on the website, and you have this model of a 60% gross margin, 30% SG&A, 15% R&D, and then consequently 15% operating income margin.

  • If you take into consideration that you're spending, to a large degree to introduce these products, so your margins are a bit out of whack now, that if you weren't doing this, you'd already be at your model P&L statement.

  • So I'm thinking that, with the growth initiatives which will fuel the top line, hopefully, and some of those have higher margins, like software, so that means the gross margin picks up, and then your SG&A is a leverageable expense with higher revenues, and maybe you keep R&D at 15% because R&D's the lifeblood of a technology company, but that operating income model seems to have a lot of upside pressure on it if things go right.

  • So I'll take your comments, and again, I don't want to put words in your mouth.

  • Fred Hume - President, CEO

  • So Tom, I think you're actually, you're very right.

  • And other people have suggested we ought to revise the model so it reflects what it might be going forward.

  • And at some point we will.

  • At some point, we will update those targets that Joel and I put together several years ago.

  • But it just wasn't the time to do it, because we have so many things moving right now.

  • But one other piece of information, I think, that could be perhaps more insightful for you, which is that there's a certain amount of lost contract revenue with our existing software, the way we administer it with our existing products.

  • And it allows a number of customers essentially to get by without paying for ongoing software maintenance and software support.

  • And what this new software also does is it allows us to close that loophole and collect some substantial amount of missing revenue, if you will.

  • We don't have the issue with reputable companies like a REM or a Nokia or an Apple or whatever, that respect license terms, that respect the way you do business.

  • But particularly in Asia, there are companies that really have no regard for the term of your standard software licenses and so forth.

  • So unless you have a mechanism in place that just puts an ironclad lock on that, you just don't get that income.

  • And so this software that we're introducing also closes that hole.

  • And so it has another impact on our gross margins, just simply from that standpoint.

  • Tom McGuire

  • Okay, great.

  • Thanks, Fred.

  • And then one last question is, re-listening to last quarter's conference call, Fred, you were talking about the plethora of devices that are coming out, et cetera, and you said, in passing, that Data I/O is not seeing that impact of higher-density file sizes yet, and that they will require greater and greater programmer capacity.

  • When will we start seeing, or have you started seeing a sense of?

  • What exactly did you mean by that, because a lot of smart phones and tablet computers do have higher density file sizes.

  • So just could you go into a little detail so I understand that better?

  • Fred Hume - President, CEO

  • Yes, Tom.

  • I think I probably miscommunicated the message, so let me restate it.

  • First of all, we have been seeing the impact of increasing file sizes increasing device densities.

  • That's been a trend we've been seeing for some time, and our success with our new FlashCORE III programming engine, a lot of that success that we've had in Asia, and the growth that we've had in Asia, has really been driven by our ability to handle these higher density devices.

  • But the comment that I was making with respect to what we haven't seen yet is when you look at a number of the analysts' projections -- the technical analysts that follow the semiconductor space and the smart phones and the applications of high-density Flash memory -- there's an inflection point on their graphs, out somewhere in the late 2011 to 2012 timeframe, where if you take into consideration what they're projecting in terms of the growth in the file sizes and the number of devices shipped, there's this very distinct turning point in the curve where the curve turns up very sharply.

  • And we've only seen a few cases so far that actually prove that point.

  • We're working right now with some customers that are truly in that domain.

  • They're past that knee in the curve, really, where the device density has just taken off tremendously.

  • And we're working closely with them on some new solutions to satisfy their needs.

  • So that's really the context in which I meant to make that point, Tom.

  • And if I didn't communicate it clearly, I apologize.

  • Tom McGuire

  • Oh, okay.

  • Thanks.

  • You've got to teach me the business, Fred.

  • Thank you so much.

  • Joel Hatlen - VP, CFO

  • One of the things that Fred would be alluding to there was really the shift in the mix of phones being produced and shipped, where if you look at the 1.2 billion phones that were shipped in 2010, 20% of them, roughly, were smart phones.

  • And that shift is dramatically accelerating, as 30% to 50% over the next two years are going to be smart phones and how fast that shift goes.

  • And that's really driving that inflection point, we believe.

  • And that's something that really does take advantage of our more capacity related FlashCORE III.

  • Tom McGuire

  • Okay.

  • Thanks, Joel.

  • And congratulations on hitting $7 million, and I can't wait for $8 million.

  • Joel Hatlen - VP, CFO

  • All right, thank you, Tom.

  • Operator

  • Michael Potter, Monarch Capital Group.

  • Michael Potter - Analyst

  • Just a follow-up on the software sale itself.

  • How do you anticipate this is going to be priced?

  • I'm assuming this is going to be a typical license with maintenance and service, or is it going to be a different type of structure?

  • Joel Hatlen - VP, CFO

  • No, it's expected to be a software license, and we expect that there's also a maintenance associated with it on an annual basis.

  • So this will have both, I'll call it a capital sale of software, as well as a recurring revenue stream going forward.

  • And then, as Fred mentioned, we believe this is going to strengthen the ability for us to get fully paid for the number of uses of the software on the different pieces of equipment.

  • So there will be a better digital rights management aspect to collecting revenue on the number of copies that are installed.

  • Fred Hume - President, CEO

  • I think, Michael, let me give you a specific that might help make that point clear.

  • Let's say a customer has 20 of our machines.

  • It's technically possible for them to take and buy an annual update contract on one of their machines and run that software on all 20 of their machines.

  • Now, none of the reputable customers do that, but that's a very common practice in Asia.

  • And with the introduction of this software, there's a new digital rights management scheme, as Joel alluded to, that closes that loophole.

  • So if they want to keep their 20 machines current and be able to run the latest software on all 20 machines, they have to have all 20 of those machines under contract.

  • Michael Potter - Analyst

  • Okay.

  • All right, so I understand the structure.

  • Can you tell us how you anticipate pricing it on a per-customer basis?

  • Is it going to be based upon volume that they run through the machines, and we're going to get a -- I don't know -- some sort of price per transaction?

  • Or is it going to be a flat license fee and all they can eat?

  • Joel Hatlen - VP, CFO

  • We actually haven't announced that.

  • It's not going to be a pay-per-use model, so I can put that to rest, because our customers generally are of the type that will not allow that type of business model in their transaction base.

  • But the exact pricing of that and the structure on that will be much more on what I would call a machine basis and license basis of that nature.

  • So we'll be rolling out that pricing structure later this quarter.

  • Michael Potter - Analyst

  • So the license is going to be on a per-machine basis, and I'm assuming that the price points will differ depending upon which machine it's on?

  • Because obviously, our machines have different throughput capabilities.

  • Joel Hatlen - VP, CFO

  • Which machine, what type of software module, there will be volume considerations -- there will be that kind of stuff.

  • Michael Potter - Analyst

  • Okay.

  • Terrific.

  • Thank you.

  • Operator

  • A final question comes from the line of David Kanen of Williams Financial Group.

  • David Kanen - Analyst

  • What were adapter sales for the quarter?

  • Joel Hatlen - VP, CFO

  • Adapter sales were $2,006,000 for the quarter, roughly.

  • David Kanen - Analyst

  • Okay.

  • And then can you sketch out for me the primary uses of software to value that, and solutions that they'll be solving for the customers?

  • Is that something we can talk about?

  • Fred Hume - President, CEO

  • Dave, we can't talk about it specifically, unfortunately, right now.

  • I can tell you that it does a lot for customers in the area of process control and security.

  • And there's much more that it does beyond that, but I really can't go into the specifics of that, as I've said.

  • All of the customers that we have for this software to this date are all on nondisclosure agreement, and we just have to keep what this software does and some of its capability quiet until introduction.

  • David Kanen - Analyst

  • Okay.

  • And then just a quick update on the strategic alternatives and the hiring of TM Advisors.

  • Is there any update you can give us?

  • And conceptually, if somebody approached the Company and expressed interest in purchasing it, is this something that you would make public, or is it something that the Board would meet on and not necessarily disclose?

  • Fred Hume - President, CEO

  • I can say a couple of things.

  • One is, I can tell you that TM Capital, as we asked them to, has helped us evaluate our strategic alternatives, and their work with us is ongoing.

  • And we expect that you'll hear more about some of our strategic actions in the coming weeks.

  • So that's a very clear, very positive thing.

  • Now, exactly what we would do with respect to public announcements in terms of if some company came and approached us and wanted to buy us, that's something that the Board would have to consider, and I don't think we're in a position to say at this point what that would be.

  • David Kanen - Analyst

  • Okay.

  • My question is, is this something that you'd disclose in the public domain, or would you guys be able to evaluate this discreetly without necessarily updating the shareholders?

  • Do you have a policy to this effect?

  • Joel Hatlen - VP, CFO

  • We really have a policy of not commenting until we actually have something to say or talk about.

  • So I really wouldn't want to box us in, in terms of having to give you an idea one way or the other.

  • So I guess the real answer is it's one of those "no comment" situations until we have something to say.

  • David Kanen - Analyst

  • Okay.

  • All right, guys, good luck.

  • Thank you.

  • Operator

  • Thank you.

  • And back to you.

  • Fred Hume - President, CEO

  • I think, since that appears to be the end of the questions, we'd like to thank you all for participating in the conference call today.

  • And we look forward to talking to you again next quarter.

  • Thank you very much, Rochelle.

  • Operator

  • Okay, thank you.

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